Coinbase Earnings: The Elephant in the Room

Last Thursday, Coinbase (COIN) reported Q3 earnings that beat analyst expectations.

The positive headline led to many publications and Twitter voices all of a sudden turning bullish on the company in the face of rising BTC prices.

And that’s all well and good. But, while they are predicting an increase in the company’s stock price, it’s disingenuous for them to not also point out some of the negatives from the quarter.

But before we get to that, here are a few key numbers from the earnings:

As we have explained before, Coinbase is keen on highlighting their Adjusted EBITDA as the metric to watch. Q3 marked the third consecutive quarter of positive adjusted EBITDA at $181 million.

A Double Edged Sword

Our gripe arises around the lack of introspection about what a potential ETF might mean for the company. The truth of the matter is that an ETF is a double edged sword.

On one hand, if Coinbase became the leading (re: only) custodian for the pending bitcoin ETFs, the company’s custodial revenue would be set to explode from the ~$16 million it is at today.

On the other hand, the spot bitcoin ETF would significantly eat into the company’s transaction volumes as investors move to the “easier” option.

Now, there is an argument that a spot bitcoin ETF would significantly increase the TAM of individuals and institutions looking to gain exposure to BTC, but the question is: will it be enough to offset current transaction revenues?

And we aren’t the only one’s asking. Twice on the earnings call, analysts asked questions to the executive team about how the company will respond to reduced trading volumes in the face of ETFs without any real clear answer from the Coinbase team.

So next time you see a story or a Twitter thread hyping up how Coinbase is going to “kill it” over the coming quarters, ask yourself: what happens in the face of an ETF?

Backing up, before you start thinking that we have given up on Coinbase, think again. We are still bullish on the company as it still has plenty going for it.

For example, although BTC and ETH may be good candidates for ETFs, most other altcoins will not be. Traders will still need a way to get exposure to their favorite PEPE or DOGE!

More seriously, Coinbase continues to push on their BASE offering which now has more than 1 million transacting wallets and $500 million in assets. If Coinbase truly is able to implement payments into BASE / Coinbase Wallet, the company overnight broadens from being a bank / exchange, to competing with payment providers such as Paypal, Square, or Stripe.

We believe that Coinbase actually doesn’t know where the future lies. It may be in international expansion, or custody, or BASE. For now, the goal is to ship product as fast as possible with the lowest headcount possible.

Robinhood Crypto Trading Revenue Plummets

Shares of Robinhood (HOOD) are down more that 13% over the past 24 hours after the company reported Q3 earnings that fell short of analyst expectations.

The company reported net revenue of $467 million, which fell slightly short of estimates of $478.9 million. Part of that fall in revenue was due to the significant decrease in trading volumes of cryptoassets.

Robinhood’s Q3 crypto trading revenue fell from $31 million in Q2 to $23 million in Q3 – a 26% drop. Even worse, Q3 revenue was down more than 55% from this time last year.

To make up for the losses, Robinhood CEO Vlad Tenev announced that the company would be soon expanding their crypto trading offering into the EU stating:

You can now add Robinhood to the list of crypto companies that are seeing clearer regulation across the pond.

This May Explain Why The SEC Sucks at Crypto

The SEC is having a world of trouble hiring crypto experts… largely because of an outdated rule that requires employees to sell all of their crypto.

What happened: This week, the Office of the Inspector General (OIG) released an annual report summarizing the most serious management and performance challenges facing the agency.

To no surprise, crypto was highlighted in the report more than once. Like in years past, the SEC has been open and honest about its challenge to regulate the complex and rapidly evolving crypto industry.

This especially holds true if your workforce lacks expertise. And that’s exactly what the SEC is dealing with. As highlighted in the report, specialized recruitment is one of the biggest headwinds for the agency.

And now we have a better understanding as to why…

Details: In a section labeled Specialized Recruitment Challenges, the OIG highlighted that while the agency aims to hire qualified crypto experts with a deeper knowledge of the market, one rule often deters them: If you want to work for the SEC’s crypto unit, you can’t own crypto.

In other words, candidates are unwilling to divest their crypto assets to come work for the SEC.

Why it matters: This situation leads to a glaring implication for crypto enthusiasts who have been simply asking for fair policies and regulation over the years. Given this rule, it’s easy to assume that the SEC is staffed by people who disown, or perhaps, even dislike crypto. Those with "crypto expertise" and a willingness to relinquish 100% of their crypto holdings could tend to be deep-seated skeptics.

This rule likely reinforces strong bias in the hiring process and it may shed light on why the SEC has adopted a consistently critical stance toward crypto.

Our take: The SEC has definitely wedged themselves into a sticky situation. If you were to compare the restrictions for SEC employees around stock ownership, their rules here on crypto aren’t that far off. Rightfully so, the SEC does not want anyone working for them to be personally incentivized. We don’t either. So, we’re not so sure this SEC ruling is actually wrong per se. But we do agree that it may lead to a staffing imbalance.

Why can’t the SEC put in place lockout periods for employees, as they do for stocks? Why can’t employees hold onto their bitcoin if they’re just investigating altcoins? Are the roles of the employees to protect investors or to protect the dollar?
These are questions that we don’t have answers to. At the end of the day, it all probably comes down to what is a security and what isn’t.

Unfortunately the agency’s lack of clarity is not only hurting crypto investors, but also indirectly hurting themselves in their efforts to find the talent they need.

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