Coinbase's Base Platform Poised to Drive Growth Amid Q1 Earnings Success
Summary:
Coinbase's first-quarter earnings reveal that the company's Ethereum layer-2 solution, Base, shows significant potential to position Coinbase as an industry leader in decentralized finance (DeFi). With a surge in transaction volumes and user growth, Base seems well placed to be a key growth driver for Coinbase. Additionally, Coinbase's custodial services for eight of the 11 new Bitcoin ETFs ensure increased revenue. Going forward, despite short-term crypto market volatility, Coinbase's diversified revenue sources indicate good prospects for long-term growth.
On May 2nd, Coinbase announced their first quarterly earnings report, which demonstrated the company's robust performance due to a lively Bitcoin (BTC) and Ethereum (ETH) market over the past few months. Interestingly enough, Base, Coinbase’s platform, showed greater potential. This could position Coinbase as the NVIDIA of decentralized finance (DeFi).
Base, which debuted in August 2023, is an Ethereum layer-2 solution designed to expand Coinbase’s on-chain user base by speeding up transactions. The ultimate goal is to decentralize Base and establish an all-inclusive global crypto ecosystem, protected by the Ethereum mainnet. As per the Q1 report from Coinbase, Base’s volume surpassed its rivals, especially following Ethereum’s Dencun upgrade. Base facilitated DeFi crypto exchanges with daily trading volumes exceeding $1 billion, closing the gap with Coinbase’s main exchange volumes where almost 250 cryptocurrencies are dealt with.
The Dencun upgrade led to a significant uplift in activities on Base, resulting in increased daily transaction volumes and earnings, outperforming competitors like Optimism and Arbitrum. This reduction in layer-2 scaling chain costs boosted user interaction and transaction volumes on Base.
The number of new Base users rose by more than 8 million between July 2023 and May 2024. Since the upgrade, Base has continued to process more than 3 million transactions daily, significantly increasing its fee revenue. Given this continued pace, Base could likely emerge as a key growth factor for Coinbase. Base's earnings following the Dencun upgrade exceeded those of other major Ethereum scaling networks.
This hike in Base's revenue is primarily due to its support for around 250 DeFi protocols on the network. This rapid increase in market share showcases Base’s potential and reinforces the claim of Coinbase potentially becoming a DeFi industry frontrunner like NVIDIA.
The cryptocurrency outlook has returned to macroeconomic aspects such as interest rates, inflation, stock market directions, and geopolitical tensions, now that one of Bitcoin's major price drivers, the halving, has ended. The Federal Reserve’s stance on higher for longer might set a risk-off mood in the markets, pushing down riskier assets. Coinbase offered promising guidance for Q2 of 2024, however, asserted that results depend on the fluctuating crypto prices. The second quarter might be weaker than the first, due to the earlier peak of Bitcoin in mid-March and subsequently decreasing trading volumes, as well as falling crypto prices. Bitcoin remains likely to return to a bull market, projecting higher price levels in the long run in the face of potential short-term weaknesses.
Coinbase's transaction-generated revenue forms approximately half of the net revenue. The rest comes from non-transaction-related streams, including subscriptions, services, custodial fees, stablecoin revenue, blockchain rewards, and interest income. Non-transaction revenue has seen a solid growth in recent years and could potentially balance out the highly crypto price-dependent transaction revenue.
As of January 10th, Coinbase is the custodian for eight of the 11 newly launched Bitcoin ETFs, with these ETFs managing assets nearing $60 billion during Q1 of 2024. Coinbase charges custodial fees proportional to the assets under custody. As the assets under management grow, so will the custodial fees.
The revenue from Coinbase custodial fees was $19.7 million in Q4 of ’23. Post the mid-January Bitcoin ETFs launch, Coinbase's custody fee revenue rose by 90% to $32.3 million. Cryptocurrency custodians play a role analogous to traditional finance banks, settling trades, managing regulatory reporting, and handling clients’ assets. The process, however, is more complex and specific in the case of crypto markets.
While it may take a while, Base could eventually contribute to Coinbase’s top-line revenue. This additional source could help detach Coinbase's share price dependency on the cryptocurrencies' price over time.
Overall, with the U.S.'s eleven Bitcoin ETFs, six Bitcoin and Ethereum ETFs launched in Hong Kong in April, and the potential approval for the first Bitcoin ETFs by the Australian Securities Exchange before 2025, there is still considerable potential for the growth of cryptocurrencies. This could consistently support crypto in the long run, benefitting both transaction and non-transaction revenue of Coinbase. Despite the short-term dip due to declining crypto prices, Coinbase’s diversification in revenue sources might propel higher share prices in the future.
Violeta Todorova, a Cointelegraph guest columnist and senior research analyst for Leverage Shares, authored this article. Previously, she served as a senior analyst for Morgans Financial Limited and Forex Capital Trading. The information in this article is intended for general information and should not be viewed as legal or investment advice.
Published At
5/4/2024 1:32:02 AM
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