Coinbase Global, Inc. COIN previously projected that the launch of the spot Bitcoin BTC/USD ETFs could add billions to the crypto market cap, opening new opportunities for asset-class investments.
Through its primary roles as a crypto custodian and trading associate for ETF issuers, COIN’s financials have seen a considerable uptick, proving the forecast to be accurate.
COIN posted its first quarterly profit in two years, primarily driven by increased trading activity fueled by restored investor enthusiasm for digital assets.
Investors responded ardently to the company’s return to profit, resulting in an over 13% increase in COIN's shares in pre-market trading on Feb. 16 following the release of its fourth quarter and full year 2023 financial results the prior day. Over the past year, the stock has gained about 175%.
Let’s now dive deeper into COIN’s fourth-quarter results and identify possible contributory elements.
COIN’s total revenue rose 41.5% quarter-over-quarter to $953.80 million, outpacing analysts' predictions – primarily propelled by an 83.4% quarter-over-quarter spike in transaction revenue. This surge was attributed to increased volatility and higher cryptocurrency prices following the much-awaited spot Bitcoin ETFs approval.
Moreover, the positive outlooks around improved economic conditions in 2024 led to robust 'risk-on' activity in capital markets, thereby driving the company’s transaction revenues higher.
COIN's total trading volume grew 102.6% sequentially due to impressive growth in Markets and Coinbase Prime – the former majorly involving market maker activity and the latter leading to a higher average fee rate. Anticipation of Bitcoin ETF approval enhancing market conditions and COIN’s expanding product portfolio can also explain the strength of Prime volume.
As of the fourth quarter, 33% of the world’s top 100 hedge funds by reported AUM decided to onboard with COIN. The company saw increased client onboarding and high reactivation rates among large-scale institutional clientele across its product range. COIN's custodial fee revenue rose 24.7% quarter-over-quarter to $19.70 million, driven by high crypto asset prices.
The investment community was primarily buoyed by the impressive surge in COIN's annual total subscription and services revenue, which shot up by 77.5% year-over-year. Stablecoin interest income, along with standard fiat interest income, constituted the main drivers of growth for COIN in 2023 – primarily tied to macroeconomic factors like climbing interest rates that were beyond COIN's immediate control.
COIN’s total operating expenses reduced 29.2% year-over-year to $838.18 million in the fourth quarter. This decline resulted in a robust net income of $273.44 million, or $1.04 per share, compared to the net loss of $557 million, or a loss of $2.46 per share in the year-ago quarter.
COIN Asserts Dominance in the Bitcoin ETF Custody Space
The spot Bitcoin ETF market has witnessed unprecedented expansion, seizing the runner-up position among commodity ETFs. COIN has distinguished itself as a pivotal force by offering trading, custody, and other services for various digital assets. Holding the custodial reins for eight out of the 11 newly-incepted bitcoin spot ETFs substantiates COIN's influential role in this booming domain.
But what precisely does the role of a custodian encompass? Essentially, COIN is a regulated financial establishment entrusted with ensuring the security and safety of the bitcoin assets underpinning these ETFs – this additional safeguarding measure fortifies trustworthiness.
This tactical approach aligns with COIN’s broader objective of fostering cryptocurrency adoptions within traditional financial institutions. The stability and prosperity of these bitcoin spot ETFs indicate the potential for an influx of more prominent financial players. This development could usher in breakthroughs for COIN.
Unsurprisingly, a staggering 90% of the investment funds have been procured by COIN, emphasizing its escalating role in shaping the junction of traditional financing and the digital currency realm.
Potential Investor Worries Regarding COIN Shares
Fees: Despite COIN’s commendable financial strides in 2023, some issues persist. The Bitcoin ETFs launched with annual fees of 0.25% or lower, which is lower than the fees when procuring cryptocurrencies on the COIN platform, putting pressure on its pricing for consumers. Consequently, it raises a thought-provoking question: with an option to seek exposure to Bitcoin at reduced transactional costs in a conventional brokerage account, what does COIN offer as a unique proposition?
There was an expectation that lower trading fees would divert investors from exchanges like COIN toward the ETF. Surprisingly, COIN remains unfazed by these trends, refusing to believe that ETFs are causing a flight of investors.
Valuation: COIN's shares are trading at a remarkably high multiple of earnings. The company's forward price-to-earnings (P/E) ratio of 78.74x and forward EV/EBITDA multiple of 23.06 suggest an elevated valuation that its limited growth prospects do not adequately justify.
Analyst’s Skepticism: JPMorgan analyst Kenneth Worthington remains skeptical about the materialization of COIN’s promised benefits. His critique centers on a perceived ambiguity surrounding the company's operations. However, it's noteworthy that Worthington has revised his formerly bearish position. His newly set 12-month price target is $95, the least among Wall Street analysts, but he still maintains his Neutral rating for COIN.
Regulatory Hurdles: COIN presently finds itself embroiled in a lawsuit with the SEC, which, last June, accused the company of unlicensed cryptocurrency securities exchange, broker, and clearing agency operations, thereby imperiling its future earnings. The company chose to mount a legal challenge, and its CEO, Brian Armstrong, has been notably forthright in expressing his disagreements with the SEC's accusations.
Regulatory transparency remains a critical discussion for COIN. Armstrong consistently states the exchange’s commitment to advocating for lucid regulation in the cryptocurrency sector. Notably, he underscores COIN’s preparedness to pursue all available means – including litigation and engagements with federal lawmakers – in its quest for clarity.
Looking Ahead
Not long after the SEC approved applications for spot Bitcoin ETFs, the apex crypto's value climbed to over $50,000, exceeding early predictions, with issuers observing an astronomical upswing in demand.
Unprecedented net inflows channeled into spot bitcoin ETFs, smashing previous records. By comparison, it took gold ETFs one year following their inception in November 2004 to amass $3 billion – a feat bitcoin ETFs achieved within mere weeks, signaling an extraordinary inception.
Bitwise Asset Management’s chief investment officer, Matt Hougan, predicts an upward trajectory in bitcoin demand as further national account platforms appear and interest from large institutions heightens. He foresees that spot bitcoin ETFs could even claim the title of the “biggest ETF launch of all time.’’ He said, “I don’t think demand is slowing down for the next 18 months. I expect these ETFs to set records.”
Current trends suggest bitcoin’s overall upward trajectory will likely prevail, potentially revisiting and surpassing its all-time high of $69,000 leading up to the fourth mining reward halving on April 19. Bitcoin typically reaches its low point between 12 and 16 months before a halving, subsequently embarking on an uptrend in the year following the event.
Also, Bitcoin's halving indirectly impacts transaction fees. As miners' block rewards diminish, competition among users vying for their transactions to be included in each block's limited space may escalate. This increased competition could lead to heightened transaction costs since users might propose higher fees to fast-track the processing of their transactions.
As per Armstrong, every institution is adopting crypto and the asset class is being integrated into diversified portfolios as a standard part. Armstrong says that formalized acceptance of digital currency within the global financial structure constitutes a substantial achievement, with COIN situated as a principal trusted partner at the core of this transition.
COIN projects subscription and services revenue for the fiscal first quarter of 2024 to fall between $410 million and $480 million, and these figures hinge greatly upon fluctuations in cryptocurrency values.
However, custodial services are not the sole means by which COIN profits from this flourishing sector. The platform also facilitates trading via its service, Prime, and offers financing for trade settlement, creating multiple streams of revenue generation.
The Coinbase CEO elucidates an ongoing focus on international expansion, complemented by the launch of new derivative products. He further moots the idea of morphing the COIN wallet into a “super app” designed to boost the broader adoption of crypto payments.
COIN's dedication to adhering to regulations and its robust fiscal position are underscored as pivotal advantages over competitors. This, in turn, fortifies the firm's identity as a dependable, pioneering force within the crypto marketplace. Industry experts foresee these endeavors enhancing COIN's market position and spurring a more widespread embrace of digital currency, thus advancing the progression of the world's financial systems.
Bottom Line
The surge in Bitcoin ETFs coupled with COIN's strategic initiatives has catapulted the shares of the exchange near their two-year high, thanks to the attention of both individual and institutional investors.
There's growing investor confidence that bitcoin ETFs will serve as a magnet for increased institutional capital infusion into the crypto sector. COIN's tactful decision earlier this month to reduce fees has stoked its current success, in appealing to high-volume traders to bolster its institutional business. This step could be beneficial for COIN’s resilience in the times to come.
Aside from dominating the custodial services sphere, COIN boasts an array of achievements, one of which includes launching its international division successfully, along with the introduction of a layer-2 network known as the Base.
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