Author: Tanay Ved & Matías Andrade Source: Coin Metrics Translation: Shan Ouba, Golden Finance
Key Takeaways:
The volatility faced by the cryptocurrency market is influenced by a variety of factors, including macroeconomic factors and cryptocurrency-specific catalysts such as sales of the Jump Crypto portfolio.
Coinbase’s Q2 2024 earnings showed a shift in revenue streams, with trading revenue down 27% QoQ, but subscription and services revenue up 17% QoQ, with stablecoin revenue being the largest contributor.
Coinbase stock ($COIN) has shown strong positive correlations with the Nasdaq Composite Index and major cryptocurrencies, highlighting its unique position at the bridge between traditional and crypto markets.
introduce
This article provides an update on the crypto market amid the global market sell-off and breaks down Coinbase’s earnings for the second quarter of 2024.
Global markets and crypto assets fall
Global markets and crypto assets were rocked by a combination of macroeconomic developments and crypto-specific events over the weekend. The Bank of Japan (BoJ) raised its benchmark interest rate from 0-0.1% to 0.25%, shifting toward monetary tightening. This led to the biggest drop in Japanese stocks since 1987, with the Nikkei 225 plunging more than 12% on Monday, while the yen (JPY) surged against the dollar. U.S. stocks, troubled by recession risks and weaker-than-expected economic data, fell further, with the Nasdaq Composite leading the decline.
Source: Coin Metrics Reference Rate
Of course, crypto markets were not immune to these developments. The total cryptocurrency market cap fell about 26% to about $1.7 trillion before rebounding on Monday, with BTC, ETH, and SOL falling between 18% and 28%. Crypto-specific catalysts exacerbated the sell-off, such as Jump Trading unwinding its crypto portfolio following a CFTC investigation, adding to the ongoing but fading supply glut of Mt. Gox creditor repayments and GBTC and ETHE outflows. Over the past two weeks, Jump Crypto’s liquidations have been primarily in ETH, with deposits on the exchange rising to levels seen during the FTX crash.
Ultimately, these developments led to increased volatility in crypto asset markets and triggered exchange liquidations at important price levels.
Source: Coin Metrics Market Data
Coinbase Q2 2024 Earnings Highlights
Coinbase, one of the most prominent cryptocurrency businesses in the United States and the largest cryptocurrency exchange in the country, reported its financial results for the second quarter of 2024 last week. Total revenue was $1.4 billion, down 11% from the previous quarter but up 108% from the same period last year, with trading volume revenue (the core engine of its business) falling 27% from the previous quarter to $781 million.
Nonetheless, Coinbase made exciting progress in Q2, adding new product categories and reducing friction from on-chain interactions. This included launching Smart Wallets, reducing fees associated with its Layer 2 Base, and integrating Base with Stripe to expand stablecoin adoption and global payments infrastructure. Significant progress was also made towards greater regulatory clarity with the launch of a spot Ethereum ETF in the U.S. and the implementation of MiCA regulations in Europe.
Trading income
Source: Coin Metrics Market Data
"Crypto asset volatility (a key driver of revenue) declined approximately 13% from the Q2 average compared to the Q1 average, resulting in weak crypto spot market trading conditions in the second quarter" — Coinbase Q2 2024 Shareholder Letter.
Trading activity across the market declined from its peak in the first quarter, helped by a sharp rise in crypto asset prices, driving up volatility and trading volumes. In the second quarter, Coinbase's spot trading volume stabilized at a 7-day average of around $2 billion, with 60% of spot trading volume coming from BTC, ETH, and USDT, and 40% from other crypto assets. This reflects the market's preference for mature, high-cap assets in the second quarter, likely due to the fact that institutional trading volume ($189 billion) is larger relative to retail trading volume ($37 billion) at this stage of the market cycle.
Subscription and services revenue
However, this did not prevent its business from growing strongly this quarter. Coinbase's recent earnings history shows that revenue from non-trading activities ("subscription and service revenue") is increasingly affecting Coinbase's revenue structure and strategic direction. This part of revenue, which includes revenue generated by Circle's USDC protocol, blockchain rewards generated by PoS staking, and custody fees for Bitcoin spot ETFs, increased by 17% month-on-month to $599 million.
Source: Coinbase quarterly earnings
The largest increase came from USDC held on the platform, which stems from their revenue sharing agreement with Circle. Coinbase and Circle equally share the interest income generated by the reserves that back USDC (such as U.S. Treasuries and other dollar-equivalent assets), benefiting from the current high interest rate environment. Despite its growing prominence, the Federal Reserve's decision to cut interest rates in the near future may adversely affect the stablecoin revenue portion of Coinbase's business.
Which variables are correlated with $COIN stock price?
As Coinbase expands into numerous verticals outside of its core trading business, it is likely to be impacted by the dynamic, interconnected nature of the crypto ecosystem and broader market shifts. Understanding the relationship between various metrics and asset returns and the returns of Coinbase stock (COIN) can provide valuable insights into its underlying drivers and risk factors.
Source: Coin Metrics Reference Rate, Network Data Pro, and Google Finance
The figure above shows the Pearson correlation matrix of the percentage change in various indicators and asset returns versus COIN returns, illustrating the strength and direction of the linear relationship between these variables.
The percentage change in the Nasdaq Composite Index exhibits the highest positive correlation (0.58) with COIN returns. This suggests that COIN returns are significantly affected by broader market trends and investor sentiment in traditional financial markets, particularly technology stocks. Correlations with BTC returns (0.49) and ETH returns (0.44) are also relatively high, indicating that growth in the largest crypto asset affects COIN returns. Interestingly, metrics related to Coinbase’s business such as spot trading volume, stablecoin supply, and staked ETH units show negligible correlations. However, looking at rolling 90-day correlations can provide a better understanding of how these variables change over time.
Correlation between $COIN and income sectors
Source: Coin Metrics Network Data Pro, Market Data Feed
The 90-day rolling correlation between COIN earnings and key metrics shows significant movement, reflecting the dynamic nature of the cryptocurrency market and metrics relevant to Coinbase's business. In Coinbase’s early days as a public company, COIN earnings showed the highest positive and negative correlations (+0.3 to -0.4) with the exchange’s spot trading volume, indicating its initial importance to investors. However, its relationship to changes in stablecoin supply and ETH staking has also become more prominent over time, although the relationship remains weak, suggesting that investor attention is gradually shifting towards new revenue streams. .
Correlation between $COIN and market returns
Source: Coin Metrics Reference Rate, Google Finance
As a Nasdaq-listed company, Coinbase offers a unique portfolio of exposure to both the cryptocurrency and traditional financial markets. The rolling correlation with the Nasdaq Composite Index returns has been strong and positive until 2023, when the cryptocurrency market declined, amplifying the impact of traditional markets. While BTC, ETH, and SOL returns also show moderate positive correlations due to the inter-correlated nature of cryptocurrencies, these relationships can diverge, especially in the event of changing macroeconomic conditions, periods of market volatility, or asset-specific catalysts.
in conclusion
Markets have been volatile recently, and risk aversion is likely to continue, testing participants' long-term convictions due to a combination of macroeconomic and cryptocurrency-specific developments. Despite these challenges, on-chain infrastructure and applications have proven resilient. In the short to medium term, the easing of excess supply from the repayment of Mt. Gox creditors, the final completion of the Jump Crypto liquidation, and the easing of Grayscale's GBTC and ETHE outflows could present opportunities for retail and institutional investors. Looking ahead, positive ETF flows will be critical as they could signal continued demand for crypto assets, catalyzing a return to growth in the crypto market, potentially benefiting companies like Coinbase, and driving broader adoption of the on-chain ecosystem.
