2023 Oct total crypto market cap: $1 trillion, BTC $26k,
2024 Feb total crypto market cap: $2 trillion, BTC $52k, 11 BTC ETFs
Lately I have been pondering what is a convenient way to get exposure to the whole digital asset market, without having to buy specific assets. Then Coinbase, the only publicly traded and regulatory compliant US digital asset exchange, reported Q4 earnings that beat across the board on 15th Feb. Given its roughly $40 billion market cap and its central position in the fast growing $2 trillion ecosystem, my interest was piqued.
If you have been a long term subscriber to the Crypto Adoption Curve, then you know there are many verticals in the fast changing digital asset market, from layer two infrastructures to social media. You would also know there are specific markets that have found product market fit and are revenue generating: stablecoin, trading and staking.
Curiously, Coinbase has growth engines in each of the three. So in this week’s newsletter, I will take you on a deep dive into the numbers that suggest perhaps there is a lot of room for the market to run before it even reaches last cycle’s activity levels.
Coinbase has 4 main revenue engines. I listed them below in the order of their contribution to Conbase’s top line.
Trading
Stablecoin
Staking
Custody
Lert's go through them one by one.
Transaction Volume & Revenue
Like any exchange business, Coinbase takes a fee on trades that happen on its exchange. Like any exchange business, the volume number scales linearly with the price of assets being traded. And as such, the 100% increase in BTC price, which makes up approx 30% of the volume being traded, had a noticeably positive impact on the total volume on the exchange.
Both the retail and institutional segments of the trading business saw 2x the volume in Q4 2023 vs Q3. Not bad. Here is the revenue breakdown corresponding to these volume numbers.
Did you spot the secret hidden in this table? While the Retail segment accounted for 17% total trading volume, it makes up 94% of the total revenue generated from trading volume on the exchange!
Retail segment generated $492.5 million in revenue on $29 billion volume in Q4, an average take rate of 1.6% or 1600 bps. By comparison the Institutional business generated $36.7 million fee on $125 billion volume in Q4, an average take rate of 3bps. The crypto retail trading business is 500x more profitable than the institutional segment!
Now if the Q4 number is a sign of what is to come, then a booming digital market is extremely conducive to Coinbase’s trading revenue generation. The correlation between volume and revenue increases in Q4 is at 63%.
Retail is back, but nowhere near peak interest.
The volume number from both the Retail and the Institutional segments are far from the euphoric numbers we saw in 2021. In 2021, the Retail segment saw $535 billion trading volume and $1.14 trillion for the Institutional side. In 2023, the Retail segment saw $75 billion and $392 billion for the Institutional side. We are about 85% away from the previous peak market activity on the retail side and 66% away on the institutional side judging by the trading volume number.
You can make your own assumptions about the BTC price and total digital asset market cap in a year, and estimate what is the likely impact on Coinbase’s trading revenue.
Diversifying Business Mix
Transaction fees is the biggest revenue engine but Coinbase has been diversifying its revenue mix. Below is a table summarizing the change over time.
