Q4 wasnât the best showing for the âpremierâ crypto exchange. The financials werenât great, the earnings call was boring, and regulation continues to be a major factor.
This quarter however, the company and its executives seemed to have changed their tune. CEO Brian Armstrong seemed to be telling the truth when he tweeted in late March that there was a ânoticeable boost in moraleâ amongst Coinbase employees.
Brian Armstrong đĄď¸ @brian_armstrong
I have to say this SEC wells notice has caused a noticeable boost in morale.
Nice to have a common cause, but never forget the main goal is to build better products for our customers. Improving the policy landscape is necessary but not sufficient.
Mar 25, 2023
8.4K Likes 895 Retweets 927 Replies
Now, as we do every quarter, letâs cover Coinbaseâs quarterly earnings.
Financial Performance Looking Positive First, looking at the financials, the companyâs net revenue was up 22% quarter over quarter to $736 million. Although this is a very positive improvement, it is worth noting that it is still 27% lower than where it was a year ago at $1.2 billion. Of course, that was also a time of heightened crypto volatility.
Furthermore, the company showed a 37% decrease in recurring operating expenses quarter over quarter. Combined, this led to Coinbase posting a loss of $79 million in the first quarter, down from a $430 million loss a year ago.
Because analysts were expecting the company to report a loss of $316 million for the quarter, the stock, of course, skyrocketed more than 15% at the opening bell.
The company was also quick to point out it has âreturn to positive Adjusted EBITDA of $284 million,â the first time since Q1, 2022. Honestly, although great, this is really just an impact from reduced stock based compensation which we called out last quarter as embarrassing.
Trading Volume Is Flat, Take Rate Is Up While on face value this may seem like a negative, the quartersâ flat trading volume actually represents the first quarter of this crypto bear market where volumes werenât down.
In fact, monthly transacting users increased from 8.3 million to 8.4 million
Interestingly though, most of this increase was not in BTC and ETH:
âOther crypto assetsâ volume up 12% while BTC and ETH volume down
Yet, somehow, BTC represented an increase in transaction revenue on a percent of total⌠how could that be?
BTC transaction revenue up 1%
It turns out that during the first quarter, Coinbase increased their pricing for retail traders using the companyâs âsimpleâ platform.
One could look at this from two different perspective, both good and bad:
The good: Coinbase has pricing power. The company is by far the leading fiat-to-crypto exchange. This is important to note as it means that new customers trust Coinbase as an exchange when first entering crypto and they are willing to pay for that security.
The bad: No customer likes increased prices and relying on this strategy for returns can only go so far.
Subscriptions and Services Continues To Grow The companyâs revenue from subscriptions and services increased by 28% quarter over quarter to $362 million.
The company defines these as blockchain rewards, custodial fee revenue, interest income, and âotherâ (mostly the Coinbase One product).
Although each segment was up on the quarter, interest income continues to be the major factor at more than $240 million in revenue. Almost $200 million of this was from USDC interest as the company now has ~$1.2 billion of USDC on their platform. The rest comes from customer fiat on the platform which is now at $5.4 billion.
With interest rates continuing to increase, we expect interest income to continue to provide needed income to Coinbase in Q2.
The Company is Walking the Talk When It Comes to Reducing Expenses Last quarter we noted that:
Although Coinbase announced major layoffs over the past few months, their financial statement still shows a YoY increase from 3,730 to 4,510. Now, to be fair, the updated head count might not show up in the statements until Q1 2023.
This is exactly what happened.
The Q1 earnings report shows headcount at Coinbase now at 3,535, a reduction of nearly 1,000 employees.
Beyond just employee expenses, the company had a reduction in expenses in every category across the board.
Even Stock-based compensation was down 54% to $199 million, which was one of our major call outs last quarter.
Some Major Launches During a time in which regulators are scratching at the companyâs ankles, we have to give props to the team at Coinbase for continuing to ship interesting products and provide new offerings:
Regulation Looms As Always We could probably sum up the bad aspects of Coinbaseâs business in one word: regulation
The company continues to deal with regulation by enforcement, with the company receiving a Wellâs notice from the SEC during the quarter.
Much of the Q&A also revolved around regulatory questions including a question around whether or not the company would leave the US. Brian Armstrong responded by stating:
Let me be clear, we're 100% committed to the U.S. I founded this company in the United States because I saw that rule of law prevails here. That's really important. And I'm actually really optimistic on the U.S. getting this right. When I go visit DC, there is strong bipartisan support for Congress to come in and create new legislation that would create a clear rule book in the U.S.
Furthermore, in the shareholder letter, the company noted that:
Substantive, bipartisan legislation is already taking shape and we believe we could see real action before the end of Q2.
As we have seen over and over again, we just donât know what is going to happen in regards to regulation. It could have a negative impact on Coinbase, or it could absolutely be a boon to the business.
Concerns Although there was significant progress quarter over quarter for Coinbase, with even the executives sounding more upbeat on the earnings call, we still have to point out our concernsâŚ
The rest of this breakdown, can be found on our site. Just click the link below to continue reading.
Overall, the company performed well in Q1, 2023. With that being said, it is still dependent on the same olâ revenue streams.
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An Introduction to Sam Altmanâs Crypto Project, Worldcoin
Outside of Elon Musk, thereâs no hotter name in tech right now than Sam Altman.
The trajectory of this 38-year-old entrepreneur has been nothing short of meteoric since he left Stanford in 2005. After swiftly climbing the tech ladder, he joined Y Combinator, a prominent startup accelerator, as a partner in 2011. His responsibilities expanded in 2014 when he assumed the position of President. During his tenure, Altman has been instrumental in investing in a multitude of tech startups.
By 2020, however, Altman then shifted his primary focus to OpenAI, serving as the CEO.
Now, unless youâve been living on a deserted island for the last 6 months, you know that AI is all the rage these days â an ongoing revolution largely thanks to OpenAIâs release of ChatGPT, which reached 100 million users in two months, the fastest growing app on record.
The AI revolution comes with a long list of advantages (ChatGPT is a godsend for time management!) and, of course, uncertainties (could AI monopolize employment and become a vector for mass misinformation?) as well.
These uncertainties can be daunting, which is why Altman is spearheading a relatively under-the-radar project to address them.
Intriguingly, this project is anchored in blockchain technology: Worldcoin.
Rocky Beginnings Worldcoin first hit the press in 2021. At that time, AI was a pipe dream. Concerns over its potential consequences were virtually nonexistent. But Altman, because of his work with OpenAI, knew otherwise.
AI was coming, and the time to prepare was now.
A chief concern of Altmanâs was what people will do once AI enters the workforce. In a world without the need to work as much, how do people make a living? His answer: Universal Basic Income (UBI) derived from the immense capital gains an AI workforce would produce.
Thus, Worldcoin was born, initially described as a âcollectively-owned global currency that will be distributed fairly to as many people as possibleâ. Basically, it was the crypto version of UBI.
It was (and still is) a super cool idea, but the way Worldcoin went about it turned a lot of people off, including us. The rockiness began when people realized they would only receive their UBI after scanning their eyeballs into a Worldcoin metal âorbâ and really picked up when the MIT Technology Review exposed how Worldcoin recruited its first 500,000 users.
Then the crypto market crashed, AI took off, and people forgot about Worldcoin. That is, until this March.
Allow Me To Reintroduce Myself Worldcoinâs new mission is to create a three-pronged product suite of:
Global ID
Global currency
An app that enables payments, purchases, and transfers using a mix of cryptocurrency and traditional currencies
The first part of this plan was fulfilled in March with the announcement of the proof-of-personhood protocol World ID. The idea behind World ID is to be a digital passport verifying you are a human while protecting your privacy. Thus, people who have a World ID can use it to sign into various web and crypto apps, proving that they are in fact a real person.
Although this is something that could prove crucial in the AI age of the internet where the lines between robot and man become increasingly blurry, the concerns over user privacy are still alive, as aspiring World IDâers must verify themselves either through their phone or through an eye scan.
The World App Another part of Altmanâs plan (an app that enables payments) was recently fulfilled with the release of Worldcoinâs crypto wallet, World App.
On the surface level, World App is simply a minimalist crypto wallet. Existing on the Polygon blockchain, World App allows people to store and send Bitcoin, Ethereum, and the stablecoin DAI. In this regard, itâs really nothing special compared to the other wallet offerings on the market.
What makes World App different is its role in the broader Worldcoin vision. World App is where people will manage their World ID, claim their Worldcoin Grants (the UBI from Worldcoinâs token, due to be released later this year), and partake in the governance of the Worldcoin protocol. In this regard, World App is absolutely special compared to the other crypto wallets, especially if the vision of AI-funded UBI comes to fruition.
Why Does This All Matter? A common criticism of crypto is that what itâs doing doesnât really matter in the real-world. And, although weâve highlighted projects with real-world use before, the truth is that these critics are largely right.
Too much of crypto is financial speculation and whale games.
Worldcoin is admirable because it aims for more. Using crypto to address two of the biggest issues stemming from the AI future (how one proves they are not a robot, or how one pays their bills if the robots replace their jobs) is a clever and inspiring use of blockchain technology.
Obviously, the project is not without its drawbacks, particularly in the user privacy realm. But, if they are able to remedy those ills, Sam Altman may just hit another homer in the coming years.
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