The Breakdown - Coinbase SMASHES Earnings Estimates

Episode Date: February 16, 2024

Coinbase had a great Q4 and Wall Street is loving it. NLW discusses the key stories to wrap up the week. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Friday, February 16th, and today we are talking about Coinbase's blowout earnings. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it. Give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Hello, friends, happy Friday. Today we kick off with Coinbase reporting their Q4 earnings, which happened last night, and absolutely blew past expectations. The exchange recorded 953.53.

which was an increase of 41% compared to Q3 and almost 50% compared to Q4 of 2022. Coinbase also returned to profit during the last quarter, recording a net income of 273 million. This was their first profitable quarter over the past two years after recording a loss of $557 million in Q4 of 2022. A highly profitable Q4 was enough to offset losses earlier in the year, giving Coinbase a 95 million in net profitability for 2023. That is, of course, still a long way from their peak of $3.6 billion in profit during the height of the 2021 bull run, but a massive turnaround from the $2.6 billion loss recorded in 2022.

Earnings per share came in at $1.4,000, beating Wall Street estimates by 2%. Anil Gupta, Vice President of Investor Relations at Coinbase said, We're really pleased with the results. Operational rigor that we set forth earlier in the year has really paid off over the course of 2023. Below the headline figures, Coinbase's earnings told a story of a return to growth for crypto businesses late last year as ETF hype built. For example, the exchange saw a doubling in trading volume compared to the previous quarter. Gupta echoed comments from Robin Hood's earnings call earlier this week,

which framed the ETF launch as additive to their crypto business. Gupta said, the ETFs are really a win-win for Coinbase. I think we're already starting to see that play out on the platform. Coinbase is, of course, the primary custodian of eight of the 10 ETFs, although their profits from custody and grayscale's assets would be reflected in this quarterly report. Gupta added, custody is obviously a relatively small part of the business today, but the great news about ETFs is that it's invigorating the entire sector, so you're seeing a lot of activity and engagement on the platform. Coinbase guided subscription and services revenue at 410 to 480 million for Q1 of this year, after disclosing that 320 million has already come in the

door so far. Those results would be another 10% increase after growing by 12% in the last quarter. Subscriptions and services have grown 78% year-on-year, becoming an important revenue driver for the firm. Significant downsizing and organizational improvements have also bolstered earnings. Coinbase reported a $2.6 billion drop in operational costs compared to the previous year. granular figures for trading volumes show that both institutional and retail customers have come flooding back in the past quarter. Retail volume was up 164% to hit $29 billion in Q4, and much larger institutional volume increased by 92% to reach $125 billion. Meaning for you math-wizz is out there that only one-fifth of Coinbase's volume is currently linked to retail demand. Bitwise Crypto Equity's analyst Alyssa Choi noted that,

retail trading ranged between 28 and 40% of total trading volume in the last cycle. It bottomed out in Q3 of 23 at 14% of total trading volume. Coinbase has not yet applied new FASB accounting standards which allow crypto to be marked at fair value on the balance sheet. They will begin doing so from Q1 of this year, which some analysts suggest would cause a one-time jump of around $2 in earnings per share. During the earnings call, CEO Brian Armstrong discussed the state of U.S. regulations, noting, Coinbase has always taken a long-term approach, focusing on building in a compliant

manner, even when it wasn't the popular choice. Many of our competitors cut corners and broke laws to get big fast, and we've seen how that strategy played out. The exchange is currently supporting two crypto bills in Congress and has invested heavily in lobbying in political funding efforts, most notably as a major donor to the Fairshake Super PAC. Armstrong added that, quote, we remain confident that the U.S. will get this right, whether it comes from the courts creating new case law, Congress passing new legislation, or ultimately the 52 million Americans who've used crypto voting in this upcoming election. Coinbase's stock was up 13% on Thursday's open as Wall Street sniffed out the strong earnings beat

coming and up a further 11% in aftermarket trading. Anthony Pompliano tweeted, Coinbase earnings just destroyed Wall Street expectations. This should shake the smart money out of their hibernation. It's going to be a fun year. Vincent Zhao from modular capital writes, Bull case on why we are early from Coinbase's earnings. One, last cycle, retail volumes 35x from trough to peak. We are 3x from trough and 80% below peak. Two, retail growth, largely from existing pro users trading more, Normie's not in yet. Three institutional volumes and take rate show funds coming in. Coinbase's team were also excited to share the results.

Victor Bunnan writes, The incredible thing is that Coinbase is only accelerating. I don't think folks understand the extent to which the people, culture, products, vision, and so much more have improved over the past few years. We are going to absolutely crush in the years ahead. Engineer Yuccaola writes, This era of Coinbase will be remembered, similarly to Apple from 2007 to 2010 or Google from 1998-2001,

relentless innovation that laid the foundation for a generation of subsequent technological progress and propelled the company to its next level of societal relevance. It was a great report to see and definitely suggest to me that we are at the beginning of a very good period. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain hours. Overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the question, what if? It invites people in instead of leaving them out. It's on 24-7, 365, and moves at the speed of real life. Not everyone

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by Payward Ventures Inc. PVI, DBA, DBA, Cracken. Now, another interesting tonal shift came from Fed Governor Christopher Waller, who has come out as a fan of U.S. dollar stablecoins. Speaking at an event on Thursday, Waller said, people often conjecture that cryptocurrencies like Bitcoin may replace the U.S. dollar as the world's reserve currency. But most trading in DeFi involves trades using stablecoins, which link their value one-for-one to the U.S. dollar.

About 99% of stablecoin market capitalization is linked to the U.S. dollar, meaning that crypto assets are de facto traded in U.S. dollars. So it is likely that any expansion of trading in the defy world will simply strengthen the dominant role of the dollar. Officials have typically framed stablecoins as a threat to both monetize. policy and financial stability, so it is quite refreshing to hear a Fed governor make this point. Waller's speech more broadly was about threats to dollar dominance. He discussed the possibility of a challenge from the euro and Chinese RMB in global trade settlement, and the speech also

touched on concerns about the overuse of sanctions. Waller concluded his speech by saying, I do not expect to see the U.S. dollar lose its status as the world's reserve currency anytime soon, nor even see a significant decline in its primacy in trade and finance. Recent developments that some have warned could threaten the status have, if anything, strengthened it, at least so far. Peter Van Valkenberg, the Director of Research at Coin Center, writes, great to see Governor Waller making a point that should be more widely understood and discussed in economic policy and even national security circles. Defi is a potent tool for preserving the dollar's power globally. Unlike China's CBDC plans, stable coins issued on permissionless

networks are something people actually want to use all around the world, if they are dollar-backed, all the better for long-term U.S. interests. Suzuki at Dystopia Breaker writes, No way, exporting dollarization into the globe on the fastest settling rails ever invented might actually increase the soft power of the U.S. dollar? Who could have predicted this? Treasury and the Fed has been too focused on the soft power of their ability to control the rails and not focused enough on the soft power of the simple availability of the dollar. Now, I'm sure the quotes that many of you will resonate most with come from Niraj from

Coin Center and Nick Carter from Castle Island. Neeraj writes, I don't know how this isn't immediately obvious to people. And Nick says, The astonishing part is that there's a single person who hasn't realized this yet. I am completely in this camp. It seems so patently obvious to me that the single best thing to happen to the U.S. dollar in the past 10 years is the invention of U.S. dollar stablecoins. Yes, there are threats to the dollar's dominance, but it still remains the most in-demand

currency. Stable coins making a proxy of that currency available incredibly easily does nothing but reinforce that position. Now, jumping over to the ongoing conversation about illicit finance in crypto, on Thursday, the House Financial Services Committee held their second in a series of hearings about it. They heard testimony from a range of representatives from crypto companies, including security firm TRM Labs, and then Coinbase and Circle. The point of these hearings has been to have an open discussion to decide what should be done

about money laundering and terrorist financing within crypto. Democrats have been adamant that enhanced measures are required, while Republican leadership are now signaling a willingness to take a closer look at the issue. One thing seemed clear from the expert witnesses. Imposing the Bank Secrecy Act on Miners and validators would do absolutely nothing to address illicit finance. With each public comment, it's becoming more and more clear that this proposal from Elizabeth Warren will be blocked by House Republicans. Certainly the most controversial comments came from representatives of Coinbase in Circle, who each urged the government to do more about non-compliant offshore firms.

Grant Rabin, the director of financial crimes legal at Coinbase said, while onshore regulated exchanges invest heavily in compliance to stop bad activity, criminals continue to seek out offshore platforms without those same robust money laundering programs and controls. The U.S. government should use all of its existing tools to go after these platforms. Caroline Hill, the senior director of global policy and regulatory strategy at Circle said, some digital asset companies have a public track record of being above AML CFT regulation, even if issuing a U.S. dollar-backed token. The power of the U.S. government's economic tools depends on the jurisdiction that the Treasury

has over U.S. financial institutions, and by proxy, the U.S. dollar and international payment services. Later in the hearing, Hill urged the government to, quote, ensure that it's using its authorities when there are U.S. touchpoints. When Wiley Nickel explicitly raised Tether as an example of U.S. touchpoints, with its portfolio of treasury bonds custodied in New York with Cantor Fitzgerald, Hill responded, I would think that the Treasury Department would have the authority to take action, given this U.S. touchpoint, and I would hope they are looking at this seriously, given Tether's reputation, as well as the data that we've seen, that they're contributing to terrorist financing and other malign activities. A lot of folks were very unimpressed with these comments.

Pleditor writes, wow, Circles Caroline Hill is really begging to Congress for the Treasury Department to go after Tether and their banking partner. And that was just the tip of the iceberg of that type of take. Now, with a slightly more nuanced perspective, Austin Campbell writes, I do think the comments from Circle are a bit different. Speaking personally, I would be fine with Tether being swept into the U.S. regulatory framework for stablecoins, or, if passed, forcing U.S. exchanges, market makers, et cetera, to de-platform tether if they don't register. But it's not primarily about the illicit finance. It's because when you are running a Fiat back stablecoin, I'm a transparency and conservative reserve maxi. I had identified problems at Circle back in 2021 with their

exposure to bank deposits and commercial paper. Thus attacking a competitor when you've also shot yourself on the foot here is perhaps a bit less wise. I would be cautious about that. I do think Tether needs to be more transparent and tighten their controls, but they are not some great villain so much as somewhat janky after having grown rapidly. Tether has probably been a net positive for the world, giving many access to the U.S.D. in a form factor far more secure than their local banking systems. Can they do better? Yes. Can most stable coin issuers do better? Also, yes. Now, coincidentally, J.P. Morgan is also convinced that the Treasury already has power to take action against Tether. A report released on Thursday claimed,

U.S. regulators can exert some control on Tether's offshore usage via OFAC. Tethers' association with Tornado Cash, a privacy enhancement platform on the Ethereum network, is an example. JPM analysts appear to be simply referring to the fact that Tornado Cash is compatible with Tether tokens, which isn't really something that Tether can control. It's also worth noting that USDC and Dye are also able to be used with Tornado Cash. When the Tornado Cash sanctions were announced, Tether said it wouldn't blacklist the sanctions wallet addresses as they had not received a request.

In December, Tether reversed this policy, complying with the Tragile. OVAC sanctions. Overall, though, when it comes to crypto in crime, a new report from Chainalysis claims that illicit activity on crypto networks has fallen significantly over the past year. The report states that illicit activity is down by 30% for 2023. Chainalysis claims that 2020.2 billion was laundered using crypto in 2020, down from an all-time high of 31.5 billion in 2022. What's more, the fall was steeper than the decrease in overall transactions, suggesting that something other than the general crypto downturn contributed. These figures confirm that less than 1% of all global money laundering activity passes through crypto networks,

based on the Deloitte approximation of $2 trillion per year in money laundering in traditional finance. To the extent that there is bad news, chain analysis did suggest that a major contributor to the reduction in activity is due to North Korean hackers Lazarus Group developing better methods of evading detection. They concluded that, the changes in money laundering strategy we've seen from crypto criminals like Lazarus Group serve as an important reminder that the most sophisticated illicit actors are always adapting their money laundering strategy and exploiting new kinds of crypto service.

Finally, a hilarious one for today. Did Senator Elizabeth Warren really fly a U.S. flag over Congress to honor Satoshi? On Thursday, pictures circulated on Twitter of a certificate signed by Warren. The certificate read, in honor of Satoshi Nakamoto, for the 15-year anniversary of Bitcoin, the first truly inclusive financial system that is providing new economic freedom to populations previously ignored by both public and private institutions. Americans are forever grateful. The certificate appears to be legitimate, and the actual flag which flew over Congress back on December 18th, is now proudly displayed in PubKee, a New York Bitcoin bar. Still, it's wildly unlikely that Warren never personally signed the certificate of Satoshi or was even aware that this had happened.

Numerous commentators noted that flying a commemorative flag over Congress is a standard service offered by lawmakers. For a $34 donation, anyone can request a flag to be flown and write whatever they want on the certificate, which is more than likely stamped by an overworked staffer rather than personally signed by the lawmaker. Still, even with that being the case, the prank was one of the best in Bitcoin's history. We know for a fact that Elizabeth Warren's staff monitors crypto Twitter, and she is probably seething at the thought that Bitcoiners managed to pull this off. And with that wonderful thought, I will leave you for the weekend. One more big thank you to my sponsor for today's show, Cracken. Go to crackin.com and see what crypto can be.

Until next time, be safe and take care of each other. Peace.