When Coinbase reported second-quarter earnings on Thursday, the numbers pointed to a few important trends for both the company and the crypto sector as a whole. The first is that Crypto Winter is still very much here. Despite a bullish start to the year, when Bitcoin prices soared and it became clear the industry would move past the FTX debacle, trading activity slowed in the most recent quarter—meaning Coinbase's revenue declined. We're not out of the woods yet.
At the same time, Coinbase showed that it is learning to be lean. The company's quarterly operating expenses are down 50% from a year ago, and it is no longer squandering money on Hollywood vanity projects or do-nothing senior executives. CEO Brian Armstrong is again showing the focus and discipline that made Coinbase the industry's flagship company in the first place.
The most significant story from the Q2 earnings, however, relates to Coinbase's revenue mix—for the first time, trading did not account for the majority of the cash coming in. As the Wall Street Journal notes, "Coinbase earned $335 million from subscriptions and services, which include custodial fees, interest income, and staking revenue. This made up 51% of total net revenue, the first time that nontrading revenue surpassed trading revenue in Coinbase’s history."
This is a critical development since it shows Coinbase is achieving its longtime goal of building diverse revenue streams. In the same way that Apple is turning to services to offset a slowdown in its core iPhone business, Coinbase is no longer a one-trick pony that relies entirely on trading revenue. While this is good news, it's not clear yet that its new business lines are sustainable.
Notably, the income Coinbase pulled in from stablecoins actually declined by $40 million—a worrying development given that interest rates climbed during this period, and one that reflects that USDC is losing badly to competitor Tether. The reasons for this are mostly beyond Coinbase's control since they relate to the macro U.S. banking environment and struggles at the company's stablecoin partner Circle, but it is something the company will have to reverse.
Meanwhile, the most promising portion of Coinbase's services business—staking, or what the balance sheet calls "blockchain rewards"—is also under threat as regulators have forced the company to shut down staking operations in several big states. The good news, though, is that Coinbase continues to build and roll out blockchain infrastructure, including its new Base layer-2 service that could become a valuable part of its business for years to come.
For now, Coinbase's still-emerging service operations are far from enough to offset the two major headwinds—sluggish trading and a hostile regulatory environment—that continue to drag down the company and the sector. But if the political climate for crypto improves, and a bull market returns, Coinbase has better foundation for long-term success than ever before.
Jeff John Roberts
jeff.roberts@fortune.com
@jeffjohnroberts
