Coinbase: ‘Tradfi’ earnings cushion blow from crypto slump

Rising interest rates have hit global stocks hard and cryptocurrencies even harder. Coinbase, the largest publicly listed US cryptocurrency exchange, has felt the squeeze on both fronts.

Ironically, earning interest on cash and Treasury holdings — a conventional “Tradfi” activity — is limiting the losses of this would-be financial revolutionary.

Falling crypto prices, a smaller user base and less trading volume resulted in a 55 per cent slump in third-quarter revenue. Losses totalled $545mn, compared to a profit of $406mn in the same period of last year. Coinbase warned trading volume would decline further.

Coinbase’s fortunes will not turn round until crypto prices recover, sparking a resurgence in trading of digital assets. The stock has dropped 76 per cent this year.

But rate rises that have floored growth stocks have a modest silver lining. Interest income was the bright spot in Coinbase’s results. This jumped from $8.4mn a year ago to $102mn during the quarter amid the sharp run-up in interest rates.

The US Federal Reserve has increased interest rates six times this year, increasing its benchmark lending rate from near zero to 3.75 to 4 per cent this week.

Coinbase, a co-owner of USD Coin along with issuer Circle, collects interest on the stablecoin’s reserves. It earns further interest on customer’s fiat balances. Interest income is the company’s second-biggest source of revenue after transaction-based revenue.

None of this means Coinbase shares are poised for take off. The company’s main business — crypto trading — remains in the doldrums. Tokens such as bitcoin and ether have lost about 70 per cent of their value since their all-time high last year.

To weather the downturn, Coinbase has cut costs, including staff. It has looked for new sources of revenue, forming partnerships with the likes of BlackRock.

The company will be lossmaking this year and for the next two years, according to consensus forecasts. Interest income will cushion the blow.