Ecoinometrics - Coinbase Quarterly Results

August 16, 2021

Aug 16, 2021

Last week, Coinbase published their results for the second quarter of 2021. As we had expected in our preliminary analysis a few weeks ago, they did well. Actually they did even better than we thought. Let’s have a look.

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Coinbase Quarterly Results

Coinbase went public earlier this year. Since then their stock hasn’t really been performing at all.

Basically the price crashed together with Bitcoin right after the direct listing and has been mostly stuck in the -20% to -30% range when compared to where it opened.

That’s probably just bad luck. An unfortunate timing with a downturn in Bitcoin’s value. I say that because when you look at their financial results there is nothing to complain about. Growing revenue. Growing net income. Positive income for five quarters…

I mean what else do you want?

Despite the big drawdown of Bitcoin and Ethereum (and well… everything else) in the second quarter, Coinbase managed to generate $2 billion in revenue. Which is an improvement over the very bullish first quarter.

So how come?

Well, as we had theorized a few weeks ago this is all about volatility.

Coinbase generates most of its revenue by taking a cut of the volume transacted through the exchange. Over the 10 quarters worth of data that we have, some napkin math shows that about 0.66% of the quarterly volume is captured as revenue.

My reasoning was that since the volatility profile of Q1 and Q2 are similar then the traded volume should also be similar. And if the traded volume is similar then the revenue must also be in the same ballpark.

As you can see in the chart below, this is kind of working.

So that was a good guess apparently, but it isn’t the full story.

Volatility is one thing. If you have the same number of users you’d expect that when the market is more volatile they’ll generate more volume.

But the other aspect is user growth. For the same level of volatility in Q1 and Q2 the monthly transacting users on Coinbase is up +44%. Of course that’s driving more volume too.

Actually if you look back at the evolution of the monthly transacting users on Coinbase since 2019 you can see that the bull market is doing a lot of the heavy lifting here.

Each bar is the monthly transacting users count for a quarter. The bars are coloured based on the year over year return of Bitcoin, the darker the colour the higher the one-year return.

Check it out.

Clearly the massive jump in users i.e. volume i.e. revenue correlates with the bull market.

So the situation looks to be simple, if not easy, for the people doing financial forecasting at Coinbase:

Guesstimate the growth of BTC and ETH over the next quarter and relate that to how many users are going to transact.
Add in some estimation of the market’s volatility over the next quarter to have an idea of how much volume those users are going to bring to the exchange.
Now that you have your estimated volume take a 0.66% cut and you got your revenue.

Obviously Coinbase has a lot of data on their users' behaviour so they should be able to get a pretty good model of future revenues depending on the market conditions.

But that’s above my pay grade so let’s come back to our stock.

As we’ve seen, Coinbase is growing well. The only two things that can really hurt their revenue would be the volatility dying down completely or an end to the growth of Bitcoin and Ethereum.

So if you are bullish on any of those assets, you gotta be bullish on Coinbase too.

Right now it feels like their stock might be undervalued. I’m not a stock picker but the fact that it barely got any pump on the announcement of record breaking revenues makes me think there is likely some long term value here.

If you want to get some stock exposure to the long term growth of digital assets then adding Coinbase to your portfolio feels like a good idea.

Maybe you already have some miners with MARA, HUT8 or RIOT. Maybe you also have some pseudo-ETF exposure to Bitcoin through MSTR. Well, COIN gives you exposure through the exchange business model. That feels like a pretty diverse coverage.

Your pick.

tRanSItoRy InfLaTion

Another month of data and another month of high inflation. But this time inflation came lower than last month! “Ahah! I told you that this is transitory” is probably what Jay Powell thought when he read the data.

Still:

Last month, inflation rate +5.33%
This month, inflation rate +5.28%

… might be a bit early to call this done no? What do you think?

The transitory camp will certainly be happy though.

And the Federal Reserve should be happy too. Look at those inflation average curves:

Core inflation, 2-year average, above 2%
Core inflation, 4-year average, above 2%
Core inflation, 8-year average, above 2%
Headline inflation, 2-year average, above 2%
Headline inflation, 4-year average, above 2%
Headline inflation, 8-year average, not yet. But it is on its way.

So we are basically at the Fed’s 2% average inflation target pretty much however you want to interpret it. See for yourself.

While inflation remains high, by contrast the 10-year US Treasury yield remains very low. Actually the rates condition in the market looks like an outlier.

To see more clearly where we are at historically speaking, I’ve made a real yield map.

On the horizontal axis is the inflation rate (headline CPI). On the vertical axis is the 10-year US Treasury yield. Each point on the chart is a monthly data for those value since the 1960s. To make it easy to read the points are coloured based on the resulting real yield. The lighter the colour the lower the yield.

Take a look.