Coinbase Global, Inc. (COIN) Earnings Call Transcript & Summary

Great. Welcome back, everybody. And our next session is our conference's keynote fireside chat, and we're very pleased to have Alesia Haas, CFO of Coinbase joining us today for what I'm sure will be an interesting conversation. Welcome, Alesia. Thanks for being here.

Thank you so much for having me. I've been a long attendee at the Barclays conference, and I'm really glad to be a speaker here today. And especially, this is our first conference as a public company, so I'm especially delighted to be able to join you. Thank you.

That's terrific. It's our pleasure. And before I get started, there is some text that I will read you. I'd like to remind you that during today's discussion, Coinbase may make forward-looking statements. Actual results may vary materially from today's statements. Information concerning risks, uncertainties and other factors that could cause results to differ from these forward-looking statements is included in Coinbase's SEC filings available on the Coinbase Investor Relations website.

With that out of the way, maybe we can go ahead and get started. Alesia, I guess for those in the audience who are new to Coinbase, could you give us an overview of the business as it stands today?

Oh, happy to. So Coinbase, we have an ambitious mission. We are here to create economic freedom. And we think about that today, the way that we invest, that we spend and we save and we manage our money, it's a cumbersome, inaccessible and expensive process. And it's also very regionally isolated. How we participate in the financials in the U.S. differs greatly from those who participate in it in Asia and Latin America, et cetera. And so when we look in contrast to the Internet, the Internet has transformed our society by connecting the world on one technology base and seamlessly allowing us to exchange information with one another. And so we're building the crypto economy. We're building what we think is a more fair and accessible and efficient and transparent system that will allow value to be sent in the same way that we send data today. So Coinbase, we're a leading provider of financial technology and infrastructure for this crypto economy. We operate as crypto custodian, an exchange, a broker, and we're building additional tools and products to help businesses grow their own crypto businesses. The majority of our revenue today is generated through trading fees. When buyers come to our platform and investors come to our platform to buy and sell the vast majority of crypto assets that we host on our platform. We're serving retail users, institutions and ecosystem partners, those who are merchants who want to accept crypto, developers who are developing their own crypto token and increasingly, the companies who want to build their own crypto services for their customers. Our goal is to become the primary financial accountant in the crypto economy for our customers, and we're building products and services like staking and custody and earn to grow our user engagement and diversify our revenue. So we just went public in April on the NASDAQ platform, and we're excited to bring this transparency into crypto and engage with you and potential investors going forward on our business.

That's great, Alesia, and we're going to get into a few of those parts of your business as we move along here. But first I wanted to ask something on the quarter. You reported Q1 last week. You're clearly seeing a lot of growth and engagement on the platform. As part of the Q2 outlook, you raised your MTU scenarios for fiscal '21. Can you talk about the drivers there that kind of helped you along with that the guide trade?

Sure, happy to. So first of all, I think it bears mentioning that the entire crypto market exploded in Q1. More and more customers chose Coinbase to enter the crypto economy. We saw increasing adoption and secular growth across both retail and institutional users. Institutional is a really recent trend. And over the last 18 months, we've seen an increase in the number and types of institutions making their first crypto investment. We're now seeing hedge funds and asset managers, pensions and increasingly, corporate treasuries, and we're really seeing just this breadth of interest in crypto. So for those who are familiar with Coinbase, our business is actually very difficult to forecast. And it's because the crypto asset prices have a lot of volatility. And you've seen that volatility play out over the last couple of days. These are huge inputs to our financial model as our transaction revenue, which makes up the 90% of our revenue, is heavily correlated with the price of crypto and then the volatility of crypto. So because we don't know with the crystal ball what the price of crypto is going to do, and we don't know how volatility can spike like it did over the last couple of days, what we do is we plan using various scenarios. And we look at could this happen? Could that happen? What is the range of possibilities out there? And the metric that we focus on is our monthly transacting users. These are users who are actively engaged in our platform and transacting within the last 28 days. So we reported 6.1 million MTUs in Q1. And in our Q1 earnings call, we raised our outlook around the MTUs based on the performance we've seen second quarter to date. So over the last 6 weeks, what are our monthly transacting users doing on our platform. And there are 3 factors that I would call out that contributed to our revised outlook. First, we're starting to see the early signs that our increased investment in sales and marketing are paying off. So what we discussed on our earnings call is that the MTUs are higher in Q2 than they were in Q1 quarter-to-date. We've also seen that Coinbase has been 1 of the top 10 downloaded apps in both iOS and Android frequently within the second quarter. So we're cautiously optimistic that this investment is generating more activity on our platform, more engagement with our users. Second, along with crypto asset prices, volatility, which I just mentioned, is a huge driver. And as you've seen, volatility is very high. And then third, we're starting to see engagement with just a wider variety of crypto assets. Listing more assets is one of our largest priorities. And we've listed a number of assets that we publicly shared now in Q2, and we're putting a lot of work into accelerating that addition. And as we add new assets, that generates new activity on our platform. So these 3 factors really contributed to us looking at the possible outcomes of 2021 and resulting in the revised MTU guidance for the year.

Okay. I also wanted to ask about Coinbase fees. There's a lot of conversation around Coinbase fees and just their trajectory over time. I think your average retail and institutional fees were actually down slightly in Q1 versus full year '20. On your earnings call last week, you talked about this resulting from a mix shift towards higher volume trading. Maybe you can elaborate on some of that?

Absolutely. So in short, the blended average fees we reported were modestly down in Q1 versus full year 2020. But this is entirely driven by higher trading volume. Higher volume results in lower fee rates since we offer volume-based tiered pricing. There were no changes to our transaction fee rates in Q1. So just to elaborate and unpack that a little bit. In retail, under our retail users and what we report as retail revenue and retail transaction fees, there's 2 products that underlie that. One is our consumer app, which is the very easy to use. It really is for new users who are trading their first crypto asset. And the second is our pro app. This is for our high-volume users, sophisticated crypto investors. Pro has volume-based pricing. And in Q1, what we saw with the extreme run-up in price in many crypto assets and the high volatility, our pro users were trading at the highest volumes that they've done in some time. And so those higher volumes result in lower fees. So just mathematically, with the volume mix, we saw a lower fee rate in Q1 than we did for full year 2020. On the institutional side, we see the same phenomenon. Higher level of trading, just more volume results in a lower blended fees. So we said this on our earnings call, but it just bears repeating. Our fees did not go down. The change in weighted average fees was just the mathematical outcome from the higher transaction volume. The other thing I would just comment on is there's been a lot of discussion, speculation, views that we're going to see fee compression. And there's been a lot of commentary about how quickly that fee compression could come. And I just want to comment that we are not focused on competing on fees. We're not even trying to win on fees right now. Crypto is not commoditized. There is such an explosion in growth in NFTs, in DeFI, in just the crypto economy going to more assets and more use cases that fees are not a focus point right now. What we're doing is we're trying to win on being the most trusted, the easiest to use, introducing our users to more and more crypto assets, offering more ways to transact, to earn a yield, to engage in the crypto economy. And they're choosing us for that experience. They're not choosing us based on fees. And similarly, on the institutional side, they're choosing us for different reasons as well. What we hear from these customers is they're choosing us for our secure storage. They're choosing us for the liquidity on our exchange. And increasingly, they're choosing us for our trading execution where we can offer the best prices. We're routing across multiple liquidity venues to find those best trading pairs and the deepest liquidity in any asset they want to trade.

That's a great segue on the institutional side because one metric that really caught my eye from Coinbase was just that the large and seemingly increasing institutional flows that you guys are capturing. Can you help us kind of parse that out a little bit and better understand sort of what types of institutional investors you're seeing? And you kind of touched it already and why they're coming to you, but -- you touched on it already.

It's been one of the most exciting trends that we've seen over the last year. So institutional acceptance of crypto has just -- it's honestly grown at a breakneck pace. What we've seen over the last 6 months, and I mean, I could probably go back even 12 months, is that leading investors are either actively allocating a portion of their portfolios to crypto or they're seriously exploring it. We get calls from all corners of the institutional ecosystem wanting to learn about crypto, discuss how it could be part of their portfolio. And that's on the investor side, and then at the same time, we're seeing a tremendous amount of interest from corporations. And they're looking to diversify their balance sheets, they're looking to understand how crypto may impact their own product road maps. Do they want to accept payments in crypto? Do they want to settle out intercompany arrangements with a stable coin? When things look a little promising and they can be faster and cheaper, it really brings a lot of interesting conversations with corporations who, especially CFOs like me or treasurers who understand the friction of the traditional financial system and look to the promise of how crypto may be able to make that a more friction-free experience. So we're seeing just a wide variety of customers onboarding. As I mentioned, kind of there's 3 drivers for why they onboard today. One is portfolio diversification, that crypto is now an accepted instrument to be in a diversified portfolio. Many people have an investment thesis that Bitcoin is new digital goals. It's a store of value, it's a hedge against inflation. But increasingly, we're seeing people look at Ethereum as perhaps as a medium of exchange. With all of the apps and DeFI growing on Ethereum, is this a good investment -- the underlying protocol. So they're folks looking at it from an investment standpoint. There's also folks that are just really technology forward, and they're thinking about like online gaming communities. Is it going to be a digital token that is how they transact in-game. And so they want to get ahead of what is crypto, how do they incorporate it into their product? And then third, as I had mentioned, there's merchants who think about just the ground flow of consumers who are now interested in owning crypto. Do they want to offer that as a payment mechanism. And if you think about offering crypto as a payment, the first thing you have to figure out is, "Oh, how do I accept this? How do I store this? What is the bank account that's going to support my crypto portfolio? Do I monetize that back into fiat? What is the exchange? What is the product suite that I need to actually support the crypto innovation?" And so all those conversations are happening right now. And increasingly, we're really happy that those companies are coming to us and choosing Coinbase. We have the deep pool of liquidity. We have the prime broker where we can offer best execution. We have one of the largest custodians with over $223 billion of asset store, which is 11% of the crypto market cap as of Q1. And we can offer a differentiated customer experience because when the clients choose us to bundle their crypto activities, they get some benefits. There's a seamless experience. You can trade out of cold storage, which we can talk about cold storage later, but it's kind of the bedrock of any crypto experience. You have less operational risk because you're dealing with one venue, not moving your crypto across multiple venues. There's security and that is critical to crypto. There's lower transactional costs, and you can participate in crypto-native features over time like staking, which earns differentiated rewards at this time. So while we're known for our retail business, Coinbase has been busy reimagining the future of institutional. And based on the feedback from hundreds and hundreds of clients, we're building this institutional product suite to provide institutions with seamless, intuitive and trusted solutions in crypto.

You brought up storage and secure storage, which obviously is critical given the nature of crypto being, in essence, sort of a bare instrument. So from a security perspective, how does Coinbase go about securely storing crypto? What types of technologies are needed, how difficult are these to replicate for your competitors? What differentiates you on this side of things?

You're absolutely right. And I just said it before, but storing crypto is critical for our customers. And we do consider our secure storage and custody as just the bedrock to our platform. And then we can also consider it one of our key strengths. We pioneered industry-leading standards for managing private cryptographic keys, and we use sophisticated cybersecurity technologies such as multiparty computation to safeguard these keys in a wide range of assets. And a wide range of assets is important here. Every blockchain protocol is different. So Bitcoin is different than Ethereum, which is different from all of the long-tailed assets that we see existing and then growing day by day. And so this isn't something that you can just pick up and do overnight. We do consider this a competitive moat of our business, and we've invested heavily in security over the last 9 years since our company was founded. It's one of the areas I will share with you every year when the budgets come forward. We approve 100% of what security asks for because it is so critical. And we've invested in our resources, in our technologies, in patents, in being the best practices within crypto. So anything is possible to replicate. But we believe that over the last 9 years, we've really differentiated ourselves. We've never lost customer funds on our platform due to a cyber attack. We've been chosen time and time again by major customers to store their crypto assets as evidenced by the 11% of crypto market cap that we store.

Fantastic. I also wanted to ask one follow-up on the institutional side of the business. Can you elaborate a little bit, help us better understand the recent, and I hope I'm saying this right, Tagomi acquisition?

Tagomi.

Tagomi, excuse me, Tagomi. Why it was a good fit? And kind of what are your expectations for the prime brokerage platform are over the next couple of years?

Absolutely. So for those that are new to Coinbase, in May of 2020, we acquired Tagomi. And Tagomi is a crypto prime brokerage platform, which really founded the foundation of our institutional trading platform. It was a great fit from a product, from a talent, cultural and really has transformed our institutional product offering. So it's expanded our prime brokerage, starting with a smart order router. And I told this a little bit earlier, but the smart order router means that we're able to source liquidity over 10 venues. So when you come to Coinbase, you don't have to find the best price on the Coinbase exchange, even though we route a majority of our orders through our own exchange because we do have very deep liquidity. But we're finding the best pricing across all exchanges and also market makers. This means that our customers don't have to go and check price and liquidity throughout the market. And that's really interesting in crypto because a crypto asset can be listed on multiple exchanges. So unlike the coin stock, which is listed on 1 exchange, we can be listed Bitcoin on hundreds of different exchanges, hundreds of market makers, hundreds of decentralized exchanges in the future. And so being able to have the smart order router, go out and find all these prices and pairs has that differentiated value to our customers. This is what's providing our clients from all types from hedge funds to high net worth, choosing us to be able to trade on our platform. So effectively, our clients have outsourced their treasury function to us, meaning that we handle the movement of cash and crypto on these 10-plus venues that we connect to, and we'll grow that over time to really facilitate our client trading. So you also asked about the future. And the way that we think about our institutional business going forward is that institutional customers will want Coinbase as their single point of entry into all things crypto. For example, in addition to buying and selling at the best price, they would like an integrated custodial offering. They also want financing. We think over the next 2 to 3 years, we're going to see a growth in our financing business as new market entrants will expect the same prime brokerage finance that they encounter in traditional securities. So we're very focused on bringing additional products and services like the ability to help institutional customers generate yield on their crypto in an integrated and easy-to-use way.

And one of the things that I think is most interesting about your story, and then you made this point yourself, is that Coinbase is not just an exchange, it's kind of an on-ramp into the broader crypto blockchain ecosystem with a lot of different potential growth opportunities and kind of financial services in fintech. Talk to me about that sort of road map. And maybe we can start with the sort of staking and earn, which is something that you offer. How should we conceive of the longer-term evolution here?

Absolutely. So those are 2 of my favorite products to talk about. But big picture, is Coinbase wants to be the primary financial account in the crypto economy. So we want to be the platform where any transaction you want to do in crypto, you think of Coinbase first, and we want to connect you to all of the first-party and third-party apps. So let's talk about staking first. I know many investors are still learning about crypto, so let me try and keep this simple. Certain blockchain protocols rely on staking, which is a method of validating blockchain transactions. Examples of proof-of-stake networks are Tezos, Cosmos and now Ethereum, too, which is the second largest market cap asset. At the highest level, when nodes validate transactions on these networks that I just mentioned, the network rewards nodes, which is called staking rewards. You're probably familiar with the concept of Bitcoin miners earning Bitcoin when they validate transactions. And this is a similar concept, just on a different type of network. So at Coinbase, we provide a service known as delegated proof of stake, which makes it easy for anyone that owns crypto to be able to participate in. In exchange for staking your rewards, our users earn rewards back from the networks, and Coinbase receives a share of those economics. So we receive a commission by operating these staking nodes. In Q1, we had 1 million of our users staking. And we believe that this is going to be a growing trend as more and more networks become proof of stake versus proof of work. Today, more than 30% roughly of the total crypto market cap, over $500 billion, is comprised of stake assets. This assumes that Ethereum is counted as a proof-of-stake asset. And one of the things that's exciting is thanks to our Bison Trails acquisition, we hope to introduce staking coverage for an additional 20 assets in the coming quarters. And this will give our users the opportunity to earn more and more rewards on their crypto. Also, proof of stake is importantly more energy-efficient than proof-of-work networks. And I know that climate is a big topic around crypto these days. And so we're encouraged by the forward growth in the proof-of-stake networks. All right, shifting to Earn, which is a little bit easier. Coinbase Earn essentially allows customers to learn about different types of crypto and then earn those crypto assets when they watch educational videos. Coinbase partners with asset issuers. There are so many new crypto assets every single week, every single month that it's hard to keep track of them all. And so what we do is we partner with these asset issuers and create educational videos. When a user on our platform watches this video, they can unlock a test and they can take a small test. And in passing that test, they can earn some of that new crypto asset. This is a way for people to learn about crypto. It's a way for them to earn small amounts of crypto, and it gets these new assets introduced to a broader group of customers. We earn our commission based on the value of the crypto assets that are distributed to our users from those asset issuers. And as you said, these are just 2 examples of products that are driving user engagement on our platform and diversifying our revenue. We have a culture of repeatable innovation, and we're really focused on building many new products and services to continue to get users more involved in the crypto economy and to be that primary financial account in crypto.

Okay. I'm going to throw another pretty big question at you, which is DeFI. It's such a hot topic and so interesting. How does Coinbase sort of participate in and/or benefit from DeFI?

It's such an exciting area. So there has been explosive growth in innovation in DeFI, and it's just been incredible to watch. I just want to dial back to note that we are in the earliest, earliest phase though of decentralized financial applications. And what is exciting now is to watch these first transactions to give us a glimpse of what may be possible into the future of finance. But again, these are early, early days. So for example, a few weeks ago, we saw New Silver. New Silver is a real estate finance company. And they became the first company to connect DeFI to real-world assets, real estate assets, tangible assets that we all know. And so in this case, they finance real estate assets with MakerDAO, which is a DeFI app, and essentially, they have a credit facility. This is no different than when a bank issues a borrower a credit line. However, MakerDAO is a crypto bank. It operates 24 hours a day, 7 days a week. It is trustlessly running on smart contracts. There's no intermediaries. There's no regulatory constraints, and it can offer low interest rates. It provides instant liquidity at a minimal cost. So this is the promise of crypto. But we are in the early stages, and there's a lot of work needed on the scalability of these protocols and also a continued focus on safety and usability. Crypto is very complex. And so we need to make it easier to use and to understand. So Coinbase, how will we participate in DeFi. So today, we actually do participate in a few ways. First, we're offering DeFI tokens on our platform. We offer maker Uniswap, which is the largest decentralized exchange, and we enable customers to buy and sell these assets. The second thing we do is we offer a self-hosted wallet, which enables our customers access to these DeFI apps. So they also can participate in peer-to-peer loans, in submitting tokens on a decentralized exchange. And third, we are active in venture investments. So we're early investors in many of these applications to help grow this ecosystem. We support DeFI protocols like Compound and Uniswap. We support infrastructure that powers these services like Blocknative and Alchemy, companies that help customers access DeFI. And lastly, services that increase safety or help secure DeFI. But this isn't enough, and we think that DeFI is going to explode, so we need to do more. And what we want to do in the future is we want to closely integrate these DeFI apps through our main Coinbase app to create a trusted easy-to-use DeFI experience for our customers. And we think this will open up a lot of opportunities for our users and also for Coinbase. In our perfect world that we imagine, people will just be able to tap, open one of these third-party apps, it will already have their wallet connected because, of course, our strategy is to become that primary financial account in the crypto economy. In the future, maybe they're identity is connected and everything is just seamlessly integrated. So users can pop from fiat to crypto centralized to DeFI and back and just be able to access the entire crypto economy in an open architecture way. So DeFI is a great illustration of the crypto economy. It's a growing use case beyond investing and trading, and we're supportive of anything that drives the crypto economy and get more people involved in this ecosystem.

Super interesting. I have to say, it's really the future here will be quite interesting to see how everything unfolds. I wanted to ask about another acquisition that you guys made, Bison Trails. If I'm categorizing this correctly sort of blockchain infrastructure platform as a service. Can you describe what kind of this is, how it works and how you expect it to have an impact on your business over time?

Sure. So Bison Trails is forming the early foundation of Coinbase Cloud, which will be our offering for developers and enterprises. Essentially, this is going to provide infrastructure products for companies and developers to interact with blockchains. Any company that wants to build a crypto application, a new DeFI app or offer their customers a service, not just custody or staking, will need to securely operate with blockchain node infrastructure. As we said before, crypto is complex. This is really scarce talent that knows how to operate these nodes and operate this infrastructure. So we believe we can provide tools that make developing in crypto trusted and easy to use, just like we made Bitcoin quite accessible to millions of people. So much like today's Internet companies use AWS for cloud infrastructure, we're seeing a shift towards companies using Coinbase Cloud, formerly Bison Trails, to power their blockchain infrastructure.

Okay. And can you talk about -- you mentioned earlier in terms of adding new currencies to the platform. Can you talk about your process of evaluation when it comes to deciding which assets to offer on your platform? What is the checklist that you need to go through in order to feel comfortable bringing something onto the platform?

Absolutely. So I think it's important to start with, we think there's going to be millions of different crypto assets in the coming years. We see security tokens, NFTs, individuals tokenizing their time. And so in this world with millions and millions of crypto assets, how we prioritize is going to become increasingly important and also how much we can accelerate. So we evaluate a number of factors. We look at cybersecurity around the coin to make sure there's not going to be an issue that would cause our customers a loss. We look at this from a legal point of view and a compliance point of view. There's various concerns out there around securities for instance. An example is we try to avoid listing any crypto that the SEC would view as a regulated security token. And we need to accelerate this process. And so we're making investments here. We're investing in all aspects of this review process in our engineers so we can add assets more quickly because our customers want access to these assets. 40% of our trading volume in Q1 came from assets other than Bitcoin and Ethereum. And we want to be the platform, as I mentioned earlier, where you can come and gain access to all forms of crypto in all parts of the crypto economy. And this is important for our business -- I would just lastly point that this is really important for our business as well because one of our goals is revenue diversification. And different [ crypto ] assets trade differently. And so yesterday, even with the material correction that we saw, there were still assets that were up. And as we get more diversification, we believe that this could smooth out the volatility that we know today.

Okay. We have a couple of minutes left here, 2, 3 minutes left. So I guess kind of in closing, I wanted to ask, the crypto market is moving really rapidly. Coinbase is clearly a leader in the space. When we look out several years, what does the company look like? I know that's a big crystal ball type question. But what do you guys -- what's the long-term vision?

Well, I think it's really hard. Just like we couldn't have imagined Uber back in 1998 when the Internet was going through its top first bubble, it's going to be hard to imagine all the opportunity that crypto can bring to our economy. But over the next few years, what we think will happen is just broader adoption and an incorporation of crypto as a complementary economy. We'll just see a lot more. We're going to see investments in scalability, usability. We're going to get more people. We hope to get 1 billion people into the crypto economy. More institutions using crypto, more institutions investing in crypto and offering crypto to their customers, and more assets, those millions of assets I just mentioned earlier. We'll also see more transaction types, payments. We'll see more firsts, like the first real-world asset issued in DeFI, and we'll see growth in permutations of all forms of those DeFI transactions. So we're also going to see things that are hard to imagine today. DeFi is just the tip of what's possible in crypto. And I think that we'll start to see more mature user applications that are not financial end user in nature. These applications could be empowered by open networks and new cryptoeconomic incentives and lead to novel use cases and emergent behavior that I think is just hard to wrap one's mind around, but I do think we'll start to see those in the next few years. And Coinbase, well, Coinbase is going to support all of this. And we're going to look to grow the entire crypto ecosystem, continuing to build products and services that are trusted and easiest to use. We expect to become the primary financial account in the crypto economy for millions and millions of users, engaging them in a more fulsome suite of products, which will drive diversified revenue with less reliance on trading fees over time. We have amazing talent, perhaps one of the largest crypto workforces and our experience and force is a great opportunity to build a crypto economy and drive economic freedom. We feel like we are just getting started.

I'm sure. I'm sure you are. Alesia, that's all the time we have today, but thank you so much for your time and your insights today. It was a great pleasure having you here.