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

Hi. Good afternoon, everybody. My name is Ken Worthington. I'm the analyst following Coinbase from JPMorgan. I'd like to thank you so much for joining the TMT Conference this year and the fireside chat with Coinbase. I'm excited to host Emilie Choi, President and Chief Operating Officer; and Alesia Haas, Chief Financial Officer of Coinbase. Coinbase is a $50 billion crypto platform that facilitates trading, staking and the custody of crypto tokens as well as instances of broader engagement with the crypto ecosystem. Before we get started, I have to read the safe harbor statement. I'd like to remind you that during today's chat with Emilie and Alesia, we may make forward-looking statements. Actual results may be materially different from today's references that may include non-GAAP financial measures. A reconciliation of non-GAAP financial measures is available on the company's latest shareholder letter, if you're interested. So thank you both for joining. I've divided sort of questions into 4 parts. We'll talk about the crypto ecosystem. We'll dig into some coin-based specific questions. We'll get to financials, and then we'll wrap up. So starting with the crypto ecosystem, Emilie, we'll begin with you. As we think about the crypto cycle where are we today in the crypto cycle? And with ETFs now live, how is 2024 and the rally we're seeing in crypto markets today similar or dissimilar to what we've seen in past cycles, including the more recent one in 2021?

So I am smart enough not to prognosticate about where we are in the cycle because I'm sure I'll always be wrong. But I think that what we've seen in this cycle that is markedly different from the last cycle or cycles before it definitely is the institutional adoption and the maturity of the L2 ecosystem. The introduction of the Bitcoin ETFs in Q1 was, I think, a huge, huge new development for Coinbase for the crypto ecosystem. It untapped a large swath of investors who previously didn't have access to crypto. And I think, in many ways, legitimized crypto even further in the minds of those who might have more traditional mindsets. On the L2 front, we have seen a lot more maturity of the rails, the blockchains that we are building for developers. This, in turn, creates a much more robust ecosystem for them to develop on and then to benefit users. And so I think Alesia and I've been talking about this a lot, I think, it's just -- it feels more mature, it feels better than it did during potentially the hype cycle of some of the NFT momentum in 2021. That doesn't mean that we don't believe deeply in NFTs over the longer term, but I think this felt like something different and a new customer base was coming in. Anything to add?

The only thing I would add is that we've always said that volatility and market cap are what have been the drivers of speculative trading volume on our platform. And while we've definitely seen an increase in market cap, we have not seen an increase in volatility. Volatility looks much more mature in this cycle than it did in 2021. Volatility of Bitcoin, volatility of Ethereum start to come, what I call on the grid as other high beta stocks and equities that we see, where previously crypto had high highs that we don't assume with other asset classes. And so that has led to differing investor behavior as well. But I agree with Emilie. You've seen just the maturation of the space. You've seen diversification of revenue at Coinbase. And so while our revenue in Q1 looked more similar to 2021 than it has in previous years, the composition of that revenue has really shifted over the last 3 years.

And to some extent, we've seen volatility and I'd even say fragility. Is sort of the rally that we're seeing now, you mentioned sort of maturation, does that make it any more durable or any less fragile, do you think, than we've seen in the past?

Ken, we are so young as a company in asset class. In some ways, yes. In some ways, yes, because what you saw in our monthly transacting users in Q1 was, we saw many of our users that were then active and staking just trade a little bit more in Q1. We saw the average dollar amount per trade increase. But it didn't mean we saw huge growth in the number of new traders. And so what that means then is people are continuing to stay activated. People are staying engaged with crypto. They still have their wallets, but they're just increasing their dollars in different environments. So I do think that leads to more durability and less fragility because we are building the engaged user base.

Maybe following up with that, I wanted to talk a little bit about your bigger revenue streams, starting with trading and then moving into stablecoin. So as we think about trading revenue and the drivers of trading revenue, how do you see the outlook for Coinbase in terms of what trading will mean to it in the future. It's a big part of the revenue stream today. If you look forward into the future, is it as big 3 years, 5 years, 10 years from now, or other parts of the business start to grow up around it? And then I want to dig more into stablecoin sort of as the next step.

Okay. Well, we don't pick our favorite children, and we have many revenue streams. So let's break them apart for a second. Yes, today, trading is our largest revenue stream followed by stablecoins and specifically, retail trading is our largest revenue stream. We do believe that we will see significant growth in non-trading revenue streams, and that growth rate will likely increase over time. However, we also believe that over time, with regulatory clarity, we could get to tokenization of other assets, which would drive trading revenues. We also recognize in that transaction revenue is where we have based our sequencer fees. We have other payment-related revenue opportunities there. And so while our goal is to continue to drive subscription-as-a-services revenues, which monetize on assets and other dynamics other than the transaction, we do think we will see growth of transaction revenues. However, they may move more towards the utility revenues and less towards speculative trading. Today, simple trading, institutional trading, the book of revenue. We saw growth -- institutional trading was all-time highs in Q1. We saw 40% of those customers engaging with multiple products. So we're really seeing that deep embedding of that institutional trader. And then on the retail side, we've gained market share. It was up in the 90% quarter-over-quarter. We're really continuing to see growth there. Stablecoins which are U.S. dollar-backed stablecoins. Our partnership with Circle on USDC, continues to be a really important infrastructure piece of the overall crypto ecosystem. A stablecoin gives you the ability to have a better dollar. It's an instant settlement dollar. It's just global in every way. It was up 30% in Q1. We brought the market cap back from the lows of 2023. And we're starting to see then more use cases. We're really excited that we're starting to pay an increasing amount of our vendors with USDC. We're starting to experiment with payments use cases. And so in addition to trading USDC as a trading payer, which has been its primary use case in DeFi or on the trading platform in prior years, moving USDC to a utility coin is really important to us.

And can you talk about the evolution of stablecoin. So Coinbase is looking increasingly at payments, USDC seems to be maybe a center of that opportunity. How does stablecoins relate to Coinbase's ambitions in the payment system?

Let me tell you all the reasons I love stablecoins. Okay. Or maybe I should say why I love USDC? I might be a little biased. My bias towards USDC is, I'm taking U.S. government risk in a 24/7, 365 U.S. dollar. I can send it to anybody. I can send it to anyone in this room via text, I can send it to any business, peer-to-peer. I can send it for a penny. I can send it in a second. It gets there. It's in your wallet. It's -- you don't have to also be on the same platform as me. You could be on MetaMask's wallet. You could have your own hardware solution. you could be anything. I love that it is permissionless. I love that it is decentralized, I love that it is a U.S. dollar. And I love that I'm not taking fractional reserve lending. I don't take specific bank risk, I'm just taking broad U.S. Government risk. So it's like I get a money market, but it's a payment currency. So I love everything about that. I think it's a better dollar. So what we've now done in Q1 is with USDC on base, which is our Layer 2 solution. And as Emilie said, Layer 2s are like the next new technology that we brought forth this year, which we're really excited about. Because Layer 1s, which are Bitcoin, which are Ethereum, which were the protocol layer, they proved we can send value on a blockchain, but it was still clunky. It was still expensive depending on congestion on certain chains. So Layer 2s are making it faster and cheaper. And so with Base, our goal was to get to 1 penny, 1 second. And there is definitely times we can get there. Sometimes it's still a few pennies, sometimes it's still a few seconds, but that is materially cheaper than a wire, that is materially cheaper than a lot of forms of global remittance payments. So we are building the infrastructure to enable this potential payments use case. So we got the costs down. We got the speed up. We are now working on the wallet architecture to make the user interface really delightful, to create wonderful customer journeys to bring forth. And that's where our experiments are starting to move forward in the future.

Great. Emilie, let's talk about crypto derivatives. Derivatives are the -- I think, the biggest transaction market in the cryptocurrency ecosystem in the world, it's one of the fastest-growing parts of Coinbase. What's the opportunity here to build them out? What are you doing? And sort of where geographically are you focusing?

So in any given traditional financial market and similar in crypto, derivatives are like 75% of the activity. Hence, it's a really big opportunity that we didn't tap into earlier and we are now tapping into, because we were focused on the spot market. We, along with CME, I think, are the only ones who've got the CFTC licensure in the United States. We are also going deep in our markets across the globe. The MiCA legislation that has happened in the EU is enabling us to be able to go after multiple markets within the EU. We have announced that we have acquired or in the process of close to acquiring a MiFID license, which will enable us to offer derivatives also to many countries within the EU. And so it's just -- it's a very large opportunity for us. I think the thing I would say is that the crypto derivatives market that existed with some of the offshore activity that happened before. Some of that was casino-like behavior. Some of that was non-KYC behavior that we will not participate in. And so it's not a one-for-one directly transferable thing when other exchanges go bust or don't play it by the rules. We will always kind of lean into the compliant, secure routes that kind of got us to this place, and we think that there's going to be a very large opportunity there for us.

Yes. So with firms like FTX which are no longer with us with Binance, that has been under particularly U.S. regulatory scrutiny. Are there still gaps that are left for you to fill? Or have all those -- has that share really found its way to other firms? Like how far is it to compete for business that had been at these other exchanges, which are either not here or under some level of stress or distress?

Well, I think the answer is, there is a robust business for us to be had for those who seek secure, well-managed derivatives that have good risk management in place that have good security in place that are regulated. For those who don't want that we are not the right offering for them. I do think the market has changed globally as well. I think that many of the players used to be able to get away with no license or no risk management. None of the good practices that we know to be true, for example, in the U.S. with traditional derivatives. And so as the market has changed, I think some of the things that benefit us, including our lenient regulatory will help us gain more share there.

As of Q1, we covered -- our products covered roughly 80% of the total volume in the market. So we still have room to grow in terms of matching our products against the total market available for trading. Our leverage levels are lower today. And so we are working on products and risk management to continue to meet the market where it is for all of the volume available to us. And then the key is to onboard customers, build that liquidity, build that market depth, and that is our focus, building to deep liquid markets to encourage traders to trade on our platform.

So Emilie, as I think about regulation, and I think about the brand and the position that Coinbase is within the crypto markets. You are -- you have built a brand around being a compliant firm, working with regulators to sort of build and develop these markets. And I think to some extent, that's worked against you in some instances and worked for you in other instances. So as we think about the build-out of your business overseas, where many competitors maybe didn't have the level of compliance, how has your brand -- how is your brand allowing you to enter these new markets and develop new products? Is it making life easier to win over regulators? Or is it making life harder to win over clients who may not want these KYC and reporting responsibilities that you're endeavoring to undertake?

For better or for worse, I think, the sins of some of the bad actors have led to a much more regulated environment globally. And so it largely, I think, benefits us because we've always done the hard work of that. I mean I think we were talking in the other room, Ken, about in 2021 Coinbase was berated for being slow, for having too much compliance. Why couldn't we be more like FTX. How are they operating with 40 people, what was wrong with us? And we did tons of bottoms up to look at the composition of headcount, how we were doing KYC, could we improve it? Can we make it more efficient? And we were scratching our heads, we're like this can't -- this doesn't work. We just -- this doesn't compute. And it turned out to all be obviously, a sham. And so I think the lesson that we've learned from that is like as boring as it can be, sometimes slow and steady wins the race that we -- the routes that we have, leaning into regulatory, leaning into compliance, leaning into the user experience, ease of use and security and safety. Those things have held us for the past 12 years. That's why we're the one left standing. And so whether that's in the United States or globally, it's going to be the same. Those who want to use Coinbase are comfortable with those premises and those who are not comfortable with those premises are probably going to use something else.

I think it uniquely benefits us on the institutional side. We were pleased to be named as the custodian in multiple ETF applications for Bitcoin. We service custodian for many of those large asset issuers. That wouldn't have been possible if we didn't keep our -- held ourselves to the standards of highly regulated financial institutions. So it uniquely benefits us in those markets. And I believe, it is uniquely benefiting us also by brand -- trusted and reputable to be able to grow new customers as we enter new markets. And we've quickly seen as we've unlocked licenses in Canada, in Singapore, in all -- number of markets last year that, that was the reputation that we had as we go in the door and has led us to be able to have numerous successes with that international expansion, which drove to our revenue being 17% of international revenue in Q1, and we think that there's growth opportunities there as we continue to move forward.

Brilliant. Alesia, on Base. So Coinbase has developed an incredibly successful Layer 2, maybe start really high level. What is Base? And then if you can dig into how does the development of Base sort of help you directly in the near term in terms of like monetization. The real interesting thing is, longer term, what is developing Base -- I'm sorry, what does Base do for developers, how does it grow sort of the ecosystem and then tie that back to Coinbase in business. There's lot there.

Okay. Let me give you the layman's term explanation of Base. You'll see so many technical announcements about Base. But what Base is a technical layer that sits on top of Ethereum. So Ethereum is a base decentralized protocol. Base is now built on top of Ethereum to have transactions be batched. They move at a faster speed at a lower cost. We're even now making upgrades to Base, which is like allowing a carpool lane on base. So it's like how do we drive traffic even faster. You're even starting to hear inklings of like the infrastructure moving to a Layer 3. Think about all of this as the equivalent of moving from dial-up to broadband when we were doing the Internet phases of tech stack building. We're building faster protocols, faster rails. What this enables then is the ability to send payments at a lower cost, faster speeds than any other payment rail that we've ever created. One of the analogies that we like to use is if you think about earlier incarnations of the Internet, is the ability to text message, it used to be, if you remember, you used to pay for each text message. You had like a number of text measures you could get per month on your phone plan. Then you had WhatsApp come on the scene and you can get hundreds of text messages per second and just that scaling effects that had, the cheaper it is to send, we send more text messages. It's like the path of least friction gets the most adoption. And so with Base, we're looking through our own tech stack for the Onchain stack. We're looking to reduce friction and create a path for the fastest, cheapest Onchain payments. And we think that by doing this, it will unlock concepts that we've never had before around micro payments. Different ways to monetize through consumption use versus subscriptions, just different ideas that we'll have to see as they get adopted. And so with Base, what we're working with is creating a developer platform that creates the best environment for developers to explore building Onchain. We saw 8x developer growth in Q1 compared to Q4. We -- as we brought down the transaction costs on base, they came down 80% in the quarter. We just saw an explosion, then a volume on Base in the last 45, 60 days. We now see more transactions on Base than we do on Ethereum. I think there's a lot of things built on Ethereum, like Base is not the only thing. So Base is getting more volume. And so our mental model, Ken, is that if you drive developer behavior, developers will build amazing Onchain applications. That one of those amazing Onchain applications, just like you've got many internet apps, some of those apps will be amazing. Some of them will peter out and fail, but you want that activity to happen. We want that activity to happen on Base, which will then drive transactions. Transactions will drive sequencer fees, sequencer fees will [ drive ] our revenue. That will then create this ecosystem. The broader ecosystem of more Onchain activities also then benefits our overall portfolio of products and services as people need -- and a wallet, they need somewhere to store the crypto they own. They need to be able to get back into fiat. So those are on-ramps and off-ramps. They need other tools, they'll want to save, if they want governance, they want online identities. And so it just speaks to them growing this whole community and ecosystem that we believe is moving the future Onchain. We went from off-line to online and the future is Onchain.

Perfect. So I was reading in the journal, I think, last week that there are 11 different major markets that are going through their election cycle.