Detailed Analysis of Coinbase's Q1 Financial Report: How Was the $440 Million Loss Incurred?

Author: Lin Qi, Hu Tao, Chain Catcher

Coinbase today announced its financial report for the first quarter of 2022. The net revenue for the quarter was approximately $1.165 billion, a decrease of 53% quarter-over-quarter, with a net loss attributable to common shareholders of $429.7 million, reversing from a profit last year. The monthly active users were 9.2 million, down 19.2% quarter-over-quarter; the trading volume was $309 billion, down 43.5% quarter-over-quarter.

As the most profitable sector in the cryptocurrency industry, the leading cryptocurrency exchange Coinbase delivered a quarterly loss of $440 million, which is undoubtedly very embarrassing and bleak.

So, why did Coinbase incur such significant losses? What other information does this financial report reveal? Below, Chain Catcher will interpret the information from this financial report.

In Coinbase's revenue structure, the core source of income is trading revenue, which significantly shrank to $960 million this quarter, down 55.5% from $2.277 billion in the fourth quarter of last year.

In the past, Coinbase has repeatedly stated its intention to diversify its revenue sources, but currently, the proportion of trading revenue in total revenue (83%) has not substantially decreased from the proportion at the beginning of last year (85.8%), which has led to Coinbase's revenue situation being too closely tied to market conditions.

Specifically, in terms of market trading volume, Coinbase's total trading volume in the first quarter was $309 billion, a sharp decrease of 43.5% compared to $547 billion in the previous quarter.

Among this, retail user (individual) trading volume was $74 billion, accounting for only 23%; institutional user trading volume accounted for the vast majority, reaching $235 billion.

Compared to the previous quarter, both retail and institutional trading volumes saw significant declines, essentially returning to the levels of the third quarter of last year. This data, shown by one of the largest cryptocurrency exchanges in the world, indicates that both institutions and retail investors have exhibited a negative sentiment towards market conditions.

From the perspective of revenue structure, Coinbase's trading revenue is still dominated by retail trading. Data shows that the trading revenue from retail users in the first quarter was $966 million, while revenue from institutions was $47 million.

Along with the decline in Coinbase's asset platform in the first quarter, its monthly trading users also decreased. Data shows that the monthly trading users were 9.2 million, a decrease of 2.2 million (-19.3%). Therefore, in the first quarter, both retail and institutional trading volumes, as well as trading revenue data, hit new lows since 2021.

At the same time, due to the bear market, the previously expanded revenue sources of Coinbase have also decreased. Additionally, Coinbase's subscription and service revenue in the first quarter was $151.9 million, a decrease of 28.8% compared to the fourth quarter of last year.

Due to factors such as the bear market, Coinbase's trading revenue and other aspects have significantly decreased by over 50%. However, at the same time, Coinbase's expenditures in areas such as corporate management and technology research and development continued to grow, reaching $1.72 billion, which is also one of the reasons for its loss exceeding $400 million.

Specifically, Coinbase's largest expenditure in the first quarter was on technology and development, amounting to $571 million, an increase of 24% compared to the fourth quarter of last year, mainly due to ongoing investments in product innovation and platform infrastructure. The second largest expenditure was general and administrative expenses, which were $414 million, up 39% quarter-over-quarter, primarily due to a significant increase in the number of employees (with 4,948 full-time employees as of the first quarter, a 33% increase from the previous quarter) and increased investments in legal, compliance, and business support functions. Lastly, transaction costs, although down 45% quarter-over-quarter, still amounted to $278 million.

Additionally, other operating expenses were $259 million, a year-over-year increase of 252%. Apart from the impairment of cryptocurrency assets, some platform-related events and losses led to an increase in other operating expenses for Coinbase.

Regarding the dismal revenue situation, Coinbase stated, "Given the price cycles in the cryptocurrency industry, you can expect our financial situation to fluctuate. This does not concern us, as we have always taken a long-term view on cryptocurrency adoption. We are looking for long-term investors who have confidence in our mission and can endure through price cycles."

However, most investors are not convinced by this financial report and statements. Due to various data generally falling short of analysts' expectations, Coinbase's stock price plummeted 12.6% in after-hours trading, quoted at approximately $72.99, with a market capitalization dropping to $16.2 billion. Since its listing last year, Coinbase's stock price has fallen by 71%.

Coinbase predicts that in the next quarter, monthly user trading volume, total trading volume, and trading costs will further decrease, but at the same time, it will increase expenses in technology research and development and administration. Meanwhile, Coinbase stated that its goal is to keep the potential adjusted EBITDA loss for the entire year of 2022 around $500 million, which means that the expected loss amount for Coinbase in the next three quarters will not exceed $100 million, posing a severe test for the exchange's cost-cutting measures.

From Coinbase's actions in recent months, we can also see the exchange's anxiety about expanding revenue sources. For example, Coinbase has not only significantly accelerated the frequency of new coin listings but also announced a list of new coins in early April, including dozens of lesser-known altcoins, intending to attract more altcoin trading users.

At the same time, after nearly half a year of development, Coinbase officially launched the Coinbase NFT marketplace in April, aiming to capitalize on the NFT market trend and generate more revenue from NFT transactions. However, according to Dune Analytics, the average transaction volume of this NFT marketplace in the past five days was only $52,000, with a total user count of 1,830, showing no significant growth.

Perhaps considering the pressure on cash flow, Coinbase may also conduct a new round of stock financing. Coinbase announced today that it has submitted a "shelf registration" document to the SEC. Shelf registration allows U.S. companies to more easily and quickly issue and sell new stocks, giving companies more flexibility in choosing when to issue stocks.

Coinbase's development status largely represents the development status of the cryptocurrency industry. How to face the challenges in revenue sources and market confidence after the bear market will be a common topic for the industry.