Detailed Analysis of Coinbase's Q2 Financial Report: User Count Surpasses 100 Million for the First Time, Net Loss of $1.1 Billion Sets a Record

Author: Linqi & Gu Yu, Chain Catcher

Coinbase today announced its Q2 2022 financial report, revealing a net revenue of approximately $803 million, a 31% decrease quarter-over-quarter and a 63.5% decrease year-over-year, with a net loss of about $1.1 billion, expanding by 250% from the previous quarter, marking another record low since its IPO.

Following the announcement, Coinbase's stock price fell 5% in after-hours trading to $83, down about 25% from its peak in August. The substantial loss of $1.1 billion also clearly exceeded market expectations, further reflecting the challenges faced by Coinbase as a leading exchange. So, what specific information does this financial report reflect? How did such a massive loss occur? Chain Catcher will provide a detailed analysis below.

For a long time, trading revenue has been the primary source of income for Coinbase, which has long been criticized for its single source of revenue. The dismal performance this quarter is mainly attributed to this. According to the report, Coinbase's trading revenue in Q2 was $650 million, a 66% year-over-year decrease and a 35% quarter-over-quarter decrease, primarily impacted by the collapse of Terra and other events during the quarter, leading to a significant decline in user trading willingness, especially among retail users.

In Q2, Coinbase's retail user trading volume decreased by 37.8% quarter-over-quarter to $46 billion, contributing revenue of $616 million, while institutional user trading volume decreased by 27.2% to $171 billion, contributing trading revenue of $39 million. Coinbase further revealed in its shareholder letter that the average trading revenue contributed by each retail user in this quarter was approximately $29, leading to a total of 21.24 million trading users for the quarter.

Additionally, by the end of Q2, Coinbase's total verified user count surpassed 100 million for the first time, reaching 103 million, a year-over-year increase of 51%. However, the average monthly active users (MTU) for Q2 was 9 million, a decrease of about 200,000 from Q1. Average monthly active users refer to retail users who traded one or more products each month, including token trading, staking products, etc.

Coinbase indicated that in Q2, monthly active users were more inclined towards staking and other non-investment activities, with 67% (approximately 6 million) of users participating in transactions involving non-investment products. This is reflected in the report, where subscription and service revenue became one of the few bright spots, achieving $147 million in revenue for Q2, a year-over-year increase of about 44%, and only a 2.6% decline from Q1, indicating that Coinbase has made some progress in diversifying its revenue, although the impact on overall performance remains relatively small.

Specifically, revenue from blockchain rewards (i.e., token staking services) was $68 million, a year-over-year increase of 98%, but a 16% decrease from Q1; custody fee revenue was $22 million, a year-over-year decrease of 30%; Earn activity revenue was approximately $2.5 million, a year-over-year decrease of 97%; and interest income was $33 million, a year-over-year increase of 211%, primarily due to USDC-related activities and higher interest rates generating interest on fiat funds held in custody; other subscription and service revenue was $21.79 million, a year-over-year increase of about 66%, mainly from the revenue of Coinbase Cloud, the cloud services division.

Coinbase's NFT marketplace, which was heavily promoted in Q2, did not generate any revenue as it temporarily did not charge users, but data from the Dune platform shows that the trading volume in the past week was only $200,000, with a cumulative trading volume of $6.35 million, indicating a rather dismal performance.

Persistently high expenditures are one of the main reasons dragging down Coinbase's financial report. Coinbase stated that in Q2, it took measures to streamline its operational cost structure, including readjusting hiring plans, optimizing vendor spending, strengthening discipline in marketing spending deployment and measurement, and reducing short-term funds allocated to discretionary investments. However, many of these measures were reported to have occurred in June, having limited impact on the overall financial situation for Q2.

From the specific financial data, although trading fees and marketing expenses were significantly reduced compared to Q1, by 40% and 30% respectively, expenditures in areas such as technology research and development and corporate management still saw varying degrees of increase, with total costs rising to $1.85 billion.

Among these, technology research and development expenses increased by 110% to $609 million. Coinbase explained that this increase was due to personnel-related expenses rising by $172.4 million (of which stock compensation expenses were $129.7 million), and software and service costs increasing by $84 million.

General and administrative expenses rose by 89% year-over-year to $470 million. Coinbase explained that this was due to an increase of $121.5 million in customer support costs, driven by increased capacity and the need for temporary labor and custodial services to support customer experience and compliance; personnel-related expenses excluding customer support increased by $5.98 million; and professional service expenses increased by $29.9 million, mainly due to increased business process and acquisition consulting services, as well as increased legal fees related to litigation, regulation, and compliance.

Other operating expenses increased by 50% to $420 million, related to the total impairment expenses of cryptocurrency assets held during the quarter, with impairment expenses (net of any recoveries) amounting to $377 million.

Additionally, expenses for conference activities and sponsorships increased by $25.6 million, and impairment expenses for certain strategic equity investments increased by $69.3 million. Coinbase also stated that the platform had no significant exposure to trading volume risks or counterparty risks related to the LUNA, Three Arrows Capital, Celsius, and Voyager liquidation events.

Notably, Coinbase added a "restructuring" cost of $42.5 million to its operating costs, primarily driven by severance pay and other post-employment benefits. Due to the rapid expansion of Coinbase's workforce in the first half of this year, the company first indicated in May that it would slow down hiring and reassess talent needs based on priority business goals. On June 14, Coinbase announced layoffs of 18%. In this financial report, Coinbase disclosed that it has laid off approximately 1,100 employees, although as of June 30, the company still had 4,977 employees.

In other data, as of June 30, Coinbase held total liquid assets of $102.1 billion, of which customer-held assets totaled $95.6 billion, with cash and cash equivalents amounting to $5.6 billion. Additionally, cash flow from operating activities was $1.5 billion. In terms of cryptocurrencies, the trading volume of Bitcoin increased from 24% in Q1 to 31% in Q2, while other assets saw varying degrees of decline.

Furthermore, Coinbase stated that it updated the retail user agreement in June to clarify the applicability of UCC Section 8 to custodial cryptocurrency assets. According to this provision, financial assets held by Coinbase do not belong to Coinbase's property and are not subject to claims from its general creditors. Previously, in May of this year, Coinbase stated in a filing with the SEC that in the event of bankruptcy, the cryptocurrency assets held by the exchange could be considered property of the bankruptcy proceedings, and customers might be regarded as general unsecured creditors, which had sparked widespread criticism in the industry.

Coinbase also provided further forecasts for its financial data for this year based on July data. Due to the decline in monthly active users to around 8 million in July, Coinbase predicts that the MTU for the next quarter will further decline, and the proportion of non-investment users' MTU will be higher than that of investment users, with average retail revenue contribution expected to drop below $20. Additionally, Coinbase expects sales and marketing expenses to be around $100 million, with research, management, and other expenditures projected to be about $1 billion in Q3, including approximately $400 million in stock compensation.

Coinbase's goal is to limit the potential adjusted EBITDA loss for the full year of 2022 to around $500 million, but it has already lost $151 million in Q2 alone. Clearly, it is under significant pressure in the current market environment, but based on the cost management measures taken in Q2, Coinbase remains cautiously optimistic.

Previously, Binance.US announced that it would allow users to trade Bitcoin against USD, USDT, USDC, and BUSD without paying spot trading fees. Robinhood and FTX US have also attempted to launch zero-commission trading services. From the retail user trading data described earlier, it can be calculated that Coinbase's overall trading fee rate exceeds 1%, which is clearly less attractive to retail users compared to its competitors.

At the same time, Coinbase stated that it has received subpoenas and requests from the U.S. Securities and Exchange Commission, suspecting that it allowed Americans to trade unregistered "securities," requiring documents and information regarding certain customer plans, including the company's listing asset processes, the classification of certain listing assets, its staking plans, and its stablecoin and yield-generating products. This will also somewhat increase the pressure on Coinbase's business operations and expansion.

In summary, due to the multifaceted pressures from Terra, Three Arrows Capital, and others in Q2, there has been a significant loss of assets and a decline in trading willingness among both retail and institutional users, coupled with aggressive market expansion plans that could not be quickly "braked," leading to an exacerbation of the negative state in Q2.

Coinbase stated that since Q2, the platform has been focusing on developing five areas: the Coinbase retail app, Coinbase Prime, staking features, developer solutions (products), and Web3. Coinbase believes that the current cycle is unique and may not yet be over, but it is confident that it possesses the key attributes to succeed under these market conditions and to become a leader in Web3.

However, ultimately, it will be the data that speaks. The upcoming Q3 will be a critical period to reflect the effectiveness of Coinbase's response strategies.