Coinbase: Kraken Staking Settlement Is A Bad Sign Of What’s To Come
On Thursday, crypto exchange Kraken agreed to “immediately” end its crypto staking-as-a-service platform for U.S. customers and pay a US$30 million fine to settle SEC charges that it was offering and selling unregistered securities. This agreement represents a significant threat to Coinbase Global, Inc.’s (NASDAQ: COIN) current and future revenue streams.
Staking entails an account holder allowing their cryptocurrency to be locked up in order to participate in the digital currency’s blockchain, thereby helping to verify the accuracy of transactions on the blockchain. In exchange, the account holder earns rewards that equate to multiples of the returns offered by banks. Per its website, Kraken’s staking service offered a whopping 20% annual yield; the firm promised to pay these rewards out twice a week. Staking is a popular way to earn income from crypto holdings without trading the coins, although it entails considerable principal risk as digital currencies are tremendously volatile.
READ: Commissioner On SEC Decision To Shut Down Kraken Staking Program: “I Dissent”
The SEC’s action against Kraken has direct implications for Coinbase because it too operates a staking platform. Coinbase’s service, called Earn, offers 6% annual interest to its account holders. In turn, Coinbase keeps 25%-35% of this return as a fee. It is not entirely clear why a customer interested in the concept of staking would do so on Coinbase when the returns on Kraken were so much higher and the risks are the same.
Coinbase reflects these staking fees in a revenue category called “Blockchain rewards.” In 3Q 2022, the company recorded Blockchain reward revenue of US$62.8 million, down 8% from US$68.4 million in 2Q 2022. A decline in crypto prices quarter-to-quarter was the key reason for the dip in revenue, while increased participation in staking “both in terms of the number of users and an increase in the number of native units staked across all assets supported on” Coinbase’s platform offset some of the drop.
COINBASE GLOBAL, INC.
| (in millions of US dollars, except otherwise noted) | Full-Year 2022E | 3Q 2022 | 2Q 2022 | 1Q 2022 | 4Q 2021 |
| Monthly Transacting Users, or MTUs (millions) | Just under 9.0 | 8.5 | 9.0 | 9.2 | 11.2 |
| Retail Trading Volume | $26,000 | $46,000 | $74,000 | $177,000 | |
| Institutional Trading Volume | $133,000 | $171,000 | $235,000 | $371,000 | |
| Trading Volume | $159,000 | $217,000 | $309,000 | $547,000 | |
| Retail Assets on Platform | $51,000 | $47,000 | $123,000 | $141,000 | |
| Institutional Assets on Platform | $51,000 | $49,000 | $134,000 | $137,000 | |
| Total Assets on Platform | $102,000 | $96,000 | $256,000 | $278,000 | |
| Total Market Capitalization of All Crypto Assets | $1,050,000 | $970,000 | $1,950,000 | $2,321,000 | |
| % on Coinbase Platform | 9.7% | 9.9% | 13.1% | 11.5% | |
| Transaction Revenue | $366 | $655 | $1,013 | $2,277 | |
| Blockchain Rewards | $63 | $68 | $82 | $103 | |
| Custodial Fee Revenue | $15 | $22 | $32 | $50 | |
| Interest Income | $102 | $33 | $11 | $8 | |
| Other Subscription and Services Revenue | $31 | $24 | $28 | $54 | |
| Total Subscription/Services Revenue | $211 | $147 | $152 | $213 | |
| Net Revenue | $576 | $803 | $1,165 | $2,490 | |
| Transaction Expenses as % of Net Revenue | Low 20% range | 18% | 21% | 24% | 20% |
| Sales & Marketing Expenses as % of Net Revenue | $500 to $550 million | 13% | 18% | 17% | 10% |
| Technology and Development Plus G&A Expenses | $4,000 | $896 | $1,079 | $984 | $757 |
| Adjusted EBITDA | ($116) | ($151) | $20 | $1,205 | |
| Operating Cash Flow | ($123) | ($3,864) | ($830) | $2,993 | |
| Net Income – Recurring | ($545) | ($647) | ($430) | $840 | |
| Cash, Including Digital Assets | $5,007 | $5,682 | $6,116 | $7,123 | |
| Debt – Period End | $3,474 | $3,483 | $3,486 | $3,491 | |
| Shares Outstanding (millions) | 261.9 | 261.9 | 261.9 | 261.9 |
Blockchain rewards comprised fully 11% of Coinbase’s net revenue of US$576.4 million in 3Q 2022. Furthermore, this revenue stream is likely a 100%-margin stream; it likely all falls to the EBITDA line.
Based on the Kraken-SEC agreement, Coinbase’s entire staking-related revenue and EBITDA, equivalent to about positive US$250 million on an annualized basis, has to be considered at risk. This is clearly significant in relation to the company’s aggregate Adjusted EBITDA of negative US$247 million over the first nine months of 2022.
Coinbase reports 4Q 2022 results on February 21, 2023.
Coinbase Global, Inc. last traded at US$57.09 on the NASDAQ.
Information for this briefing was found via Edgar and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
