Here’s the most alarming number from Coinbase’s latest earnings report


When Coinbase global (PIECE OF MONEY -2.31%) announced its second quarter results on August 9, it announced net revenue for the three-month period of $803 million, down 61% from the year-ago period. And the company posted a net loss of $1.1 billion, compared to a profit of $1.6 billion in the second quarter of 2021.

Since most of the company’s revenue is tied to trading volume, a bad time for the whole cryptocurrency market in the second quarter deserves a fair share of the blame. The Federal Reserve’s series of interest rate hikes to curb soaring inflation has resulted in a risk-averse approach on the part of investors. But over the past month, that sentiment has seemed to reverse; Bitcoin and Ethereum are up 16% and 58%, respectively, to date.

Nonetheless, Coinbase is struggling right now, and its shares have fallen 67% in 2022. In the last letter to shareholders, there was one important data point that really stood out that investors might have missed. And that could predict more adversity for Coinbase’s business.

Coinbase loses market share

In Q2, Coinbase platform assets (as a share of the overall crypto market) fell to 9.9% from 11.2% in Q1. “We observed that the majority of this behavior was from institutional clients who reduced risk and sold crypto for fiat instead of withdrawing their crypto to another platform,” the management team wrote in the letter to the public. shareholders.

Based on this explanation, even though a small portion of these assets were transferred to other exchanges, it still caused Coinbase’s market share to drop by a significant amount. This is clearly not a good sign for the company, whose investment thesis is still based on the fact that it will attract more market share from digital assets over time, which has shown a tendency to rise in the past, from 4.5% to 11.5% between the end of 2018 and the end of 2021. Not only is Coinbase suffering from an extremely weak cryptocurrency market, but customers are choosing to opt for competing services .

It is extremely important for a brokerage and exchange company like Coinbase to at least maintain, and ideally increase, the assets that are on its platform. This is because it leads to greater revenue generation opportunities. In the last quarter, 82% of the company’s revenue came from transaction fees, and if there is more capital entering Coinbase’s network, this figure may increase.

Additionally, management’s intense focus on growing subscription and service revenue, derived from activities such as blockchain rewards and custodial fees, is dependent on bringing in more assets. This segment actually grew revenue by 44% year-over-year in the second quarter, a positive for the company.

Coinbase wants as much money as possible in its ecosystem to generate revenue from its various services, so the recent downward trend in assets on its platform is alarming. But management continues to introduce new product features, such as a improved retail appEthereum staking for institutional clients and other developer tools.

The outlook for the rest of 2022 there is nothing to get excited about. The management team wants to stay adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) less than $500 million for the full year. In the first six months of this year, adjusted EBITDA losses totaled $131 million, so management should expect worse days ahead. But with With $5.7 billion in cash and cash equivalents on its balance sheet as of June 30, the company is well positioned to weather prolonged weakness in the crypto market.

Maybe Coinbase’s latest move partner with the gargantuan asset manager black rock will help bring assets, at least from institutional investors, to the platform. But whichever way you look at it, losing market share when it comes to total cryptocurrency assets is not a good sign. And as a shareholder, market share will continue to be a key metric I watch for insight into Coinbase’s outlook.

Neil Patel has positions in Bitcoin, Coinbase Global, Inc. and Ethereum. The Motley Fool holds positions and endorses Bitcoin, Coinbase Global, Inc., and Ethereum. The Motley Fool has a disclosure policy.

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