While the crypto market is currently in a turbulent zone, and all players seem to blame it, Coinbase Global continues to post insolent results. But these results, the firm owes them not directly to crypto, whose global market value continues to melt. But thanks to the explosion of interest rates, in the form of passive income – drawn from its “cash” reserves.
According to the firm’s latest results, in fact, the fees that Coinbase charges for each transaction remain by far the platform’s leading source of revenue (88% or $7.4 billion in 2021). But the firm could not stay on this achievement. On pain of seeing its business model falter in the event of a drop in revenue from this channel.
Coinbase Benefits from a Sharp Rise in Interest Rate Revenue
This is where Coinbase’s strategy is particularly brilliant. In the 3rd quarter of 2022, the firm generated a very comfortable 101.8 million dollars with… interest rates. This represents a massive increase in this revenue channel (213% year over year). The platform closed the period with a reserve of $5 billion in cash and other equivalents.
And it is therefore these reserves that allow it in part to generate money via interest rates, knowing that the Fed (the American Federal Reserve) recently significantly raised its key rate: it was flirting with 0% during the pandemic , but was raised in the space of a few months to 3.83% in 2022.
We emphasize “in part” because according to the data transmitted to the SEC (Securities and Exchange Commission), Coinbase drew from its reserves revenues of around 14 million dollars. A sharp increase, of course, but very far from the total of 101.8 million dollars. So how was Coinbase able to pull off such a feat?
The answer is simple: thanks to USD Coin, a stable coin that Coinbase co-founded with Circle. The USDC is the second stablecoin on the market with a capitalization of 42.7 billion dollars. But thanks to Circle’s upcoming IPO, hard data is surfacing as to why the business is proving so lucrative in an economic cycle with high interest rates.
A lasting trend?
The supervision of the stablecoin is ensured by a structure controlled at 50% by each entity. However, each USDC is backed by real dollars, and it is these that generate income via the interest rate. We don’t know exactly everything about the editing, but Circle reveals that it generated $28 million in revenue through this channel in 2021, compared to $438 million in 2022.
According to The Motley Fool, Coinbase would recover around 35% of the sum, but there are no official figures. What is interesting about Coinbase’s strategy on these interest rates is that the source of income at the moment seems as sustained as it is sustainable. Circle believes that revenue from these interest rates will increase by 400% in the year 2023 due to both higher interest rates and the growth of USDC.
This should also be reflected in the economic performance of Coinbase. For the time being, income from interest rates represents 18% of the platform’s income. But if Circle’s projections hold true, Coinbase could as early as next year approach that rate to 50% of its revenue — nearly on par with what the firm currently earns from its transaction fees.
However, there remains a risk for Coinbase: that the gloom remains (and strengthens) in crypto in the next 12 months – which would prevent the USDC stablecoin from growing as much as expected. The indicator will certainly be scrutinized very closely by investors.