Why ‘weakness prevails’ at Coinbase despite better-than-expected earnings

Happy Friday!

Coinbase stemmed its loss and beat consensus on revenue, but the company’s underlying fundamentals keep getting worse, Mizuho analysts led by Dan Dolev wrote in a note to clients.

Let’s dive into it.

2.5% trading fees

Coinbase stock is flat in New York trading as investors weigh third-quarter results.

While pockets of the earnings report were better than analysts’ expectations, “the underlying fundamentals continue at COIN to worsen,” Mizuho analysts said. “Weakness prevails.”

Retail volumes “continued to slide to new lows” to about $11 billion, as did institutional volumes. Subscription and services revenue excluding interest income was lower in the third quarter compared with the second quarter, Mizuho noted, “breaking a multi-quarter trend.”

The average rate of fees Coinbase generates from retail clients also rose in the third quarter, to about 2.5% from about 2.21% during the three-month period before.

The increase was attributed to a decline in trading volumes on Coinbase’s advanced platform, which charges fees between 0.05% to 0.6%.

Those fees “saved the day” for Coinbase, Mizuho said.

But that’s a risk in the longer-term as finance giants including BlackRock and Fidelity offer crypto products to retail consumers, upping competition and pressuring fees.

And overall fees that Coinbase generated from both retail and institutional users were down in the month of October, Mizuho calculated.

The firm posted a loss of $2 million, paring a $79 million loss in the first quarter and a loss of $97 million in the second quarter.

The stock is up more than 150% this year.

High fees

“COIN is charging its retail customers unsustainably high fees/commissions, but is still losing money,” short seller Jim Chanos told DL News in April.

“A Bitcoin [exchange-traded fund] would cost 0.01% to trade, and this goes for anyone regardless of size, on all major exchanges,” Eric Balchunas, Bloomberg Intelligence ETF analyst, wrote on Twitter this summer. “Compare that to any crypto exchange, and you can see the potential here.”

Investors expect the Securities and Exchange Commission to imminently give the green light for BlackRock and other firms to launch Bitcoin spot ETFs.

Crypto market movers

• Bitcoin is down 3.2% in the last 24 hours and trading at $34,265.
• Ethereum slumped by 2.5% in the same period of time, reaching $1,789.
• Solana is down 12%.

What we’re reading

• FTX co-founder Sam Bankman-Fried found guilty of all charges in fraud trial — DL News
• SBF lied, denied, and forced a trial — he won’t be shown mercy at sentencing — DL News
• The SBF trial is over — here’s what you need to know — DL News

Adam Morgan McCarthy and Tom Carreras are Market Correspondents at DL News. Got a tip about Coinbase? Reach out to adam@dlnews.com or tcarreras@dlnews.com