Coinbase adds more wobbly legs to stool

Shaky foundation. Coinbase Global is leaning into the volatility of the cryptocurrency business. Despite an ongoing court battle against the United States Securities and Exchange Commission that could obliterate some of the $46 billion firm’s revenue sources, Coinbase shares rose 12% on Friday after it reported fourth-quarter earnings of $273 million. Brian Armstrong’s firm is profitable for the first time in two years, but it’s also standing on wobblier legs.

Oddly for a digital asset exchange, Coinbase’s fortunes have decoupled from bitcoin’s. Even as the largest digital token surged more than 150% in price last year, Coinbase’s revenue shrank slightly over that period, coming in at $2.9 billion in 2023, excluding interest Coinbase made on its own cash. It could diverge even further: The company makes the majority of its sales in the United States, and if the SEC wins its current case, Coinbase may no longer be able to operate as an exchange in the country at all.

Armstrong has tried to get ahead of this by launching an international derivatives exchange and pushing into new markets, although these efforts are still too nascent to have a significant impact. Cost-cutting helped bring down operating expenses, too. Coinbase is diversifying: Revenue from transaction fees shrank from three-quarters of net sales in 2022 to just over half in 2023, according to the company’s latest shareholder letter.

The trouble is that the areas where Coinbase is growing might be even less reliable than trading. Three activities – stablecoins, interest income and staking – jumped from comprising less than 20% of Coinbase’s net revenue in 2022 to 41% in 2023. Armstrong may tout the benefits of decentralization, but the first two of those categories are almost entirely dependent on central banks. If the U.S. Federal Reserve cuts rates this year, both areas could see declines.

Meanwhile staking, which lets customers earn rewards by pledging their crypto tokens as collateral to help secure blockchain networks, is legally ambiguous. The SEC says it violates securities laws, and already the exchange has stopped offering staking in various states over similar concerns. Compared to troubled rival Binance, which last November agreed to pay $4 billion to regulators to settle charges that it engaged in money-laundering and violated sanctions rules, Coinbase looks like the grown-up in the room. But adding shaky legs to a wobbly stool won’t help it thrive.