Although the cryptocurrency market has risen roughly 25% over the past 2 1/2 weeks (as of Feb. 9), it's still down about 31% since Nov. 9. Such is the extremely volatile nature of this nascent asset class.
Coinbase (COIN -6.28%), the biggest U.S. cryptocurrency brokerage and exchange, has seen its stock price fluctuate in line with the broader cryptocurrency market. Because most of the company's revenue comes from unpredictable transaction fees, Coinbase's success today is largely dependent on what crypto prices do in any given period.
The business is expected to report 2021 fourth-quarter financial results on Feb. 24. Here are three numbers investors should pay close attention to.
Monthly transacting users
As of Sept. 30, Coinbase counted 73 million verified users, of which 7.4 million were monthly transacting users (MTUs). These were retail users who used one or more products on the platform during the prior 28-day period. They are crucial to the company because they're Coinbase's most active customers. In Q3 2021, 82.8% of overall sales were derived from retail-transaction fees.
While MTUs dropped sequentially from Q2 to Q3, management mentioned that because October started off strong for the crypto market, Coinbase expects to have more MTUs in Q4, compared to Q3. When crypto prices are rising and volatility is elevated, users tend to trade more, benefiting Coinbase.
But as we saw, the crypto market tanked during the last couple of months in 2021. Falling prices could cause customers to close out their crypto positions, simultaneously discouraging new users from signing up. This situation doesn't bode well for Coinbase.
Therefore, I wouldn't be surprised if MTUs in the fourth quarter were lower than the 7.4 million registered in Q3.
Growth of subscription and services revenue
The most important factor that scares investors away from Coinbase, and probably why the stock currently trades for a cheap valuation of 19 times trailing-12-month earnings, is how much the business relies on transaction revenue. It accounted for 94% of total sales in the first nine months of 2021. Transaction revenue is very hard to predict quarter to quarter because it's correlated to crypto market prices and volatility.
Management is aware of this; that's why a huge focus right now is on increasing Coinbase's subscription and services revenue. Blockchain rewards and custodial fees make up the bulk of this segment. Initiatives like Coinbase Cloud, a tool for developers to build blockchain projects, and Coinbase NFT, a marketplace for non-fungible tokens, could help, as well.
Although just 11.8% of net revenue was derived from subscriptions and services in Q3, the segment grew 1,244% year over year, compared to a 295% increase in transaction revenue. If the same trend continued in Q4, it's a fantastic sign.
As cryptocurrencies shift from the investment phase to the utility phase, expect Coinbase's dependence on transaction revenue to fall, while its reliance on subscription and services revenue will rise. This is what shareholders should want, as it adds much needed stability and predictability to the business.
Number of assets on the platform
As one of the oldest crypto exchanges in the U.S., Coinbase has established a reputation for ease of use and security. Plus, having a first-mover advantage means that it has more crypto assets on its platform than domestic competitors.
During Q3, Coinbase added 30 new assets for trading and 19 new assets for custody to its platform, bringing the total to 103 and 158, respectively. Furthermore, the company now has integrations in place with fiat currencies in more than 90 countries.
Not only does Coinbase offer a broad range of digital assets, but it's working to reduce friction when connecting the traditional financial ecosystem with the crypto economy. From a user perspective, this is extremely appealing. And for Coinbase, it means less of a dependence on Bitcoin and Ethereum.
While Coinbase's process to bring new digital assets to its platform might take longer than competitors, it ensures that tokens pass the company's rigorous legal, regulatory, and compliance standards. As the crypto economy continues to grow with the introduction of new cryptocurrencies, expect the number of assets Coinbase offers to increase.