Coinbase (COIN -0.34%) reports earnings after the market closes on Thursday, Feb. 24, 2022, and the market doesn't seem to be expecting a lot from the company. Shares of the stock are down 47% since the third-quarter 2021 earnings report was released, and cryptocurrency in general has been under a lot of pressure in those three months.
But investors should keep in mind how Coinbase makes money. It doesn't need cryptocurrency prices to rise to make money; it needs people to make transactions. And transactions of cryptocurrencies like Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH) are up since the third quarter, indicating that Coinbase's results may be better than hoped.
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The disappointment in Coinbase's last quarter
Investors reacted strongly to the sequential drop in Coinbase's revenue and net income in the third quarter of 2021. You can see below that the drop was pretty significant.
COIN Revenue (Quarterly) data by YCharts
But the third quarter was actually a low point for Bitcoin and Ethereum transactions. Between October and the end of December, transaction volume was up, which should mean more revenue for Coinbase.
Bitcoin Transactions Per Day data by YCharts
In addition to more Bitcoin and Ethereum transactions, Coinbase has been getting an increasing percentage of its revenue from other cryptocurrencies. So, an increase in Bitcoin and Ethereum will be a benefit, but the company should also grow as altcoins continue to grow in popularity.
More growth ahead?
Let's also not forget that Coinbase is expected to launch a non-fungible token (NFT) marketplace sometime soon. And it's expanding into more traditional finance products like credit cards and direct deposit. In time, we will likely think of Coinbase as a next-generation bank.
Given the high-profile hacks and scams in cryptocurrency and NFTs, I could also see Coinbase expanding its custodial services to more people. Security isn't something crypto or NFT users should have to think about, and Coinbase is already offering some needed custodial services to institutional investors.
I think these are incredible growth opportunities for Coinbase long-term and could ultimately be more consequential for the business than cryptocurrency trading.
Building a cryptocurrency ecosystem
Coinbase stock has been crushed recently, but I think it's important to understand what the company is building. It's not just a cryptocurrency trading platform; the company is trying to build an entry point to the cryptocurrency ecosystem for tens of millions of users. Right now, that means buying and selling cryptocurrencies, but in the future that could mean buying and using NFTs, paying for goods and services with cryptocurrency or stablecoins, and maybe even foregoing traditional financial institutions for a company like Coinbase.
It's very early in this evolution, and yet Coinbase is very profitable even as it grows and evolves. I like what the company is building, and with cryptocurrency trading trends improving over the last few months, the company's fourth-quarter results may not be as bleak as investors expect.
