What happened
Shares of cryptocurrency company Coinbase Global (COIN -0.47%) jumped on Tuesday after the stock got an upgrade from an analyst. As of 9:50 a.m. ET, Coinbase stock was up about 8%, but it had been up as much as 11%.
So what
The stock market is generally up today as well, so this is also helping Coinbase stock. However, the bigger boost came from analyst Simon Clinch of Atlantic Equities. According to Street Insider, Clinch wrote a note to investors, laying out reasons why the stock has upside.
Clinch noted that Coinbase is trying to make its business model more resilient to crypto market conditions, which can be quite volatile. He specifically cited Coinbase's custodial revenue as an example.
And it's a good one. While many cryptocurrency platforms have gone under, Coinbase has a better reputation that often allows it to hold cryptocurrencies on behalf of corporate customers.
In Clinch's view, revenue streams like this are more stable than revenue earned from fees charged on cryptocurrency trading. And as these grow, Coinbase stock has upside.
Now what
I believe there's truth to Clinch's perspective. However, in the first quarter of 2023, custodial fee revenue was just $17 million and down 46% year over year.
Encouragingly, Coinbase's total subscription and services revenue (of which custodial revenue is a part) was 49% of total revenue -- it's the highest percentage ever.
However, Coinbase's subscription and services revenue comes with a big asterisk. Roughly two-thirds of Q1 "subscription" revenue was interest income, generated from the company's cash. And much of Coinbase's cash comes from its interest in stablecoin USD Coin.
According to CoinMarketCap, the market capitalization of USD Coin has fallen from about $44 billion in early March to about $29 billion as of this writing. In other words, the cash balance for USD Coin is dropping dramatically as users cash out. Therefore, there's a good chance Coinbase's interest income will start dropping in 2023, and this is the majority of its supposedly more resilient revenue stream.
Coinbase may be a great way to invest in the future of the cryptocurrency space. But that future is filled with uncertainties, so it needs to be approached with caution.
