Cryptocurrency exchange company Coinbase Global (COIN +1.85%) works hard to simplify things in the complex crypto market, hoping ease of use will bring more than 1 billion new people into the ecosystem. But the company generated 28% of its revenue in the second quarter of 2023 not from working hard, but passively through interest income.
Coinbase generated $201 million in total interest income in Q2. Of this, 75% came in because of its interest in stablecoin USD Coin (USDC 0.01%). And the company just made a move to protect that source of revenue.
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Key Data Points
Coinbase reworks arrangement with Circle
USD Coin is the second-largest stablecoin in the world. Each coin is backed by dollar reserves, making each one redeemable for $1. This is what stabilizes the price, unlike other cryptocurrencies that are prone to extreme volatility.
Technically speaking, USD Coin was controlled by an entity called the Centre Consortium, which was founded by Coinbase and Circle Internet Financial. But on Aug. 21, Coinbase announced that the Centre Consortium was dissolved.
From here, Coinbase gets an equity stake in Circle. How big the stake is or what it cost, Coinbase's blog post didn't say. According to a report from CoinDesk citing people familiar with the matter, Coinbase didn't pay Circle anything for the stake.
Coinbase still brings something to the table, however. The crypto exchange will support USD Coin's growth, helping it launch on six new blockchains. It already operates on nine.
For its part, Circle will issue USD Coins, govern the project, and be responsible for operations.
Importantly for Coinbase shareholders, the new arrangement protects its interest income from USD Coin. Coinbase's relationship with Circle was unclear, and rumors suggested that Circle wanted to lower Coinbase's involvement. That speculation can be laid to rest.
From here, Coinbase will earn interest income from USD Coin based on how much USD Coin is held on its platform. And it will also earn some revenue from fees charged from the use of USD Coin.
The lingering question
While Coinbase's reworked agreement with Circle brings a level of clarity regarding USD Coin, investors need to be careful not to miss the bigger picture. USD Coin is losing market share in the stablecoin sector, whereas top stablecoin Tether continues to take share.
At the start of 2023, the market capitalization for USD Coin was about $44.5 billion, according to CoinMarketCap. Today it's $25.9 billion -- a drop of more than 40% and the lowest market cap for USD Coin in about two years.
By contrast, the market cap for Tether started the year at about $66 billion but it has surged to nearly $83 billion now. This implies that stablecoin adopters are putting money into Tether and taking money out of USD Coin.
Unfortunately, I can't provide conclusive commentary on why USD Coin is relinquishing market share to Tether -- any thoughts would be speculative. But regardless of why it's happening, I can't deny that it is happening.
This reality jeopardizes Coinbase's interest income even though its relationship with Circle is now more secure. To illustrate, Coinbase's interest income dropped 16% quarter over quarter in Q2. And given further drops in the market cap of USD Coin, interest income is poised to fall further still for Coinbase for the remainder of 2023.
Coinbase's priority, therefore, needs to be increasing the adoption of USD Coin. I don't believe having the stablecoin available on six new blockchains will help in that regard. After all, USD Coin is already available on the most used blockchains, including Ethereum and Solana.
Therefore, Coinbase will need to do something more to boost adoption levels of USD Coin. For now, I suggest shareholders listen to plans from Coinbase's management on what else it can do. And from there, investors can keep watching the market cap of USD Coin to track the effectiveness of Coinbase's decisions. If the market cap starts going back up, it would suggest the company is making the right moves, which would be encouraging.
