Coinbase is expected to report second-quarter earnings Thursday — but it's not just the crypto exchange's ongoing regulatory battles that should be top of mind for investors. 

The crypto firm, which has made a flurry of regulatory headlines since the U.S. Securities and Exchange Commission sued it in June, has seen its stock price surge since the beginning of the year — despite regulatory uncertainty stateside and dwindling spot trading volumes. Indeed, Wall Street analysts have increasingly warmed up to the stock, with the consensus price target for COIN increasing from $53.79 in April to $94.15 today. 

The stock has appreciated 180% since the beginning of the year, outpacing Bitcoin's 71% rise over the same period. 

Coinbase enjoyed a beat during its Q1 earnings in May, with the firm reporting $773 million in revenue, buoyed by effective cost-cutting measures — which brought reoccurring operating expenses down 37% Q/Q — and a diversification of its revenues. Adjusted EBITDA flipped positive from -$124 million in Q4 2022 to $284 million in Q1.

Analysts anticipate Q2 earnings per share to come in at -$0.76 and estimated revenues to $628 million. 

Diversification

Analysts will be keen to see if Coinbase can continue its story of revenue diversification.

The firm has come a long way from its early days when most revenues were derived from trading. While firms like Coinbase make relatively more money from the fees they charge per trade than their brokerage and exchange counterparts in equities, it is a highly cyclical business. Despite Bitcoin holding steady at $30,000, spot volumes are stuck in the proverbial doldrums, with Coinbase's monthly volumes sitting at levels similar to late 2020. 

In an email to The Block, Needham's John Todaro noted that expectations for the quarter are low, with the firm anticipating the lowest "quarterly volume since becoming a public company." 

To be sure, a higher-than-expected take rate could help push transaction-related revenues higher.

"Our focus will be on where take rate comes in at, as this metric is the most likely to drive a positive surprise on trading revenue," Todaro said. "Last quarter, a higher than expected take rate drove a revenue beat."

Still, Coinbase has done an excellent job executing on diversification, with subscription and services revenues — which span its Coinbase One retail subscription product as well as fees from custody and other institutional financial services — increasing steadily since Q2'22, as it noted in its last shareholder letter. 

Coinbase International

Last earnings, Coinbase management teased its plans to expand offshore further. It executed that vision, which it describes as being part of a "global expansion strategy," with the launch of its Bermuda-registered derivatives exchange, Coinbase International, in May. The market's activity has chilled a bit over the last month, but analysts that have spoken with The Block are impressed with the progress so far. 

Still, this is a show-me story for most analysts, as it takes time to build a robust marketplace for new derivative products. Throughout July, Coinbase International saw $1.963 billion in volumes traded across its ether and bitcoin perpetual futures contracts. By way of comparison, CME Group clocked in $64.3 million in volumes for its ether futures contract during the first month it traded in 2021, according to data from The Block. Monthly volumes, meanwhile, for Coinbase International's ether contract came in at $770 million in July. 

Given the uncertain regulatory environment in the U.S., Coinbase will need to prove that it has a viable path offshore and that it can court users who trade on venues like ByBit, OKX and behemoth Binance. To do that, it must show it can quickly roll out new products and listings. So far, it only offers contracts in bitcoin, ether, XRP, and litecoin.

Regulatory uncertainty

Naturally, regulatory headwinds will be top of mind for investors.

In addition to the SEC's lawsuit against the firm, Coinbase has recently stopped offering staking to users in four states amid legal battles across regulatory agencies in ten states. In Q1, blockchain rewards increased 18% quarter over quarter — with the business representing approximately 3% of net revenue in Q1. But it is a business that analysts were expecting to grow much larger. 

As for the SEC battle, Coinbase will have to mollify analysts' concerns about the potential costs associated with its battle with Gary Gensler's agency. As The Block reported, legal costs for Binance and Coinbase in their respective battles with the SEC could top $100 million. "If legal fees for both exceed $100 million, I would not be surprised," Moses Singer partner Howard Fischer told The Block in an interview. Fischer, a former senior trial counsel at the SEC, led the regulator's litigation into the London Whale scandal at JPMorgan Chase during his 9-year tenure at the agency.

Another interesting regulatory to keep an eye on, according to Berenberg Capital Market's Mark Palmer, is a recent amendment to U.S. Senate’s 2024 National Defense Authorization Act (NDAA) that could prove to be "problematic" for stablecoin issuers. Here's Palmer [emphasis is our own]: 

"We believe this amendment, if it remains in the final version of the NDAA, could be problematic for USDC and other issuers of stablecoins if it were to result in the establishment by the Treasury Secretary a standard of KYC and AML monitoring with which they would be unable to comply. We note that the identities of the holders of stablecoins can only be ascertained at two points: when they are issued and when they are redeemed. The addition of new KYC and AML requirements throughout the stablecoin lifecycle likely would cause further deterioration in USDC’s market cap, and in the amount of interest income that COIN would be able to generate going forward."

Coinbase, which launched USDC with Circle in 2018, counts on the interest from USDC's cash stockpile for a good chunk of its revenues. As per the firm's Q1 shareholder letter, interest income from USDC accounted for $199 million. Palmer noted that 27% of Coinbase "derived 27% of its net revenue from interest income on USDC."