Coinbase’s Interest Income May Be Bright Spot Amid Challenging Third Quarter

Crypto exchange Coinbase Global (COIN) may post another weak quarter in terms of revenue and trading volumes amid tough macroeconomic conditions, but several analysts expect that interest income could be a bright spot.

“For Q3, we are forecasting revenues below the Street as exchange volumes declined in September,” Barclays analyst Benjamin Budish told clients in a note earlier in October. “But the new story we see developing for Coinbase is interest income: While rates were low (and crypto markets were hot), investors paid little attention to this revenue driver,” Budish added.

For the third quarter, Budish estimates that Coinbase could have generated $137 million in total interest income across its stablecoin business, customer fiat holdings and its corporate cash balance.

Interest income

For 2023, Budish forecasts Coinbase’s interest income reaching almost $1.4 billion, given increases in short-term interest rates, while JPMorgan recently estimated that figure could be a slightly lower $1.2 billion. Coinbase’s joint venture with USDC issuer Circle alone could contribute about $700 million in incremental revenue in 2023, JPMorgan added.

More recently, the MakerDAO community approved a proposal to place as much as $1.6 billion in USD coin (USDC) with Coinbase Prime, where it will yield 1.5%.

As for its corporate cash balance and customer fiat holdings, Coinbase reported having roughly $5.7 billion in cash and cash equivalents in its second-quarter earnings report, in addition to having just over $7 billion in customer custodial cash.

Earlier in the third quarter, some analysts saw ether staking following The Merge as a potential near-term positive catalyst for Coinbase, though that does not appear to have materialized.

“Despite the highly anticipated Ethereum Merge, we estimate staking revenue will not materially change between Q2 and Q3 given the declining average crypto prices between the two quarters,” Needham’s John Todaro told clients in a note. “Ethereum staking deposits have yet to see the large uptick that the community was hoping for. More than one month post merge, ETH deposited in staking pools stands at just 14.3 [million] ETH (~12% of the total network supply),” Todaro added.

Third-quarter estimates

Analysts expect Coinbase to post an overall adjusted Q3 loss of $2.37 per share on revenue of $646 million, according to FactSet. The consensus revenue estimate compares with $808 million in the second quarter and $1.3 billion in the year-ago quarter.

Trading volumes continue to fall, according to Mizuho, which has been more bearish versus peer analysts on the stock. “3Q trading activity on Coinbase has been range-bound of late, and lack of volatility has weighed on volumes,” analyst Dan Dolev wrote in a recent note to clients. Additionally, Dolev sees the interest income boost being short-lived as Coinbase’s customers could seek higher-yielding alternatives for their cash deposits.

For Coinbase’s stock, it may remain a longer-term story barring a significant jump in crypto prices.

Coinbase is “explicitly tied to crypto prices at this point, but we anticipate that patience will be rewarded as we believe the company remains in a leading competitive position, is actively diversifying its business model, and will experience better pricing resiliency than the bear thesis argues,” JMP’s Devin Ryan told clients in a note.

Read more: Crypto Exchange Coinbase Waives Fees for Converting Between USDC and Fiat, Eyeing Global Audience