Hi, good afternoon, everybody. My name is Ken Worthington. I'm the analyst following Coinbase from J.P. Morgan. I'd like to thank you so much for joining the TMT conference this year, and the fireside chat with Coinbase. I'm excited to host Emilie Choi, President and Chief Operating Officer, and Alesia Haas, Chief Financial Officer at Coinbase. Coinbase is a $50 billion crypto platform that facilitates trading, staking, and the custody of crypto tokens, as well as instances of broader engagement with the crypto ecosystem. Before we get started, I have to read the safe harbor statement. I'd like to remind you that, during today's chat with Emilie and Alesia, we may make forward-looking statements. Actual results may be materially different from today's references. That may include Non-GAAP financial measures.
A reconciliation of non-GAAP financial measures is available on the company's latest shareholder love letter, if you're interested. So thank you both for joining. I've divided sort of questions into four parts. We'll talk about the crypto ecosystem. We'll dig into some Coinbase specific questions. We'll get to financials, and then we'll wrap up. So starting with the crypto ecosystem, Emilie, we'll begin with you. As we think about the crypto cycle, where are we today in the crypto cycle? And with ETFs now live, how is 2024 and the rally we're seeing in crypto markets today similar or dissimilar to what we've seen in past cycles, including the more recent one in 2021?
So I am smart enough not to prognosticate about where we are in the cycle, because I'm sure I'll always be wrong. But I think that what we've seen in this cycle that is markedly different from the last cycle or cycles before it, it definitely is the institutional adoption and the maturity of the L2 ecosystem. The introduction of the Bitcoin ETFs in Q1 was, I think, a huge, huge new development for Coinbase, for the crypto ecosystem. It untapped a large swath of investors who previously didn't have access to crypto, and I think in many ways legitimized crypto even further in the minds of those who might have more traditional mindsets. On the L2 front, we have seen a lot more maturity of the rails, of the blockchains that we are building for developers.
This, in turn, creates a much more robust ecosystem for them to develop on and then to benefit users. And so I think, you know, Alesia and I have been talking about this a lot. I think it, it's just, it feels more mature. It feels better than it did during potentially the hype cycle of some of the NFT momentum in 2021. That doesn't mean that we don't believe deeply in NFTs over the longer term, but I think this felt like, like something different and, and a new customer base was coming in. Anything to add?
The only thing I would add is that we've always said that volatility and market cap are what have been the drivers of speculative trading volume on our platform. While we've definitely seen an increase in market cap, we have not seen an increase in volatility. Volatility looks much more mature in this cycle than it did in 2021. Volatility of Bitcoin, volatility of Ethereum start to come, what I call, on the grid as other high beta stocks and equities that we see, where previously crypto had high highs that we don't assimilate with other asset classes. And so that has led to differing investor behavior as well. I agree with Emilie. You've seen just a maturation of the space.
You've seen diversification of revenue at Coinbase, and so while our revenue in Q1 looked more similar to 2021 than it has in previous years, the composition of that revenue has really shifted over the last three years.
And to some extent, we've seen volatility, and I'd even say fragility.
Mm-hmm.
Is sort of the rally that we're seeing now, you mentioned sort of maturation, does that make it any more durable or any less fragile, do you think, than we've seen in the past?
Ken, we are so young as a company in asset class. In some ways, yes. In some ways, yes, because what you saw in our monthly transacting users in Q1 was we saw many of our users that were then active in staking just trade a little bit more in Q1. We saw the average dollar amount per trade increase, but it didn't mean we saw huge growth in the number of new traders. And so what that means then is people are continuing to stay activated. People are staying engaged with crypto. They still have their wallets, but they're just increasing their dollars in different environments. So I do think that leads to more durability and less fragility because we are building the engaged user base.
Maybe following up with that, I wanted to talk a little bit about your bigger revenue streams, starting with trading and then moving into stablecoin. So as we think about trading revenue, and the drivers of trading revenue, how do you see the outlook for Coinbase in terms of what trading will mean to it in the future? It's a big part of the revenue stream today. If you look forward into the future, is it as big three years, five years, 10 years from now, or do other parts of the business start to grow up around it? And then I want to dig more into stablecoin, sort of, as the next step.
Okay, well, we don't pick our favorite children, and we have many revenue streams, so let's break them apart for a second. Yes, today, trading is our largest revenue stream, followed by stablecoins, and specifically, retail trading is our largest revenue stream.
We do believe that we will see significant growth in non-trading revenue streams, and that growth rate will likely increase over time. However, we also believe that over time, with regulatory clarity, we could get to tokenization of other assets, which would drive trading revenues. We also recognize in that transaction revenue is where we have Base, our sequencer fees. We have other payment-related revenue opportunities there. And so while our goal is to continue to drive subscription and services revenues, which monetize on assets and other dynamics other than a transaction, we do think we will see growth of transaction revenues. However, they may move more towards the utility revenues and less towards speculative trading. Today, simple trading, institutional trading, the bulk of revenue. We saw growth, institutional trading was all-time highs in Q1.
We saw 40% of those customers engaging with multiple products, so we're really seeing that deep embedding of that institutional trader. And then on the retail side, we gained market share. It was up in the 90% quarter-over-quarter. We're really continuing to see growth there. Stable coins, which are U.S. dollar-backed stable coins, our partnership with Circle on USDC, continue to be a really important infrastructure piece of the overall crypto ecosystem. A stable coin gives you the ability to have a better dollar. It's an instant settlement dollar. It's just global in every way. It was up 30% in Q1. We brought the market cap back from the lows of 2023, and we're starting to see then more use cases. We're really excited that we're starting to pay an increasing amount of our vendors with USDC.
We're starting to experiment with payments use cases, and so in addition to trading USDC as a trading pair, which has been its primary use case in DeFi or on the trading platform in prior years, moving USDC to a utility coin is really important to us.
Can you talk about the evolution of stablecoins? Coinbase is looking increasingly at payments. USDC seems to be, maybe a center of that opportunity. How do stablecoins relate to Coinbase's ambitions in the payment system?
Let me tell you all the reasons I love stable coins. Okay, or maybe I should say why I love USDC. I might be a little biased. My bias towards USDC is I'm taking US government risk in a 24/7, 365 US dollar. I can send it to anybody. I can send it to anyone in this room via text. I can send it to any business, peer-to-peer. I can send it for a penny. I can send it in a second. It gets there. It's in your wallet. It's. You don't have to also be on the same platform as me. You could be on MetaMask's wallet. You could have your own hardware solution. You could be anything. I love that it is permissionless. I love that it is decentralized. I love that it is a US dollar. It's...
I love that I'm not taking fractional reserve lending. I don't take specific bank risk, I'm just taking broad U.S. government risk. So it's like I get a money market, but it's a payment currency. So I love everything about that. I think it's a better dollar. So what we've now done in Q1 is with USDC on Base, which is our Layer 2 solution, and as Emilie said, Layer 2s are like the next new technology that we brought forth this year, which we're really excited about. Because Layer 1s, which are Bitcoin, which are Ethereum, which are the protocol layer, they proved we can send value on a blockchain, but it was still clunky. It was still, it's still sometimes expensive, depending on congestion on certain chains. So Layer 2s are making it faster and cheaper.
So with Base, our goal was to get to one penny, one second, and there is definitely times we can get there. Sometimes it's still a few pennies, sometimes it's still a few seconds, but that is materially cheaper than a wire. That is materially cheaper than a lot of forms of global remittance payments. So we are building the infrastructure to enable this potential payments use case. So we got the cost down, we got the speed up. We are now working on the wallet architecture to make the user interface really delightful, to create wonderful customer journeys, to bring forth, and that's where our experiments are starting to move forward in the future.
Great. Emilie, let's talk about crypto derivatives. Derivatives are the, I think, the biggest transaction market in the cryptocurrency ecosystem in the world. It's one of the fastest-growing parts of Coinbase. What's the opportunity here to build them out? What are you doing, and sort of where geographically are you focusing?
So in any given traditional financial market, and similar in crypto, derivatives are, like, 75% of the activity. Hence, it's a really big opportunity that we didn't tap into earlier, and we are now tapping into because we were focused on the spot market. We, along with CME, I think, are the only ones who've got the CFTC licensure in the United States. We are also going deep in our markets across the globe. The MiCA legislation that has happened in the EU is, is enabling us to be able to go after multiple markets within the EU. We have announced that we have acquired or are in the process of, of close to acquiring a MiFID license, which will enable us to offer derivatives also to many countries within the EU. And so it's just—it's a very large opportunity for us.
I think the thing I would say is that the crypto derivatives market that existed with some of the offshore activity that happened before, some of that was casino-like behavior, some of that was non-KYC behavior that we will not participate in. And so it's not a one-for-one, directly transferable thing when other exchanges go bust or, or don't play by the rules. We will always kind of lean into the compliant, secure routes that kind of got us to this place, and we think that there's gonna be a very large opportunity there for us.
Yeah, so with firms like FTX, which are no longer with us, with Binance, that has been under particularly U.S. regulatory scrutiny, are there still gaps that are left for you to fill, or have all those-- has that share really found its way to, to other firms? Like, how hard is it to compete for business that had been at these other exchanges, which are either not here or under some level of, you know, stress or distress?
Well, I think the answer is there is a robust business for us to be had for those who seek secure, well-managed derivatives that have good risk management in place, that have good security in place, that are regulated. For those who don't want that, we are not the right offering for them. I do think the market has changed globally as well. I think that many of the players used to be able to get away with no licensure, no risk management, none of the good practices that we know to be true, for example, in the U.S. with traditional derivatives. And so as the market has changed, I think some of the things that benefit us, including our leaning into regulatory, will help us gain more share there.
As of Q1, our products covered roughly 80% of the total volume in the market, so we still have room to grow in terms of matching our products against the total market available for trading. Our leverage levels are lower today, and so we are working on products and risk management to continue to meet the market where it is for all of the volume available to us. And then the key is to onboard customers, build that liquidity, build that market depth, and that is our focus, building to deep liquid markets to encourage traders to trade on our platform.
So, Emilie, as I think about regulation, and I think about, you know, the brand and the position that Coinbase is within, the crypto markets, you have built a brand around being a compliant firm, working with regulators to sort of build and develop these markets. And I think to some extent, that's worked against you in some instances and worked for you in other instances. So as we think about the build-out of your business overseas, where many competitors maybe didn't have the level of compliance, how has your brand, how is your brand allowing you to enter these new markets, and develop new products? You know, is it making life easier to, to win over regulators, or is it making life harder, to win over clients who may not want these, KYC and regulatory reporting responsibilities that, that you're, endeavoring to undertake?
For better or for worse, I think the sins of some of the bad actors have led to a much more regulated environment globally. And so it largely, I think, benefits us because we've always done the hard work of that. I mean, I think we were talking in the other room, Ken, about in 2021, Coinbase was berated for being slow, for having too much compliance. Why couldn't we be more like FTX? How were they operating with 40 people? What was wrong with us? And we did tons of bottoms-up to look at the composition of headcount, how we were, you know, doing KYC. Could we improve it? Could we make it more efficient? And we were scratching our heads. We were like: This can't... This doesn't work. We just-- This doesn't compute. And it turned out to all be obviously a sham.
And so I think the lesson that we've learned from that is, like, as boring as it can be, sometimes slow and steady wins the race, that the routes that we have, leaning into regulatory, leaning into compliance, leaning into the user experience, ease of use and security and safety, those things have held us for the past 12 years. That's why we're the one left standing. And so whether that's in the United States or globally, it's gonna be the same. Those who want to use Coinbase are comfortable with those premises, and those who are not comfortable with those premises are probably gonna use something else.
I think it uniquely benefits us on the institutional side. We are pleased to be named as the custodian in multiple ETF applications for Bitcoin. We serve as custodian for many of those large asset issuers. That wouldn't have been possible if we didn't hold ourselves to the standard of highly regulated financial institutions. So it uniquely benefits us in those markets, and I believe it is uniquely benefiting us also by brand of trusted and reputable to be able to grow new customers as we enter new markets.
We've quickly seen, as we've unlocked licenses in Canada, in Singapore, in all number of markets last year, that that was the reputation that we had as we go in the door, and has led us to be able to have numerous successes with that international expansion, which drove to our revenue being 17% of international revenue in Q1, and we think that there's growth opportunities there as we continue to move forward.
Brilliant. Alesia, on Base, so Coinbase has developed an incredibly successful Layer 2. Maybe start really high level, what is Base? And then if you could dig into, you know, how does the development of Base sort of help you directly in the near term in terms of, like, monetization? The really interesting thing is, longer term, what does Base do for developers? How does it grow sort of the ecosystem, and then tie that back to Coinbase and business?
Okay.
There's a lot there.
Let me give you the layman's term explanation of Base. You'll see so many technical announcements about Base, but what Base is, is a technical layer that sits on top of Ethereum. So Ethereum is a base decentralized protocol. Base is now built on top of Ethereum to have transactions be batched, so they move at a faster speed, at a lower cost. We're even now making upgrades to Base, which is like allowing a carpool lane on Base. It's like, how do we drive traffic even faster? You're even starting to hear inklings of, like, the tech infrastructure moving to a layer three. Think about all of this as the equivalent of moving from dial-up to broadband when we were doing the internet phases of tech stack building. We're building faster protocols, faster rails.
What this enables then is the ability to send payments at a lower cost, faster speeds than any other payment rail that we've ever created. One of the analogies that we like to use is, if you think about earlier incarnations of the internet, is the ability to text message. It used to be, if you remember, you used to pay for each text message, or you had, like, a number of text messages you could get per month on your phone plan. Then you had WhatsApp come on the scene, and you can get hundreds of text messages per second. And just that scaling effect that had, the cheaper it is to send, we send more text messages. It's like the path of least friction gets the most adoption.
And so with Base, we're looking, and through our own tech stack for the on-chain stack, we're looking to reduce friction and create a path for the fastest, cheapest on-chain payments. And we think that by doing this, it'll unlock concepts that we've never had before around micropayments, different ways to monetize through consumption use versus subscriptions, just different ideas that we'll have to see as they get adopted. And so with Base, what we're working with is creating a developer platform that creates the best environments for developers to explore building on chain. We saw 8x developer growth in Q1 compared to Q4. As we brought down the transaction costs on Base, they came down 80% in the quarter. We just saw an explosion then of volume on Base in the last, you know, 45-60 days.
We now see more transactions on Base than we do on Ethereum. I think there's a lot of things built on Ethereum, like, Base is not the only thing. So Base is getting more volume. And so our mental model, Ken, is that if you drive developer behavior, developers will build amazing on-chain applications. That, one of those amazing on-chain applications, just like you got many internet apps, some of those apps will be amazing, some of them will peter out and fail, but you want that activity to happen. We want that activity to happen on Base, which will then drive transactions. Transactions will drive sequencer fees. Sequencer fees are our revenue. That will then create this ecosystem. The broader ecosystem of more on-chain activities also then benefits our overall portfolio of products and services, as people need and a wallet.
They need somewhere to store the crypto they own. They need to be able to get back into fiat, so those are our on-ramps and off-ramps. They need other tools. They'll want to stake, they'll want governance, they'll want online identities, and so it just speaks to then growing this whole community and ecosystem that we believe is moving the future on chain. We went from offline to online, and the future is on chain.
Perfect. So I was reading in the journal, I think last week, that there are 11 different major markets that are going through their election cycle.
It is a year. Yeah.
And crypto is starting to have an impact on elections. So, Emilie, how is the crypto ecosystem influencing elections? And then ultimately, how are elections going to impact the crypto ecosystem and ultimately Coinbase?
I think the past 12-18 months were the first time that we have had our act together as an industry. We have worked together, and we are starting to see some major benefits. These have included things like top-down, a Super PAC called Fairshake. That is one of the largest Super PACs in existence. This includes an incredible grassroots movement called Stand with Crypto, that, as of today, has more than 600,000 members, many of them in swing states. There are 52 million holders of crypto in the United States, and up until about a couple weeks ago, I think that most politicians would have called it a fringe movement.
But things move fast, and things change, and we saw something pretty extraordinary this past week with bipartisan support of repealing SAB 121, which in my opinion, was an overreach by the regulator, SEC, and got broad bipartisan support in both the House and Senate, which is a very rare thing to do for anything these days. I think that has caught the attention of the Biden administration. I think it's also quite interesting that over the past week or two, Trump said that he is a big supporter of crypto. These things just don't happen as mistakes. These people recognize the power that the crypto industry and the crypto, crypto voter wield, and so it's just been really gratifying to kind of see the momentum. We expect this week that a landmark crypto bill, FIT21, will be introduced into the House.
It would be an extraordinary accomplishment. We are working everything we can to kind of make sure that happens.
Feel free to call your representatives.
Yes. Yes. Go to standwithcrypto.org and register and call your representative. For us, having clarity, regulatory clarity is such an important thing. And I think the other thing, Ken, we talked about in the room, is that we don't know what's happening with the ETH ETFs, but the signals are such that they were not gonna be approved, and it looks like they might be approved at this moment. And if that's the case, it just feels like there's a changing tide for crypto, which is really fantastic. We have a lot of work to do, though.
So another topic that came up in the room was this concept of where do you participate in financial services? So we trade our crypto at Coinbase, we trade our equities at Schwab or Morgan Stanley. What happens over time? Does Coinbase and crypto sort of converge with traditional finance? Is that sort of the end goal or the outlook for Coinbase? Or, you know, are we going to live in a system where if we want to trade equities, we're not gonna be able to do it on Coinbase, we're gonna have to keep our financial house in, you know, many different rooms, so to speak. What's the outlook? What does Brian want? What do you want for Coinbase in terms of other more traditional financial services products?
I would like to start. Sure. I think it's so important to note that the crypto assets that exist today were all designed to have utility, that you would use the asset that we trade on our platform in the developer's app that then launched that token. So they were designed for consumptive use. Not all of these projects are gonna succeed. Some of the projects have flamed out, but that was the initial intent of the tokens that have been designed in the crypto system today, consumptive use. Securities were not designed as for consumptive use. They were designed as passive investment returns. We are believers, though, that the underlying blockchain technology will then underpin the entire financial system. We believe that we'll have tokenized securities. We have a tokenized dollar in a stable coin, for all intents and purposes.
We have tokenized commodities, we'll have securities, we'll have mortgages. We, we can tokenize anything. It moves it to a different tech stack. So over time, we could build those things out, and you could have those things in different portfolios on Coinbase. Today, because of regulatory uncertainty and there's no path to register crypto securities, it doesn't seem like the right business strategy for us. And building backwards into a legacy tech stack to issue traditional securities that are CUSIP form and traded on traditional brokers, there are adjacencies, obviously, to tradable assets and holding for investments. We don't believe that's the future. We believe that we are building towards the future and want to continue down the direction of crypto-native assets.
Perfect. As we think about the financials and profitability across cycles, so Coinbase invested very heavily in growth in 2021, pulled back when market conditions became more challenging, and the new target is achieving profitability sort of across cycles. What is the right level of investment for Coinbase? Are you there now? Is what you're doing now sustainable? And as the revenue stream and earnings growth sort of continues to move up into the right, how should we think about profitability in good times and then profitability in bad times? We'll start there.
Well, we've committed to be Adjusted EBITDA positive in all market conditions. That was the pivot that we made in early 2023. What's important to note in 2023, though, is we generated roughly 30% EBITDA margins throughout the year, and then as you saw an improvement in crypto market conditions, an increase in crypto market cap, and modest growth and volatility, we generated 60% EBITDA margins in Q1 2024. We are gonna see some increase in variable expense in Q2 as the expense growth lags the revenue growth to some degree. But you can see there's a wide range of profitability depending on the market conditions that we operate in. Emilie put together a really great framework when she became COO President around how we do resource allocation in terms of ensuring that we're always investing towards the future. And so we call that 70/20/10.
We call that 70% of our costs are going to our core, 20% to adjacencies, and 10% to ventures to ensure that we're always gonna disrupt ourselves, and it's truly where Brian's passion lies, is building this future. We are, have our eyes on the ball, and we learned a lot through 2022 about being really efficient in where we're putting our dollars. So we believe that we have the right OpEx space for the breadth of products that we're looking to support today. We believe that we have really hardened our scenario planning around understanding what the range of crypto market conditions could be that we can operate through. And we have a better understanding about what is tied to volatility assumptions and what is tied to, like, speculative trading versus more durable revenue.
So for example, we see stickiness in staking, we see stickiness in custody, we see stickiness in USDC market cap. Obviously, price can change the revenue, but there's durability there, and so we're really looking to grow subscription and services to cover our fixed OpEx and then have trading revenues, which can be more volatile, go to the bottom line and feel that we can generate EBITDA on all market conditions. If there's something systemic that happens that would change our revenue opportunities, we could go back to revisiting the expense base, but feel really proud of where our expenses are today. And we've also learned we're really efficient when we operate at a more nimble scale.
Great. So, in terms of things being timely, when we look at the price of ETH, ETH is up 20% in the last 24 hours. Emilie, what's happening here, with Ethereum? What's changed? Maybe what is the role of ETFs in the crypto ecosystem? And if ETFs get bigger and bigger and gather more assets, is that good for Coinbase, or is that, you know, a risk in, you know, building a competitor to Coinbase?
Yeah. So to answer the first question, I alluded to this, there was general market sentiment that the ETH ETFs would not be approved by the SEC as of, like, a week ago, and all of that changed, I think, within the past 48 hours. And the sense is that the tone from the SEC has just changed literally overnight based on some feedback it must have gotten, from just seeing the SAB 121 repeal and probably the administration sensing some panic, I guess, from parts of the administration.
What it all means? Well, I think for the Bitcoin and ETH ETFs and any future ETFs that are crypto native, those are largely predicated upon buyers who didn't have access to spot before. And so we do think of that as new TAM and new territory, and a new swath of institutional users who are tapping into crypto as a new asset class. I think that that is only good for us. Now we make a custody fee out of that, and we are the named custodian on most of those ETFs, which is great.
But more importantly for me, I think it's just atmospherically having a new swath of investors who are tapping into crypto and validating it feels very gratifying and feels like it's expanding the market.
And you're the custodian of choice, I think, for nearly all of the-
Mm.
Bitcoin ETFs, and...
Mm-hmm.
Okay, so we're running out of time. So just to wrap up, this is sort of my favorite question. As we think about the crypto ecosystem, I've always thought about your success being built on the success of the broader ecosystem, and the broader ecosystem was gonna be successful on the new use cases that popped up, for blockchain and crypto broadly. What are you guys excited about in terms of use cases? What's sort of interesting and exciting to you? What's your favorite new anecdotes and stories about what's popping up?
One of our Coinbase alums founded a company called Farcaster. You may have heard of it. It's decentralized social media. The idea here is: How can you do a lot of the great stuff that you've done historically on social networks in a more on-chain way, with portable identity and, and all the things that you would have hoped you had gotten from the Web 2 ecosystem? So we're really excited about that, and Base is the L2 of choice for Farcaster. We're deeply integrated with them. I think more importantly for us is that we have become the platform of choice for developers like the Farcaster founder, because of Base. And so as long as we can continue to, like, have all of that activity centered on some swath of our products and services, we're winning.
I just think that we're starting to see maturation across the product suite, whether it's the broader institutional adoption, we're continuing to see new institutions onboard. We have a third of the global top 100 hedge funds as customers. We're seeing approval of these new asset classes, i.e., the ETF approvals have happened this year. We're seeing the layer 2s. We're seeing the developers really engage deeply now in these products and these tool stacks. We're seeing payments become a possibility with faster, cheaper rails. And so I just think we're seeing maturation of the technology. We're starting to focus much more on utility and the use cases than just the tech stack and talking... You know, who talks about TCP/IP or HTML protocols? We don't talk about those things anymore. Up until this year, we were all talking about Bitcoin only and Ethereum and the protocols.
So I'm excited to move our conversation out of the protocol conversation and into the application layer.
Okay, great. Emilie, Alesia, thank you so much.
Thank you, Ken.
Thank you all.