Block and Coinbase Earnings Show Crypto’s Flight to Quality Lands on Bitcoin

Expectations weren’t very high for Coinbase Global this most recent quarter.

The company continues to face very significant risks on the regulatory front within the U.S., and remains entangled in a nasty case with the Securities and Exchange Commission (SEC).

Still, the crypto exchange’s stock has jumped almost 80% since mid-June, lifted by a partial court win by Ripple against the SEC (from which a later federal ruling diverged) as well as BlackRock’s recent application to launch a bitcoin exchange-traded fund.

Coinbase’s Chief Legal Officer Paul Grewal said to investors on the company’s second quarter 2023 earnings call that the exchange is moving to fully dismiss the case.

“It is our view that none of the assets or services in the SEC’s complaint constitute investment contracts under longstanding securities law,” Grewal added. “We plan to use these proceedings as an opportunity to bring more clarity to our industry as a whole … and are encouraging the U.S. to follow the progressive regulatory frameworks seen in emerging crypto hubs.”

The crypto firm is also looking to broaden its ecosystem — and that of the builders in the Web3 and crypto space.

“As we look ahead, we are expanding our focus towards crypto use cases beyond trading,” Coinbase CEO Brian Armstrong said. “Trading is the big use case of the early days of crypto, but it is starting to move away from that … with layer 2 solutions [alternative uses] can get much, much better as people interface with them more.”

While the company beat Wall Street expectations, the earnings results might appear moot to the most cynical observers, given the regulatory turmoil brewing in the background.

“Trust is the premium brand that we are selling,” Coinbase CFO Alesia Haas said to investors.  

Digging Into the Numbers

Coinbase notched a 30% reduction in headcount compared to this same time last year.

Two of the only metrics that were “up” for Coinbase this quarter were its sales and marketing expenses of $84 million, up 31% since last quarter, and general and administrative expenses of $259 million, up 4% since last quarter, driven by legal costs.  

Both cost centers make sense given the position the exchange finds itself in.

Coinbase’s net revenue was $663 million, down 10% since last quarter, and Q2 total transaction revenue was $327 million, down 13% from Q1.

The transaction revenue slide was driven by a 37% decrease in trading volume from Q1.

Consumer transaction revenue was $310 million in Q2, down 12% from Q1. Q2 consumer trading volume was $14 billion, down 33%. Coinbase Q2 institutional transaction revenue was $17 million, down 24%. Institutional trading volume was $78 billion, down 37% from the previous quarter.

Overall, bitcoin accounted for 40% of trading volume in the quarter, up from 31% in the year-ago period.

And it was a similar bitcoin-as-hero narrative over at Block, the payments giant run by Jack Dorsey and formerly known as Square, which also reported earnings Thursday (Aug. 3).

It’s an Ecosystem Block Party

Of Block’s total $5.5 billion Q2 net revenue, $2.39 billion came from bitcoin, which was helped along by 34% increase in bitcoin revenue compared to this same period last year.

The price of bitcoin has increased more than 75% year-to-date. The digital asset comprises nearly half of the cryptocurrency market cap and has proven its resiliency in the face of ongoing sector issues and scrutiny.

Block’s Cash App, which started as a person-to-person payments app, has emerged as a popular tool for buying and selling bitcoin.

“The year-over-year increase in bitcoin revenue and gross profit was driven by an increase in the quantity of bitcoin sold to customers, partially offset by a decrease in the average market price of bitcoin compared to the prior-year period,” the company wrote in a letter to shareholders.

Block’s two central businesses, Cash App and Square, both generated earnings that topped Wall Street expectations.

Square generated gross profit of $888 million, up 18% year over year (YoY), and Cash App generated gross profit of $968 million, up 37% YoY.

Square had strong momentum with its banking products, which generated $167 million in gross profit, up 24% YoY, driven primarily by Square Loans, Instant Transfer and Square Debit Card.

Cash App boasted 54 million monthly transacting active customers, a growth of 15% YoY.

Enabling omnichannel, growing upmarket, expanding globally, and integrating generative artificial intelligence were listed as four growth pillars across Block’s house of businesses.

Company executives told investors on the call Thursday (Aug. 3) that they expect Tap to Pay to become the “dominant way to pay” in the future, and that “markets outside the U.S. that we’re less than 1% penetrated in are [a huge] opportunity with a long runway for growth.”

“Because Square is one ecosystem and it all connects together with all the operational utilities as well, it’s very easy to choose and add these new dimensions to your offering and to your customers, which ultimately differentiates you from your competitors and grows your sales,” Block leadership told investors on the call.

Block’s stock price has largely recovered from the hit it took this spring when short seller Hindenburg released a critical report on the business, alleging Block made false claims about its customer acquisition costs and user counts.

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