After Brutal Q2, Coinbase Needs to ‘Get Smart’ About Revenue Streams: Analyst Says

Coinbase Global (COIN) will need to reevaluate its approach when it comes to earning revenue, said Michael Safai, a managing partner at trading firm Dexterity Capital.

Safai told CoinDesk TV on Wednesday the U.S. crypto exchange’s lower-than-expected earnings report does not come as a surprise, but does highlight how the exchange’s business model and overall management style might be falling out of time.

“Coinbase is going to have to get smart about how they are going to make revenue numbers in the future,” Safai said on CoinDesk TV’s “First Mover” show.

On Tuesday, the largest publicly traded crypto company in the U.S. posted a net loss of more than $1 billion for the second quarter amid declining trading volumes and a so-called crypto winter. The exchange missed analysts’ revenue expectations by more than 30%, falling to $803 million.

Safai said Coinbase’s overall strategy in the near term needs to be “survive, be smart about spending” and “find new ways to generate revenue.”

That could mean its existing business model needs a facelift. Safai suggested the exchange could start charging fees for market data and colocation. Rival exchanges Binance and FTX also support thriving options markets, for instance.

Historically, the centralized exchange has derived almost all of its profit from transaction fees and may have inadvertently neglected other sources of revenue, Safai said. That’s not for a lack of trying.

Earlier this year, the exchange launched a non-fungible token (NFT) marketplace in a bid to capture part of that growing market. But its effort was unpopular since launch, and, according to its earnings report, user growth fell from 9.2 million monthly active users to just 9 million this quarter.

As part of a wider effort to trim its budget, the exchange said it would be cutting back on its marketing spending. In June of this year, Coinbase laid off about 18% of its staff – about 1,100 employees.

“It’s still early days, and they need to spend a lot of money getting new users. Cutting your marketing budget, that’s going to make that hard,” Safai said.

Other headwinds include a marketwide trend to drop trading fees to zero, lack of interest among retail investors and regulatory uncertainty. Last month the U.S. Securities and Exchange Commission said nine tokens listed to trade on Coinbase were unregistered securities, as part of an investigation into insider trading allegations by a former employee at the firm.

Moreover, even though Coinbase appeared to be unaffected by the crypto contagion that spread from Voyager Digital, Three Arrows Capital and Celsius Network, those failures still “sucked a lot of leverage and assets out of the ecosystem.”

“Retail users, they're spooked by the failures, but they're also kind of seeing less to do [in crypto],” Safai said. “And so this is generally bad news.”

Moving forward, Safai said retail investors could become more comfortable as crypto moves toward regulation. He adds that Coinbase acquiring FairX is a smart move.

“By acquiring FairX, Coinbase now has a legit properly licensed futures platform,” he said. “But to do that, you have to invest a lot and they’re doing that, to say the least.”

Read more: SEC Probing Coinbase for Allegedly Listing Securities: Report