Coinbase CEO Brian Armstrong made a splash Tuesday (Aug. 23) by announcing that the Nasdaq-listed cryptocurrency exchange was planning to focus more aggressively on moving to a subscription-based trading model.
“We’re investing today so much in subscription and services revenue,” he told CNBC on Aug. 23. “I’d like to get to a place where more than 50% of our revenue is subscription and services.”
Last year, trading fees accounted for 86% of Coinbase’s revenue.
The idea of subscriptions isn’t new. Subscription service Coinbase One, which was rolled out in November 2021 — and is still in beta — wasn’t the first exchange offering this model, which appeals most to frequent traders.
In 2020, crypto derivatives exchange Phemex offered manual traders a $10-a-month flat rate, Coindesk reported, noting that high-volume algorithmic traders still paid fees.
And, of course, there are fee-free trading platforms like Robinhood, which make their money on the bid-ask spread and payment for order flow — which became very controversial during the Gamestop short-selling debacle.
Beyond that, many large crypto exchanges offer flat fees to their largest clients.
The real question is, can Coinbase replace the revenue it gains from traders in good markets to justify abandoning it for steadier subscription fees? In mid-July, an analyst noted that Coinbase’s trading volume dropped from about 9% of global volume at the top of the bull market in November 2021 to 2.9% at the time.
The company was “suffering from a perfect storm of more competition in a declining market while take rates are perceived to be too high and unsustainable,” Mizuho analyst Dan Dolev told Bloomberg.
Such experiments have not always ended well. In 2019, Estonia-based DX.Exchange, shut down after nine months, with its CEO telling The Block that the “costs of providing the required level of security, support and technology is not economically feasible.”
Gained and Lost
Coinbase One will continue to make money off the spread fees — but not accept payment for order flow — and customers will no longer pay a commission. Customers will get dedicated 24/7 phone support, $1 million insurance against losses from a compromised account, and pre-generated tax reporting —a bigger deal than it sounds, given that any sale of crypto generates a capital gain (or loss) that must be reported.
That said, there are caps on the $29.99 per month service. Coinbase One’s fee-free trades end at $1 million per day and $5 million per week. And, the subscription does not apply to its Advanced Trading, Coinbase Pro or Prime Broker services.
Armstrong’s 50% goal, which has a five- to 10-year timeframe, also includes staking support and crypto debit cards. Currently, subscriptions via its Coinbase One product, which offers zero trading fees and improved customer support, account for about 18% of its revenue, Armstrong said.
It certainly makes sense, given the company’s dismal Q2 earnings report, which included a $1.1 billion loss, with net revenue down 64% and transaction revenue down 35% on trading volume that dropped 30%. Coinbase laid off 18% of its staff earlier this year, and its stock price is off 70%
Like many exchanges, trading fees make up the lion’s share of Coinbase’s revenue, and they tend to skyrocket in bull markets and collapse in bear markets.
But in Coinbase’s case, there’s more to it than that. For one thing, its base trading fees are substantially higher than other exchanges: 1.5% for trades above $205 and $0.99 to $2.99 for trades below that level.
Ultimately, if it’s going to compete with fast-growing and far cheaper exchanges like FTX — which saw revenue grow from $89 million in 2020 to $1 billion in 2021, with net income jumping from $17 million to $388 million, CNBC reported on Aug. 22 — Coinbase is going to have to do something different.
Like offering flat-fee trading to gain even more customers to whom it can upsell other products, like staking and debit cards.
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