Summary 37% year over year contraction in outstanding stablecoin USDC is a headwind for COIN's future earnings. As of December 31, 2022, 1.9% of USDC outstanding was owned by COIN, up from 0.8% in September 2022. Has COIN increased their ownership of USDC since Dec 2022? With COIN not the sole beneficiary of income generated from USDC, why would COIN increase their USDC investment instead of investing directly in the underlying Treasuries backing USDC? With 15% of revenues collected in crypto assets and not fiat currency, COIN needs price appreciation in crypto assets beyond Bitcoin and Ethereum to increase earnings. Coinbase's (COIN) December 2022 10-K and USDC Examination Reports raise a number of questions going into the March 2023 earnings. USCoin (USDC-USD) is a stablecoin backed 1:1 by US Treasuries or US dollars held in US financial institutions. USDC is administered and governed by the Centre Consortium, which was co-founded by COIN and Circle, the issuer of USDC. USDC is a meaningful contributor to COIN's revenue growth as disclosed below in the 2022 10-K. USDC - a leading US dollar stablecoin redeemable 1:1 for US dollars - is an asset whereby we have a unique commercial arrangement and generate income through means other than our customers' engagement with our products and services. We offer rewards on USDC to our customers in order to encourage participation . Within transaction revenue and subscription and services revenue, a meaningful concentration is from transactions in Bitcoin and Ethereum and interest income in connection with USDC , respectively. In particular , our subscription and services revenue has grown over time with interest income received in connection with USDC is becoming a more meaningful revenue contributor. Therefore, our operating results could fluctuate significantly as a result of changes in the demand for our subscription and service offerings, in the demand for USDC, the balance of USDC on our platform, in interest rates, and to our ongoing relationships with third parties, such as the issuer of USDC. For the year ended December 31, 2022, we derived a more meaningful amount of our net revenue from interest income, primarily in connection with USDC, than we have historically. As illustrated in the chart below, despite the rewards offered by COIN to encourage participation, the amount of USDC outstanding has contracted materially over the past year. While the quantity of USDC outstanding has declined, COIN has increased their ownership from $100 mln USDC as of December 2022 (0.2% of USDC outstanding) to $861 mln (1.9% of USDC outstanding) as of December 31, 2022. Investors should pay close attention to COIN's USDC holdings as of March 31, 2023. COIN is not the sole beneficiary of earnings generated from USDC as the 10-K explains. We earn income on fiat funds under a revenue sharing arrangement with the issuer of USDC, pursuant to which we share any interest income generated from USDC reserves pro rata based on (i) the amount of USDC distributed by each respective party and (ii) the amount of USDC held on each respective party's platform. Our income is dependent on the balance of such fiat funds and the prevailing interest rate environment. Since COIN is not receiving 100% of the revenues generated by USDC, then why would COIN invest any of their cash into USDC versus directly owning the underlying Treasuries USDC is backed by? Rather than investing nearly $860 million into USDC, COIN would be better served to have purchased the underlying Treasuries backing USDC and not sharing any of the interest income. With the amount of USDC outstanding declining from $55.6 billion in June 2022 to $32.5 billion as of March 31, 2023 (down 41%), investors should take note of whether COIN has increased or decreased their USDC position at the end of March 2023, and what percentage COIN's ownership represents of the total USDC outstanding. COIN discloses in their 10-K that 15% of their revenues came not in fiat currency, but in crypto assets. For the year ended December 31, 2022, we collected approximately 15% of total revenue in crypto assets. We currently do not have any formal policies requiring conversion of these crypto assets received into fiat currency. There is no disclosure as to what portion of these crypto assets received as revenue were in the liquid and transparent markets for Bitcoin or Ethereum (ETH-USD) versus the nontransparent and nebulously categorized "Other crypto assets" that constituted 49% of COIN's transaction revenue from crypto traded on COIN's platform. For perspective, Bitcoin trading represented only 29% of COIN's transaction revenue and Ethereum transactions 22% of COIN's revenues. COIN discloses up to 10% of quarterly earnings can be invested in crypto assets. With COIN accepting 15% of revenues in crypto and with 10% of earnings plowed back into crypto assets, COIN's earnings are levered to price appreciation of crypto assets. If crypto prices remain flat, there is no boost to earnings and earnings will remain entirely dependent upon staking, trading volume and interest income from USDC. If crypto prices decline, earnings will be adversely impacted as illustrated with COIN's massive 2022 loss following their $3 billion profit for 2021. Recommendation: Avoid COIN. If you're a crypto bull, then own the crypto asset directly. With the amount of USDC outstanding contracting rapidly, there is limited upside to COIN and plenty of downside risk. For crypto bulls, a short position in COIN could serve as an effective hedge on a price decline in crypto assets.
