Shares of the cryptocurrency brokerage
Coinbase Global
have been on a wild ride. They have lost two-thirds of their value since the company’s initial public offering in April 2021, although the stock price rose nearly 400% last year. While shareholders have been strapped into this roller coaster, Alesia Haas, Coinbase’s chief financial officer, could be thought of as the grim-faced technician on the ground. In reality, she’s quite cheerful.
Haas joined Coinbase in 2018, after a career in traditional finance at companies including General Electric, Merrill Lynch, California’s OneWest Bank, and Och Ziff Capital Management (now Sculptor). It fell to her to telegraph Coinbase’s painful results to the market during the so-called crypto winter of 2022-23. The company’s fortunes, and shares, subsequently rebounded, along with crypto prices, driven in part by the anticipated launch of spot
Bitcoin
exchange-traded funds, which were finally approved in the U.S. last month.
Issuers have tapped Coinbase as custodian for their crypto, and ETFs are another source of potential revenue, although ultralow-fee funds could cannibalize some of the broker’s core Bitcoin trading business. But Coinbase’s biggest vulnerability could be its legal battle with the Securities and Exchange Commission, which charged the company last year with operating an unauthorized exchange. Coinbase denies the allegations and has vowed to fight the SEC in court, a battle that could prove existential for the company and all of crypto.
Barron’s caught up with Haas on the sidelines of the World Economic Forum in Davos, Switzerland, in late January, days after the first spot Bitcoin ETFs began trading. An edited version of our conversation follows.
Barron’s: The approval of spot Bitcoin ETFs is huge news for the cryptocurrency market. What are your projections for flows into Bitcoin and interest in digital assets?
Alesia Haas: It took 10 years to get to this approval, and now there are many money managers who need to ask whether this is the right thing for their portfolios. These are largely institutional asset managers, registered investment advisors, and pension funds that have deliberate allocation processes. We have had a steady drumbeat of institutional adoption over the past four years through the ups and downs [in crypto prices]. Five years ago, big names like [BlackRock Chairman and CEO] Larry Fink said this was a bad asset. Now, Fink is saying, nope, Bitcoin is a store of wealth and an investible asset class.
The market is interested in the fees that Coinbase will reap from the ETFs. What can you tell us about fees?
Fees will be based on transaction volume and custody needs.
News about ETFs has driven more engagement with crypto across the board. We saw higher volatility late in last year’s fourth quarter with the anticipation of ETF approval, and we’re seeing higher volatility now. Bitcoin was up 90% in 2023, and that brought more money and investments into the ecosystem, separate from the flows into the ETFs.
Why should someone still use Coinbase to buy Bitcoin, now that it’s easy to buy Bitcoin via the
iShares Bitcoin
ETF?
There is a lot more to crypto than just buying Bitcoin. The majority of users on our platform have more than one asset in their portfolio, and have always had the option of lower-cost ways to buy Bitcoin. Coinbase has never put itself out there as the low-cost option. However, we continue to grow customers on our platform. What seems to happen is, you buy Bitcoin, then you want to buy
Ethereum,
and then you want to stake Ethereum [earn money by validating transactions on the Ethereum network] and explore some decentralized apps and nonfungible tokens, or NFTs.
Crypto is a journey. Many customers want to explore the world that crypto has to offer and learn about this new ecosystem. Also, a lot of capital was shut out of this market, as it was in 401(k)s, or with RIAs or pension funds. We believe that ETFs have opened up trillions of dollars of new investible capital that previously had no access to the crypto spot market. But the average consumer is still looking for more than just Bitcoin investment exposure.
Bitcoin spot trading remains an important part of Coinbase’s business. Analysts estimate that your average commission on trades in the fourth quarter was about 2%. Surely that will come under pressure, given there are so many alternatives with lower fees.
There have always been lower fees geared toward U.S. retail customers. There have been spot ETFs in Canada for many quarters, and we haven’t seen any change in user behavior on our platform there. For people getting into crypto, prices aren’t the decision point in choosing a platform or a product. I’m not saying that will last forever, but right now, people are choosing trust and the breadth of product offerings.
Coinbase has been sued by the SEC over tokens and crypto services that the agency views as unregistered securities. These tokens are almost a third of Coinbase’s trading business. How do you deal with that risk?
Legal arguments are on our side: These aren’t securities. As you note, 33% of our trading is in non–Bitcoin and Ethereum, but only 12 assets have been listed by the SEC as securities, accounting for a much smaller percentage of our trading volume.
Whether we resolve this in the short or long term, the outcome is the same: We will continue to offer products and services to our customers, and we’re going to get regulatory clarity. If that requires a change to our business, we can adapt and drive that change. We are invested in compliance and security, and are trying hard to focus on consumer protection. Consider what the Department of Justice did with Binance. [The company pleaded guilty to money-laundering violations and other offenses, and settled with the government for $4.3 billion and an agreement to submit to years of third-party monitoring.] If regulators were trying to shut it down, they would have taken much more serious action. No one is trying to kill crypto.
Congress has tried and failed to pass any meaningful rules regarding crypto. What are your hopes for the coming months?
Unfortunately, in the past year, geopolitical risks have taken priority in Congress. There are also budget issues. These are much larger issues for the American population than crypto regulation. However, there still is strong bipartisan support for regulation. I’m optimistic that it will come up for a vote in the House of Representatives in 2024.
Zooming out, it’s an election year, and only 9% of Americans are happy with the current financial system. Crypto is in the hands of 52 million Americans.
At various points last year, Coinbase was among the most heavily shorted stocks on Wall Street. Bears have suffered as the price has increased. Why have so many people been betting against the company?
I don’t think all of them are betting against Coinbase. Some are betting against crypto, and some are betting against Bitcoin, and because there aren’t many ways to express short views on crypto, Coinbase, as a public company with a lot of liquidity, has been one of the ways that investors can express a short on crypto, writ large. Our stock gets used for many things other than to express a Coinbase-specific view. Also, when we were sued by the SEC last year, people viewed that as a negative thing.
Crypto prices suffered when interest rates started rising. But a higher-rate environment has boosted Coinbase’s net interest income because of the company’s partnership with the U.S. dollar stablecoin issuer Circle. With rates expected to fall later this year, how will you adjust your business?
In the past five years, we have really worked on revenue diversification. Our revenue has different drivers, and we did see an increase in interest income for our stablecoin product. That helped us weather the crypto winter and the lower crypto asset volatility that we saw in 2023. But we are also introducing additional revenue streams that have no correlation to interest rates or crypto volatility.
Subscription and services revenue as a percent of total revenue got close to 50% in the third quarter. When we went public, it was 4%. That subscription and services revenue, which tends to be stickier, isn’t as tied to volatility, which drives a lot of unpredictability. Our goal is to get this to cover our expenses, which would remove market volatility as the determining factor in whether we are earning or burning cash. That is our near-term financial goal.
With the stock up so much, Coinbase commands a premium valuation based on numerous metrics. Surely, there will be more pressure to deliver earnings from here.
I’m not feeling a pinch, because we’ve been transparent with the Street about our goals and the fact that we aren’t looking to cut down to our core products and focus primarily on profitability.
When our stock rallies, it is a reflection of the broader sentiment around the future of crypto more than a reflection of Coinbase financials or our near-term financial performance. We’re starting to see a change in sentiment about regulatory stability in the U.S. We’re also starting to see milestones, like cheaper and faster transactions, which show the promise of the technology. Use cases are becoming more apparent, and we are seeing opportunities for tokenization of real-world assets on blockchain. All of that gets rewarded in our stock.
When you launched your offshore derivatives exchange last May, that seemed like a hedge against the U.S. regulatory environment. How is that business going, especially with your dominant rival, Binance, under pressure?
We didn’t do this because of [issues with] Binance or FTX or hedging the U.S. We did it because we want to bring a billion people into crypto and see that 75% of the trading volume is in derivatives. We want to be able to meet those customers. We think we can provide customers with an alternative to some other platforms that aren’t as transparent.
Thank you, Alesia.
Write to Jack Denton at [email protected]
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