Shareholder Letter August 10, 2021 Fellow shareholders,
Q2 was a strong quarter for Coinbase with growth and diversification across our platform. Retail Monthly Transacting Users (MTUs) grew to 8.8 million, up 44% from Q1 2021. Verified Users were 68 million. We now have over 9,000 institutions who continue to deepen and broaden their activities in the cryptoeconomy and more than 160,000 ecosystem partners who are using our crypto tools and services to engage with their own customers. We generated $2.0 billion in net revenue, including $1.9 billion in transaction revenue and over $100 million in subscription & services revenue. Net income was $1.6 billion and Adjusted EBITDA was $1.1 billion.
Q2 illustrated the volatility we have anticipated in these still-early days in the cryptoeconomy. In Q2, we saw many crypto asset prices reach new all time highs. For example, the price of Bitcoin surpassed $64,000 in April, while Ethereum prices more than doubled during the quarter to over $4,200 in May. Later in the quarter, we saw a steep decline in crypto asset prices with Bitcoin and Ethereum falling over 45% each to ~$30,000 and ~$1,700, respectively, resulting in exceptionally high levels of volatility. As volatility and crypto asset prices are highly correlated with trading revenue, the crypto market environment heavily influenced our Q2 financial results.
Across the industry we see immense innovation with new crypto projects addressing a broad range of issues from scaling (to improve transaction speed and lower cost) to developing novel ways for borrowing and lending. New market entrants are joining the cryptoeconomy from all corners, as we saw with the first Sotheby's auction settled in crypto this quarter. Most recently, crypto has arrived on the U.S. regulatory agenda. We are proud of the broad crypto community for coming together in an incredibly powerful way to inform debate in the U.S. Senate surrounding the crypto reporting provisions in the infrastructure bill. While the legislation has not yet been enacted, and the implementation of these provisions by the U.S. Treasury is still ahead of us, this moment highlights the power of the voice of crypto users, who we believe will have an increasing voice in crypto policymaking in years to come. It also underscores the importance of Coinbase and our users engaging with policymakers to help them understand crypto and its potential uses and benefits for society.
Against this dynamic industry backdrop, we remain focused on our mission to increase economic freedom in the world with a goal to bring 1 billion people into the cryptoeconomy. We are investing heavily towards this future by adding more users, more assets, and more products to our platform while keeping our focus on being the most trusted and easiest to use.
Q2 2021 Select Key Operating and Financial Metrics¹
¹ For a reconciliation of net income KEY OPERATING METRICS Q2’20 Q3’20 Q4’20 Q1’21 Q2’21 to Adjusted EBITDA, please refer to the reconciliation table in the Monthly Transacting Users “MTU” (M) 1.5 2.1 2.8 6.1 8.8 section titled “Reconciliation of Net Income to Adjusted EBITDA”, following the financial statements Trading Volume ($B) 28 45 89 335 462 included at the end of this shareholder letter. Assets on Platform ($B) 26 36 90 223 180
Financial Metrics ($M) Q2’20 Q3’20 Q4’20 Q1’21 Q2’21
Net Revenue $178 $287 $497 $1,597 $2,033
Net Income $32 $81 $177 $771 $1,606
Adjusted EBITDA¹ $61 $123 $288 $1,117 $1,150
Q2 2021 2 User Growth
Q2 MTU growth was driven by the crypto market environment, product launches, our marketing efforts, and the growing number of crypto assets we support.
Overall, we are seeing that retail users are deepening their engagement with our platform, both in terms of the assets in which they invest and trade, and the products they use. Approximately 27% of our Q2 retail MTUs, or 2.4 million individuals, both invested and engaged with at least one other non-investing product. This is up from 25% of our Q1 retail MTUs, or 1.5 million individuals. These incremental 0.9 million retail MTUs are predominantly using Staking or Earn which allows them to earn rewards or a yield on their crypto assets.
On the institutional side, we now have over 9,000 financial institutions using Coinbase. Several important themes have developed with our institutional business.
- First, adoption continued at a rapid pace throughout the quarter despite market volatility. We are encouraged by the progress we made over the past year as we build our institutional suite of products and service offerings. As an example, 10% of the top 100 largest hedge funds by reported assets under management have chosen to onboard with Coinbase, with many clients selecting us as their exclusive partner. In addition, in recent months, we have formed partnerships with industry leaders including Elon Musk, PNC Bank, SpaceX, Tesla, Third Point LLC, and WisdomTree Investments.
- Second, institutions are becoming more sophisticated and are seeking to do much more than buy, sell, and store Bitcoin. Increasingly, our institutional customers see Coinbase as a one-stop shop for the services they need including trading, custody, lending, yield generation, data, and more across a broad spectrum of crypto assets. Institutions are choosing Coinbase for the deep pools of liquidity we offer, our sophisticated algorithmic order execution, as well as the trust that comes with being a public company. Furthermore, we have enabled access to all our order books and our global fiat payment networks, allowing our institutional exchange customers to reach new currencies and markets and improving their access to global liquidity pools.
- Third, we are seeing a growing number of customers leveraging our infrastructure as they create their own crypto offerings. These include traditional banks, asset managers, and fintechs that are seeking best in class capabilities in custody with a crypto-native partner that offers strong security and a trusted brand. Overall, we are excited by our increasing momentum with institutions and the opportunity to grow our presence with this community over time.
Q2 2021 3 International expansion is also an important leg of our user growth strategy. Consistent with our vision that the cryptoeconomy can unlock economic freedom around the world, we remain focused on making the long-term investments necessary to drive Coinbase’s expansion into international markets, including diligently pursuing approvals and licenses from regulators around the world where needed. In Q2, we obtained two key licenses which we believe will accelerate our entry into Japan and Germany.
- In Japan, we have successfully registered with the local regulator JFSA (Financial Services Agency of Japan) as a crypto asset exchange service provider. This registration will enable us to actively solicit customers in Japan and provide them a range of crypto services. We see huge long-term potential in Japan, the third largest economy in the world, with an active and mature crypto customer base.
- In Germany, our subsidiary Coinbase Germany GmbH was awarded a license for crypto custody and trading from the German Federal Financial Authority (BaFin). The BaFin licensing framework is the first of its kind in the European Union, and Coinbase Germany is the first company to be issued such a license. Germany is an exciting market for crypto, ranking as the second largest country in the world in terms of the number of Bitcoin nodes being run.
Listing More Assets and Trading Pairs
The cryptoeconomy is still in its early stages, but it is clear that every year more and more economic activity will take place on crypto rails. We are seeing crypto quickly mature from its initial use case of trading bitcoin to the trading of thousands of new assets, and the adoption of new use cases like decentralized finance (DeFi), non-fungible tokens (NFTs), smart contracts, decentralized autonomous organizations (DAOs), and more. With all of this new innovation coming to crypto, we have a massive opportunity to give our customers access to these new products and features. Bringing more assets to Coinbase, faster, safer and ultimately listing all legal assets is one way we will tackle this opportunity.
Throughout Q2, we continued to enhance the depth and breadth of the assets we support. We want to treat asset issuers as the important customers they are and empower our users to make their own risk-adjusted decisions. Overall, we executed well against this goal as we added 29 new assets for trading and 39 new assets for custody during the first six months of 2021. In Q2 alone, we added more assets for trading than we added in all of 2020. We currently support 83 assets for trading and 142 for custody. The addition of more assets is helping to drive diversification in the assets our customers are transacting in.
Q2 2021 4 In June, we outlined steps we are taking to improve our asset addition process. First, we are simplifying our legal review to focus specifically at what raises the most concerns under the law. Second, we need to create an “experimental” zone for new assets where we can appropriately disclose risks to customers and enable them to make educated decisions. Lastly, we recognize we may not be able to trade every asset on our centralized exchange for regulatory reasons, but we believe we can enable access to most assets for basic wallet functionality.
Building Innovative Products
We continue to invest in innovative products that attract new customers and deepen relationships with existing ones. Our products are built to be safe, trusted, and easy to use for both retail and institutional users. For retail users, we aim to serve as their primary financial account in the cryptoeconomy to invest, store, spend, earn, and use crypto assets. For businesses, we offer a diverse and growing range of products, services, and APIs - whether they are institutions or ecosystem partners. Throughout Q2, we continued to invest in building the cryptoeconomy and positioning Coinbase for long-term growth. Key investments include:
RETAIL / Individuals Blockchain Rewards Education Coinbase now offers reward opportunities In addition to Coinbase Learn across six tokens including three proof-of- (coinbase.com/learn) which we stake protocols. In April, we launched launched in Q1, we have developed ETH2 staking which drove staking several ways to help better educate our adoption and we ended Q2 with 1.7 million users about crypto. For example, we customers earning yield on their crypto introduced our newsletter Coinbase assets with Coinbase. With Ethereum Bytes which now reaches being the second largest crypto asset by approximately 10 million people each market capitalization, our ETH2 staking week. Our users continue to learn product drove our Blockchain rewards — about new crypto assets via our Earn primarily comprised of staking — to campaigns as well. We had 2.3 million increase more than 300% in Q2 compared users engage with one of our nine to Q1. One of our priorities is to continue to active campaigns during the quarter, add proof-of-stake protocols and other five of which were new campaigns reward-generating assets to our platform launched in Q2. to expand reward opportunities for our users.
Coinbase Card As part of our goal to become our users’ primary financial account, we started inviting U.S.-based users to apply for the Coinbase Card in Q2. Coinbase Card allows U.S. users to convert and spend crypto from their Coinbase account at more than 70 million merchants where Visa® debit cards are accepted worldwide, and earn crypto rewards from our partners on their spending. Card is seeing healthy early traction and user satisfaction, and we are excited to offer users more ways to make crypto part of their everyday lives.
Q2 2021 56 Institutional / Businesses We launched the beta of Coinbase Prime, our prime brokerage, an integrated solution that includes trading, secure custody, financing, yield generation, data, and more for our institutional clients. We are continuing to onboard customers and plan to expand our offering in coming months.
Custody Custodial fee revenues grew to $31.7 million in Q2, up 35% compared to Q1. Our track record of keeping assets safe while operating at scale has been enabled by a multi-year investment in segregated cold storage that is built on a principled approach to security. Our product was also designed to meet regulatory and compliance requirements — a key decision criteria for many of our clients — while still offering an intuitive experience that supports institutional workflows.
Institutional Data Financing In May, Coinbase acquired Skew LTD We have begun building out a robust (Skew), a leading institutional data and financing business, offering bilateral analytics platform. Skew serves as the lending and post-trade credit to our foundation for a superior intelligence institutional clients. Our retail-focused offering for our users, arming Borrow product has also seen growth, professional traders with dynamic, with customers now able to borrow up aggregated market data, presented in a to $100,000 against their existing highly actionable format. crypto holdings.
Ecosystem / Developers Our Ecosystem products are designed to help developers and businesses access, interact, and build upon the broader crypto ecosystem. We are building a platform that will enable any asset issuer, developer, or merchant to build robust, secure, and scalable crypto solutions. Our team is making a series of foundational investments that we believe have long-term potential.
Coinbase Cloud USDC We have integrated Bison Trails as the Our USDC stablecoin, issued via our backbone for Coinbase Cloud, which partnership with Centre, experienced serves as a universal platform for rapid growth in Q2. USDC market cap is developers to build on, analyze, and currently over $27 billion, roughly 6x integrate with blockchains. We are higher compared to the start of the year building a single platform experience and over 26x higher year-over-year. that enables developers, token holders, Stablecoins like USDC are increasingly a and companies to interact with and key component of the DeFi ecosystem build blockchain products and services. and have emerging applications in areas In Q2, through our Cloud offering, we such as payments. broadened staking support and began investing more deeply in the Coinbase developer platform.
Q2 2021 6 Looking Ahead
The cryptoeconomy continues to innovate at a blistering rate and, we see significant opportunities for growth and investment as we execute on our goal of getting 1 billion people into crypto.
- First, ensuring we are scaling to match industry growth will be an ongoing area of investment. We must continue to deliver consistent platform performance even at the highest levels of volatility in order to maintain high quality customer service and efficient customer onboarding.
- Second, the cryptoeconomy continues to evolve rapidly - including the proliferation of thousands of assets, new use cases like decentralized finance (DeFi), NFTs, decentralized autonomous organizations (DAOs), and more. Despite being in early stages of development, we believe these areas represent the future of the cryptoeconomy. Similar to how Coinbase helped people access Bitcoin for the first time in a safe, trusted, and easy to use way, we need to do the same for the decentralized economy. As we outlined in June, as we look to the future, we plan to: