Coinbase’s first-quarter earnings report, released on May 2, revealed a thriving company benefiting from a vibrant market for Bitcoin (BTC) and Ethereum (ETH). However, the real star of the show was Coinbase's Base platform, which has demonstrated even greater potential. Launched in August 2023, Base is a secure, low-cost Ethereum layer-2 solution designed to scale Coinbase’s user base on-chain, making transactions faster and more efficient. With daily trading volumes on Base surpassing $1 billion and new users climbing by over 8 million, Base could position Coinbase as the NVIDIA of decentralized finance (DeFi), driving significant growth and innovation in the industry.

The Rise of Base: A Game-Changer in DeFi

Coinbase’s Q1 report highlighted the impressive performance of the Base platform, which has surged past its competitors, particularly after the rollout of Ethereum’s Dencun upgrade. This upgrade significantly boosted activity on Base, leading to a surge in daily transaction volume and revenue, surpassing competitors like Optimism and Arbitrum. The upgrade reduced costs for layer-2 scaling chains such as Base and led to a surge in user engagement and transaction volume.

Daily Trading Volumes and User Growth

Since the Dencun upgrade, Base has consistently processed more than 3 million transactions daily, substantially lifting its fee revenue. If this pace is sustained, Base could become a significant growth driver for Coinbase. The fees that Base has earned have surpassed other major Ethereum scaling networks, highlighting its potential to become a long-term industry leader.

New Base users have climbed by more than 8 million between July 2023 and May 2024, showcasing the platform's rapid adoption and growing popularity. This impressive rise in market share in such a short period of time illustrates Base’s potential and undergirds the case that Coinbase could become the NVIDIA of DeFi.

Outlook for Q2 and Beyond

Now that Bitcoin's halving — one of its major price drivers — is over, the outlook for cryptos may turn back to macroeconomic factors such as interest rates, inflation, the direction of stock markets, and geopolitical tensions. The Federal Reserve’s “higher for longer” stance is one of the catalysts that could set a risk-off mood in the markets and exert downward pressure on riskier assets.

Coinbase provided good guidance for the second quarter of 2024 but cautioned that results will depend on crypto prices. Since Bitcoin peaked in mid-March, trading volumes have been declining, and the second quarter is likely to be weaker than the first, especially if crypto prices continue to slide.

Long-Term Prospects for Bitcoin and Crypto Markets

Over the long term, Bitcoin’s bull run is likely to resume, with higher price levels in the cards. However, in the short term, further weakness is likely to unfold. Despite this, the potential for cryptos to grow remains significant, thanks to the United States' 11 Bitcoin ETFs and the launch of six Bitcoin and Ethereum ETFs in Hong Kong in April. The Australian Securities Exchange may also approve its first Bitcoin ETFs before 2025.

These factors are likely to offer consistent support for crypto in the long run, which will be beneficial for Coinbase's transaction and non-transaction revenue. While declining crypto prices may weigh on Coinbase’s share price in the short term, the diversification of revenue drivers is likely to lead to higher share prices in the long term.

Coinbase Custodian Fee Revenue Expected to Rise

Coinbase's revenue from transactions is roughly half of its net revenue. The other half comes from non-transaction revenue, which encompasses subscriptions and services: stablecoin revenue, custodial fees, blockchain rewards, and interest income. The non-transaction revenue has seen strong growth over the past two years and could offset fluctuations in transaction revenue, which is highly correlated to cryptocurrency prices.

The Role of Bitcoin ETFs

Coinbase is the custodian for eight of the 11 new Bitcoin ETFs launched on Jan. 10. These ETFs have reached close to $60 billion in assets under management in the first quarter of 2024. Coinbase charges a fee for assets under custody, which are a few basis points on the assets under custody.

As the assets under management in these ETFs increase, Coinbase custodian fees would rise too. Coinbase custodian fee revenue was $19.7 million in Q4’23. After the launch of the Bitcoin ETFs in mid-January, Coinbase revenue from custody fees rose 90% to $32.3 million.

Cryptocurrency custodians have a similar role to banks in traditional finance – to settle trades, manage regulatory reporting, keep, and manage clients’ assets. However, for crypto markets, the process is more complex as it is more specific to digital assets. Also, the technology, security, and storage requirements are different.

Base Could Offset Future Declines in Trading Volumes

While Base is likely to become a contributor to Coinbase’s top-line revenue, it is likely to take some time. The additional — possibly substantial — source of revenue could help Coinbase's share price loosen its correlation to cryptocurrency prices in the future.

Overall, there is still huge potential for cryptos to grow thanks to the United States' 11 Bitcoin ETFs. Likewise, six Bitcoin and Ethereum ETFs launched in Hong Kong in April, and the Australian Securities Exchange may also approve its first Bitcoin ETFs before 2025.

These factors are likely to offer consistent support for crypto in the long run, which will be beneficial for Coinbase's transaction and non-transaction revenue. While declining crypto prices are likely to weigh on Coinbase’s share price in the short term, Coinbase’s diversification of revenue drivers is likely to lead to higher share prices in the long term.

Conclusion

Coinbase's Base platform has shown remarkable potential since its launch in August 2023. With daily trading volumes surpassing $1 billion and new users climbing by over 8 million, Base could position Coinbase as the NVIDIA of DeFi, driving significant growth and innovation in the industry. The platform's impressive rise in market share and revenue highlights its potential to become a long-term industry leader.

As the crypto market continues to evolve, Coinbase's diversification of revenue drivers and the growing popularity of its Base platform are likely to lead to higher share prices in the long term. While short-term fluctuations in crypto prices may impact Coinbase's performance, the company's strong fundamentals and innovative solutions position it well for future growth and success in the decentralized finance space.