Coinbase Revenue Drops 10% in Q1, Acquires Deribit for Derivatives Dominance

Coinbase had a significant day, announcing its intention to acquire Deribit, a major player in the crypto options market, and subsequently revealing its first-quarter earnings. The crypto exchange reported a total revenue of $2 billion for the first quarter, marking a 10% decrease from the previous quarter. Trading revenue saw a more substantial decline, dropping 19% to nearly $1.3 billion, while subscription and services revenue increased by 9% to approximately $700 million. This revenue includes income from stablecoins, specifically from its arrangement with Circle, where Coinbase earns reserve income on the USDC it holds.

Despite the overall revenue decline, Coinbase's stablecoin revenue showed strong growth. The market cap of USDC reached around $60 billion in the first quarter, and the average USDC held in Coinbase products grew by 49% quarter over quarter to $12.3 billion. This growth in stablecoin revenue is a positive indicator for Coinbase, as it diversifies its revenue streams beyond traditional trading fees.

Analysts had mixed reactions to Coinbase's first-quarter results and the Deribit acquisition. Benchmark analyst Mark Palmer noted that the purchase of Deribit would give Coinbase a dominant position in the high-growth derivatives space, which is increasingly attracting institutional investors. Architect Partners’ Michael Klena expects competitors to respond with their own acquisitions. Coinbase CFO Alesia Haas highlighted that Deribit has a history of positive adjusted EBITDA and is expected to be accretive on that basis. Oppenheimer & Co. analyst Owen Lau believes this deal positions Coinbase as a legitimate challenger to major derivatives platforms like Binance, Bybit, and OKX, noting that crypto options are less cyclical and have steady demand in both up and down markets.

However, Compass Point analysts Ed Engel and Joe Flynn pointed out that Deribit's focus on institutional customers may not directly benefit Coinbase's retail-driven perpetuals trading volumes, which they consider crucial for growing market share. Coinbase president Emilie Choi mentioned that the company's substantial cash reserves ($8.5 billion) allow it to make larger bets and that regulatory clarity will enable more confident expansion into new products, use cases, and geographies.

Despite the optimism surrounding the Deribit deal, Morningstar analyst Michael Miller does not believe the acquisition significantly alters his overall view of Coinbase. He noted that the deal is an extension of existing efforts and does not reduce Coinbase's exposure to the volatile crypto market. Miller expects a decline in blockchain rewards revenue to offset the growth in stablecoin revenue in the second quarter, projecting subscription and services revenue to fall between $600 million and $680 million. Coinbase's total transaction revenue in April was $240 million, suggesting a 34% decline from the first quarter.

Engel and Flynn downgraded Coinbase to a sell rating, citing the deeply penetrated retail trading market in the US and the lower margins and higher competition in the institutional segments. Their stock price target for Coinbase is $180. In contrast, Lau is more bullish, setting a 12- to 18-month price target of $269, although he lowered this from $279 due to macroeconomic uncertainties. The future of Coinbase will be influenced by legislative updates and trade developments, which could impact its performance and market position.