Coin Metrics’ State of the Network has provided comprehensive update on cryptocurrency markets amidst the unfolding global market sell-off as well as an insightful break down Coinbase’s Q2 2024 earnings.
During this past weekend, global markets and crypto-assets alike were jolted by a number of macroeconomic developments and crypto-specific developments.
The Coin Metrics reported pointed out that the Bank of Japan (BoJ) moved to raise its benchmark interest rate from 0-0.1% to 0.25%, in a shift towards “monetary tightening.”
Coin Metrics also mentioned that this prompted the largest decline in Japanese equity markets since 1987 “with the Nikkei 225 index plunging over 12% on Monday while the Japanese yen (JPY) surged against the US Dollar.”
Meanwhile, the US equity markets—gripped “by risks of recession and weaker than expected economic data—slid further, with the NASDAQ Composite leading losses.”
Coin Metrics added that the crypto-asset markets “did not go undisturbed by these developments.”
The research report further noted that the total crypto market capitalization “declined by ~26% to ~$1.7T before rebounding on Monday, with BTC, ETH & SOL down between 18% to 28%.”
The Coin Metrics update also noted that the “selloff was exacerbated by crypto-specific catalysts, such as the unwinding of Jump Trading’s crypto portfolio following its CFTC probe, adding to the ongoing but subsiding supply overhangs from Mt.Gox creditor repayments and GBTC & ETHE outflows.”
The report added that Jump Crypto’s liquidations over the past two weeks “stem predominantly from ETH, with deposits to exchanges rising to levels last seen during the FTX collapse.”
In culmination, these developments have “resulted in heightened volatility in crypto-asset markets and triggered liquidations across exchanges at significant price levels.”
The Coin Metrics report further noted that Coinbase, one of the most widely recognized crypto businesses and the largest exchange in the United States, reported their earnings “for Q2 2024 last week.”
Total revenue came in “at $1.4B, 11% lower Q/Q, but 108% higher compared to last year, with revenue from transaction volumes, the core engine of their business, down by 27% Q/Q at $781M.”
Nevertheless, in Q2 Coinbase made “progress in growing new product categories and reducing the frictions that come with interacting on-chain.”
Coin Metrics added that this “includes the launch of smart-wallets, lowering fees associated with their layer-2 Base, and integrating Base with Stripe to expand stablecoin adoption and global payment infrastructure.”
Significant strides were also “made in achieving greater regulatory clarity, with the launch of spot Ether ETFs in the US and the implementation of MiCA regulations in Europe.”
Coinbase Q2 2024 Shareholder Letter has noted:
“Crypto asset volatility – a key driver of revenue – declined approximately 13% when comparing the Q2 average with the Q1 average, resulting in softer crypto spot market trading conditions in Q2.”
Trading activity across the market “declined from the peak seen in Q1, which benefited from a major rally in crypto-asset prices, driving volatility and volumes higher.”
In Q2, spot trading volumes on Coinbase “stabilized around the $2B level on a 7-day average basis, of which 60% of spot volume came from BTC, ETH & USDT, while 40% came from other crypto-assets.”
This reflects the market’s preference “for established, higher-cap assets in Q2 and may be explained by the larger presence of institutional trading volumes ($189B) relative to retail ($37B) at this point in the market cycle.”
However, this did “not prevent a strong quarter for its growing business.”
The Coin Metrics report noted that the recent history of Coinbase’s earnings “have shown that revenue from non-trading activities, (‘Subscriptions & services revenue’), has increasingly influenced Coinbase’s revenue mix and strategic direction.”
This segment, which includes “revenue generated from Circle’s USDC agreement, blockchain rewards from PoS staking, and custodial fees from bitcoin spot ETFs, among others, grew 17% Q/Q to $599M.”
The largest increase came “from USDC held on the platform, stemming from their revenue sharing agreement with Circle.”
Coinbase and Circle equally “share the interest income generated on the reserves backing USDC such as US Treasury bills and other dollar-equivalent assets, benefiting from the prevailing high interest-rate environment.”
Despite its growing prominence, the Federal Reserve’s decision to cut rates in the near future “could present a headwind for the stablecoin revenue segment of Coinbase’s business.”
With Coinbase expanding to numerous verticals beyond its core exchange business, it is likely to “be influenced by the dynamic, interconnected nature of the crypto ecosystem and changes in broader markets.”
Understanding how various metrics and asset returns relate to Coinbase stock (COIN) returns can “provide valuable insight into its potential drivers and risk factors.”
The Coin Metrics report pointed out that the “percentage change in the NASDAQ Composite shows the highest positive correlation (0.58) with COIN returns.”
This suggests that COIN returns “are significantly influenced by broader market trends and investor sentiment in traditional financial markets, particularly technology stocks.”
There is also a “relatively high correlation with BTC returns (0.49) and ETH returns (0.44), indicating that a rise in the largest crypto-assets influence returns on COIN.”
Interestingly, metrics related to Coinbase’s business, “such as spot trading volume, stablecoin supply and units of ETH staked display negligible correlations.”
However, looking at 90-day rolling correlations can “provide a better view into how these variables have evolved over time.”
The 90-day rolling correlation “between COIN returns and key metrics show significant variability, reflecting the dynamic nature of crypto markets and metrics tied to Coinbase’s business.”
The Coin Metrics report further noted that “during the early phases of Coinbase as a publicly listed company, COIN returns exhibited the highest magnitude of positive and negative correlations (+0.3 to -0.4) with spot volumes on the exchange, indicating its initial importance to investors.”
However, over time, its relationship “with changes in stablecoin supply and ETH staked has also grown in prominence, albeit still weak, suggesting a gradual shift in investor focus towards newer revenue streams.”
Coin Metrics explains that “as a Nasdaq-listed company, Coinbase provides a unique mix of exposure to both the crypto market and traditional financial markets.”
The rolling correlation with returns on the NASDAQ Composite has displayed “a strong positive relationship up until 2023, a period when crypto markets declined, amplifying the influence of traditional markets.”
While returns on BTC, ETH, and SOL also display moderately positive correlations “due to the interconnected nature of crypto, these relationships can diverge, especially during shifts in macroeconomic conditions, periods of market volatility, or in the presence of asset-specific catalysts.”
Coin Metrics pointed out that markets have “seen near-term volatility and may continue to be risk-off due to a combination of macroeconomic and crypto-specific developments, testing the longer-term conviction of participants.”
Despite these challenges, on-chain infrastructure and applications have “demonstrated resilience.”
In the short to medium term, “subsiding supply overhangs from Mt. Gox creditor repayments, the eventual completion of Jump Crypto‘s liquidations, and easing outflows from Grayscale‘s GBTC & ETHE may present opportunities for both retail and institutional investors.”
The report concluded that when looking ahead, positive ETF flows will be “crucial as they could signal sustained demand for crypto-assets, catalyzing a resumption in growth for crypto markets, potentially benefiting companies like Coinbase, and drive wider adoption of the on-chain ecosystem.”
The report also noted that ERC-20 tokens for DeFi protocols like AAVE (+46%) and COMP (+44%) saw “increases in daily active addresses and over a 100% rise in adjusted transfer values over the past week.”
According to the Coin Metrics report, this “surge in activity was driven by market volatility and the processing of liquidations during the recent crypto market downturn.”