Editor's note: Cryptocurrency data analyst Phyrex conducted a comprehensive analysis of Coinbase's third-quarter financial report and concluded that Coinbase is increasing its efforts to buy the dip, with BTC and ETH remaining the main means of doing so.

Yesterday evening, after the opening of the US stock market, Coinbase's stock price continued to gap up. By the close, it had risen by nearly 9%. At first, it was thought that there was some unknown positive news that caused a large number of investors to buy. However, after reading the financial report, the situation can only be described as mixed feelings. Let's first talk about the results and then look at the details. After the financial report was released, Coinbase's stock price fell by more than 4% in pre-market trading. Generally speaking, BlackRock's application for a Bitcoin ETF in June did stimulate trading volume and user sentiment in the market, resulting in a 14% increase in Coinbase's revenue to $674 million, higher than the market's expected $654 million. However, the trading volume was only $76 billion, lower than the market's expected $80.4 billion and lower than the second quarter's $92 billion. This is the main reason for the decline in Coinbase's stock price.

However, although Coinbase has been losing money for seven consecutive quarters, the loss for this quarter has decreased from $545 million in the same period last year to $2.3 million. Considering that the fourth quarter, which may bring greater trading volume and user sentiment, it is very likely that Coinbase will turn losses into profits. The main reason for Coinbase's profitability this time is its joint operation with Circle on USDC, which enjoys the benefits of the USDC reserve buying US bonds. Especially, Circle's reserves are mainly short-term US bonds, and the yield of short-term US bonds is generally around 5.3%, even this week, there is a function that allows eligible US investors to trade futures. Of course, these are not the focus. The focus is to see the real reaction of US investors through detailed data.

First of all, according to the data as of September 30th, it can be seen that in the main trading revenue, ordinary users contributed $274 million in transaction fees, which is lower than the $346 million in the same period in 2022. The trading revenue for the first nine months of 2023 was less than $937 million, significantly lower than the $1.928 billion in the same period last year. This represents a decline in user sentiment and also represents a shortage of liquidity in the market, which is the same situation we are analyzing together. In addition, the transaction fees of users in the third quarter are lower than the average of the first three quarters, which is normal because there was only one month of improved sentiment from mid-June to the end of July.

Another important data is that the revenue from institutions (including market makers) is only $14.07 million, which is nearly $20 million lower than the same period last year. In addition, the revenue contributed by institutions in the first three quarters of 2023 is less than $100 million, which is half of the same period last year. Moreover, the institutional revenue contribution in the third quarter is lower than the average of the first three quarters, which also indicates that as the SEC and CFTC regulations intensify, not only market makers are leaving, but also institutional investors' enthusiasm for investment is continuously decreasing. The biggest benefit in terms of revenue is the income from stablecoins. It can be seen that the revenue in the third quarter is $172 million, which is nearly $100 million higher than the same period last year. The stablecoin revenue in the first nine months of 2023 is $522 million, more than five times higher than the same period last year. The stablecoin revenue in the third quarter is slightly lower than the average of the first three quarters.

Even we can see that Coinbase's non-trading revenue, including stablecoin revenue, block rewards, interest, and custody revenue, in the third quarter was $334 million, which is 16% higher than the trading revenue of $288 million. If we only calculate the trading revenue, Coinbase has lost its pants. Not only is it significantly lower than the same period last year, but the trading revenue in the third quarter is also lower than the average revenue of the previous three quarters. This data tells us that small-scale investors, institutions, and market makers in the United States are gradually moving away from cryptocurrency trading. Of course, this data was before the hot speculation of spot ETF in October. It is expected that the data in the fourth quarter should improve, but the help is also limited according to current forecast data.

However, an interesting phenomenon was observed through Coinbase's financial report. With the compliance of USD deposits, Coinbase supports direct deposits from credit cards and bank accounts, which provides an opportunity for some speculators. Although it is not explicitly stated, it is likely that they invest after depositing with credit cards. If they make a profit, everyone is happy. If they lose money, they complain about fraud and the bank will revoke the funds from Coinbase. Coinbase will have to bear the "loss". Of course, even if these users are not blacklisted, Coinbase will strengthen its management. It is likely that there are many speculators who want to take advantage of this loophole.

Another thing to pay attention to is that Coinbase has increased its custody and asset protection for customers. As of the first nine months of 2023, the total amount of customer assets held by Coinbase exceeded $117.76 billion, higher than the full-year total of $80.45 billion last year. It is worth noting that the current market value of the entire cryptocurrency is only $1.28 trillion, which is the result of the overall market's significant increase driven by BTC and ETH. At the end of September, the market value was just over $1 trillion, and Coinbase's user storage accounted for more than 10% of the overall market value of the cryptocurrency. Ironically, this mainly represents that more users currently distrust decentralized storage and instead trust centralized storage. Of course, Coinbase has also purchased insurance and provides full compensation, and the custody fees are indeed not high.

This is the preferred choice for high net worth individuals and institutions, but only for fully compliant and regulated exchanges. I know many of you may be thinking that there are also many custodial institutions in Hong Kong, but it seems that KYC and AML are also required. Interested friends can learn more about it themselves. Speaking of Coinbase's custody, it can also be seen that nearly half of the assets held by high net worth and institutional users in custody are BTC, accounting for nearly half. Among the remaining half, ETH accounts for more than half, so the current pattern can still be very clear. For high net worth individuals and institutions, #BTC is still the preferred holding, followed by #ETH, and the holding amount of ETH can reach about 53% of BTC, which is still the second most favored cryptocurrency by high net worth and institutional users after BTC.

The next piece of data is the total amount of cryptocurrency assets held by Coinbase itself, which provides data for many people to judge whether "Dogecoin" is worth investing in or not. As of September 30, 2023, the total value of cryptocurrency held by Coinbase as an investment is $572 million, with a cost of $310 million. There is also a specific explanation for investing in Coinbase, which basically means that Coinbase does not intend to trade these assets frequently, but will hedge them through derivatives or other financial instruments, and may even lend them out. The total holding cost and fair value for the first nine months have exceeded the data for the entire previous year, which means that after entering 2023, Coinbase has increased its bottom-fishing of cryptocurrency, bought more assets, and has already made a profit of more than $260 million, which is higher than last year's total revenue of less than $140 million.

Coinbase's assets for bottom fishing are mainly BTC and ETH, which is expected. However, although the cost of Coinbase's BTC and ETH bottom fishing is very similar, the cost of investing in ETH is slightly higher at $128 million compared to BTC's $126 million. This indicates that Coinbase is bullish on both BTC and ETH, but slightly more bullish on the price growth of ETH. Of course, from the current financial report data, the net income from investing in ETH is indeed not as high as BTC. BTC and ETH account for more than 82% of Coinbase's total investment, but in terms of income, BTC and ETH only account for 78% of the total income. Indeed, the rise of BTC and ETH is lower than ALT.

However, looking at the data relative to 2022, Coinbase has increased its investment returns for BTC and ETH, even though ALT contributed the most to the returns in 2022, the investment in ALT has been reduced. This tells us an important lesson: the larger the investment, the more willing one is to choose assets with lower potential returns but higher stability. At the same time, small positions can be used for high-risk investments. This is exactly the same as the investment strategy I shared yesterday. Of course, the choice of assets still depends on individual preferences. In addition, the majority of the cryptocurrencies held by Coinbase for operational purposes are ALT, with over $44 million, followed by ETH with over $2,500, and the least is BTC with around $1,100, and these assets will be used to pay for gas fees and other expenses.

Finally, Coinbase analyzed its own users and found that a large portion of trading volume comes from a relatively small number of customers. The loss or decrease in trading volume of these customers may have an adverse impact on Coinbase's business, operating performance, and financial condition. A relatively small number of institutional market makers and high-volume consumer customers account for a significant portion of trading volume and net revenue on Coinbase. This actually reveals a very important data point, which could also be a fatal flaw for Coinbase. More institutions, market makers, or high net worth investors are Coinbase's main source of revenue, but the main reason these investors choose Coinbase is because it is compliant enough and is a regulated public company. However, if BTC and ETH spot ETFs are approved, it is likely to significantly weaken Coinbase's profitability.

Although this has little impact on more ordinary investors, it can be seen as the direction of future exchanges. The more compliant the exchange, the more it will be impacted by spot ETFs. The revenue of compliant exchanges has already shifted from trading income to peripheral income, which will inevitably reduce the attribute of the exchange as a "trading" platform, but it will indeed increase the attribute of the exchange as a financial platform. The most important conclusion drawn from Coinbase's third-quarter financial report is that Coinbase's efforts to buy the dip are increasing, and buying BTC and ETH is still the main means. The amount of ETH purchased will be more than BTC, and according to financial report data, Coinbase will add 9,629 BTC, 144,450 ETH, and some ALT with a 22% share in 2023.