It’s popular to be on the side of crypto. It speaks to the innovative and rebellious spirit that weaves its way through generations of Americans. Crypto takes on “The Man”, fiat currency, centralized control, and ultimately Federal Reserve money printing. Yet, if crypto is the answer, why is it so reliant on fiat?
Here’s the dirty little secret of crypto exposed in plain sight.
Bitcoin Started The Crypto Ecosystem But..
You only need to glance at a chart of the dollar’s purchasing power over the last century to see how it has been annihilated. The cause is clear. Federal Reserve money printing necessarily increases money supply and erodes the value of the dollar over time.
Bitcoin was introduced as an answer for those who didn’t want to see their cash value erode. With a limited supply of 21 million bitcoins, it could not be inflated away as the US dollar and other currencies have been. With no centralized organization controlling it, bitcoin would be the answer to maintaining wealth over time, or so the story was told. It was a means of preserving wealth and a means of exchange all in one.
But then other cryptocurrencies were launched. All of a sudden it seemed there were other coins created to solve problems associated with bitcoin; payment speed, anonymity, and so on.
As more and more cryptocurrencies launched, speculation ran rife. The original thesis behind bitcoin was supplanted by a dash to launch and market new cryptocurrencies for fast gains.
NFTs launched, and bombed, and the bottom fell out of the cryptocurrency market. And that brings us to today, where it is evident crypto has a big problem.
Dirty Little Secret of Crypto Exposed
We discovered the big gorilla in the room when scrutinizing Coinbase’s financial statements.
In its most recent filing, Coinbase reported that its #1 revenue source last quarter came from customers. Transaction revenue was $308 million. We’ll come back to that.
But first, take a look at the other sources:
- Institutional transaction revenue was $13.4 million.
- Blockchain rewards were $62 million.
- Custodial fee revenue was $11.4 million.
- Interest income was $182.2 million.
- Subscription and services revenue was $26.7 million.
Did you catch the problem?
The second highest revenue for the company was, drumroll, interest earned by depositing customers’ cash with Uncle Sam. So, staking fiat in the bond market is now the company’s #2 revenue stream. Worse still, that number has increased by 24x year-over-year from $7.6 million in Q4 2021.
A crypto exchange has a really big problem when it makes almost as much money taking in customer deposits and arbitraging them by earning interest from the bond market as it does from its primary business model facilitating cryptocurrency transactions.
When customers cotton on to what Coinbase is doing, they should – if acting rationally – withdraw funds and deposit them into CDs, high-interest savings accounts, Treasury bills or bonds to capture the interest for themselves. As is, Coinbase customers are leaving $182 million of interest on the table they could be pocketing themselves.
The ugly truth of crypto’s flagship exchange is that it relies heavily on the existing financial system for its own survival. As customer transaction revenues have plunged from $2.1 billion in Q4 2021 to $308 million in Q4 2022, the Coinbase business model has been upended and its survival as an entity is connected to the perilous fate of customer deposits.
When the rush (of customer funds) to the exits (withdrawals) turns into a stampede, the fate of Coinbase will be anyone’s guess. And as the flagship cryptocurrency exchange, that leaves crypto as a whole on a precarious perch.