There are plenty of problems these days for cryptocurrency company Coinbase Global (COIN 1.45%). Top cryptocurrencies, including Bitcoin, have dropped substantially from highs, investors are trading less, and rival platforms have gone bankrupt. Coinbase’s own operations are challenged right now as well, as evidenced by recent layoffs and the company’s decision to shut operations in Japan.
You’ve likely already heard about Coinbase’s challenges. But if you’re wondering if there’s anything promising happening at Coinbase, I’m here to say that there is. And the good news right now relates to stablecoin USD Coin (USDC -0.01%).
How USD Coin works
Coinbase co-created USD Coin with Circle, a crypto and fintech company. Those who open an account with Circle can deposit funds in U.S. dollars. Those dollars are then held in reserve and new USD Coins are minted at a 1-to-1 ratio. When you withdraw dollars from your account, the same amount of USD Coin is burned, or taken out of circulation.
In other words, as a stablecoin, the value of each USD Coin is always pegged at $1. But the market capitalization of USD Coin — the total circulating value — can go up and down depending on how many dollars are held in reserve.
Fortunately for Circle and Coinbase, those dollars held in reserve are generating more interest income than ever thanks to interest rate increases during 2022. And there will likely be further rate hikes in 2023, based on what the Federal Reserve has said.
For perspective, Coinbase generated $101.8 million in interest income in the third quarter of 2022 alone. That was a big jump from the $8.4 million in interest income it had during the same quarter of 2021. Part of its interest income comes from the $5 billion it has in cash and cash equivalents on its balance sheet as of Q3. But a substantial portion comes from USD Coin interest.
The good news for Coinbase
According to CoinMarketCap, the market cap for USD Coin is about $43 billion, as of this writing. On one hand, that’s down from a peak of about $56 billion back in June. But the market cap of USD Coin has stabilized since October and is little changed during the past year.
Despite everything that’s happened in the crypto industry — from exchange bankruptcies to a decrease in investor activity — users don’t appear to have cashed out their USD Coins for U.S. dollars. That’s very encouraging for Coinbase shareholders.
Moreover, the drop in market cap with USD Coin is easily explained. Cryptocurrency exchange Binance decided to promote its own stablecoin Binance USD over USD Coin. And consequently, billions of dollars of USD Coin were automatically converted to Binance USD for Binance customers, according to Circle filings with the Securities and Exchange Commission (SEC). This is now in the past.
If the market cap for USD Coin can hold steady from here or even go back up, then Coinbase stands to gain a large and steady stream of revenue without having to do anything. USD Coin’s reserves will simply earn interest while sitting there.
There is one caveat that Coinbase shareholders should be aware of. Circle had intended to go public, but withdrew its plans in December. Some have speculated that this might mean Circle is rethinking some aspects of its business and perhaps its relationship with Coinbase when it comes to USD Coin. Unfortunately, investors don’t have much to go on there and will simply have to wait and see.
Coinbase shareholders hope that the cryptocurrency market is cyclical and that today’s valley will eventually give way to tomorrow’s peak. Interest income could play an important role in helping Coinbase endure its present challenges, which is why I suggest shareholders keep a close eye on USD Coin’s market cap in the coming months.