Coinbase Global Inc

NASDAQ:COIN

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon. My name is Gino, and I will be conference operator today. At this time, I would like to welcome everyone to the Coinbase First Quarter 2022 Earnings Call. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Anil Gupta, Vice President of Investor Relations. You may begin.

[Anil Gupta, VP, IR]

Good afternoon, and welcome to the Coinbase First Quarter 2022 Earnings Call. Joining me on today's call are Brian Armstrong, Co-Founder and CEO; Emilie Choi, President and CEO; and Alesia Haas, CFO. I hope you've all had the opportunity to read our shareholder letter, which is published on our IR site earlier today.

Before we get started, I'd like to remind you that during today's call, we may make forward-looking statements. Actual results may vary materially from today's statements. Information concerning risks, uncertainties and other factors that could cause these results to differ is included in our SEC filings. Our discussion today will also include references to certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on our Investor Relations website. Non-GAAP financial measures should be considered in addition to, but not as a substitute for GAAP measures.

We are once again using the Say Technologies platform to enable our shareholders to post questions. In addition, we'll take some live questions from our research analysts. With that, I'll turn it over to Brian and Alesia for some opening comments.

[Brian Armstrong, Co-Founder, Chairman & CEO]

All right. Thanks, Anil. So before we dive into our results this quarter, I think it's worth just addressing the elephant in the room, which is that, of course, the broader markets are down. We're seeing a down market for growth tech stocks and risk assets. And of course, Coinbase and crypto is no exception to that. So the good news is that as a crypto company, we've lived through many different cycles in crypto, including major drawdowns, which I think make us well suited to operate through these environments. .

And I have to tell you, kind of going back over the last 10 years in crypto, the up periods, we tend to focus mostly on scaling. There's so many customers beating a path to our door that we have to have all hands on deck just to keep everything running. And so the down periods are often sometimes kind of a welcome change from that, in the sense that we get to focus on building the next layer of innovation that will benefit us in the next cycle. We also tend to see the down period as a big opportunity because we're greedy when others are fearful. We tend to be able to acquire great talent during those periods and others pivot, they get distracted, they get discouraged. And so we tend to do our best work in a down period.

So ironically, I'm actually -- I've never been more bullish on where we are as a company. And I think it's really important to separate our performance, how are we executing towards our goals versus how is the broader market doing. And I think in terms of how we're executing towards our goals, I really -- there's a lot of bright spots. I couldn't be happier.

For instance, this quarter, we had positive EBITDA despite the market being down, which I think speaks really highly of the resilience of our business. We're incredibly well capitalized during this period. So we have over $7 billion on the balance sheet of cash in crypto, which gives us lots of opportunities. As I said, to bring in -- continue to bring in the top talent, acquire companies. 54% of our active users now are doing something other than just trading crypto, they're actually using crypto in a variety of ways. And so our thesis about moving away from just being a trading platform to enabling the entire crypto economy and being that primary financial account people, it's really starting to work. The majority of our active users are now doing something other than trading.

And even the trading business itself is doing really well. Despite preferred trading volumes in the macroenvironment being down 44%, and yet we were down about 44% as well, but in the assets that we support, including the core ones like Bitcoin and Etherium, we actually gained share. There's been a lot of talk in the past about fee compression, but we've seen in the last few quarters that, that hasn't been the case. In fact, our take rate is slightly up over the last few quarters. And there's a lot of new emerging revenue streams like staking and our subscription and services, which grew 169% year-over-year.

So things -- I think we're executing really well towards our goal. And I just want to read a quote from our S-1 when we went public about a year ago that kind of laid some of this out and we actually talked about it in our earnings call last year, sort of anticipating this downturn. So the quote is that "You can expect volatility in our financials, given the price cycles of the cryptocurrency industry. This doesn't phase us because we're always taking a long-term perspective on crypto adoption. We may earn a profit when revenues are high, we may lose money when revenues are low. But our goal is to roughly operate the company as breakeven, smoothed out over time for the time being. We are looking for long-term investors who believe in our mission and will hold through price cycles."

So of course, this is the early days of this industry, and we are going to continue to invest. As the industry matures over time, we're going to be a very profitable company and more consistently profitable. But for now, regardless of whether the market is up or down, we're going to keep building. And I think the real key is to mentally flip from seeing down markets as being scary to actually being opportunities to pull ahead and that's exactly what we're going to be doing in this environment. Alesia, anything you want to add?

[Alesia Haas, CFO]

Thanks, Brian. I just want to reiterate that Brian said that the good news is that we have a decade of experience in managing to this type of volatility and we expected Q1 to be down from Q4 of last year. And our approach to planning is very deliberate and it considers how we would manage through all types of market conditions. And this is definitely within the range of market positions that we considered in our 2022 plan.

So I want to switch over and talk about our Q2 outlook. So we note in our letter that the softness that we saw towards the tail end of Q1 has continued into April, with crypto market cap and volatility both down compared to Q1. Volatility in particular, was at its lowest level we've observed since mid-2020. Our April MTU averages around 8.9 million users. Our trading volume is approximately $74 billion, and as a result, we expect Q2 to have both lower transaction volumes and lower MTU than the Q1 levels. In terms of our subscription and services, we anticipate this being similar to modestly lower as the Q1 levels.

On the expense side, we anticipate transaction expenses to be in the low 20s, driven primarily by the growth of our blockchain rewards revenue. Sales and marketing to be in the mid- to high teens as a percent of net revenue, and tech and dev and G&A will range between $1.1 billion and $1.3 billion. We really recognize that we are navigating through in certain volatile markets, and we plan to continue to invest prudently to drive long-term growth. As such, our outlook for 2022 is largely unchanged. And I want to reiterate that we are aiming to manage to a maximum of $500 million adjusted EBITDA loss, even if we are in a prolonged market downturn.

We historically planned our spending under a conservative assumption of a multiyear period of low volatility. And we believe with our balance sheet and resources, we are well capitalized to assist in our operations and its brands that continue to make our focus on building great product experiences building up our user base and getting ready for the return of the market.

So with that, Anil, let's go to questions.

[Anil Gupta, VP, IR]

Great. Thank you both. So before we get into Q&A, I wanted to reiterate our Q&A principles. First, we'll answer the most upvoted questions determined by the number of shares and we might group some questions together that touch on the same themes. Second, we don't plan to answer questions related to the potential listing of new assets. And third, we'll avoid questions we've answered in the past, if there are no updates. For example, we still don't plan to issue a dividend.

So the first question here, we're combining two questions. The top 1 is about M&A. George R. asked if we see a strategic advantage in acquiring or merging with Robin Hood. Noah P. asked about ventures and how we think about exiting or monetizing the investments made there.

[Emilie Choi, President & COO]

This is Emilie. Thanks for the question. So we don't comment on rumors or speculation on any specific M&A transactions. I think that the question actually was more about the strategic advantage of owning a traditional securities platform. And we are a crypto company, crypto is in our DNA. Everything we do is in service of building the crypto economy and increasing economic freedom. So we don't plan to offer traditional securities, unless this somehow would help us massively accelerate crypto adoption.

I also think this is a great opportunity to talk about our invest and acquire strategy more broadly. On the venture side, we are one of the most active corporate investors in the world, and we've made more than 300 investments to date. We take minority positions in tons of companies that we think will have great potential, including OpenSea, Alchemy, Dapper Labs, TaxBit, Uniswap and Compound, and we're very proud to be in these companies and support their growth.

The goal of ventures is to grow the overall crypto economy and to support the ecosystem and get differentiated insights. We look for the best teams and products to invest in, and we spend a lot of time working with protocols, Web3 infrastructure, DeFi, CeFi, NFTs and the metaverse. We also care about ROI, and we're happy with the returns that we've generated since 2018. For the most part, we don't have any intention of selling or monetizing those stakes because we're just long in the whole crypto sector. To me, it would be like Facebook or Google having bet on a large portfolio of the most promising tech companies back in the day and then just having held them through long periods.

That takes me to the second pillar, which is Corp Dev, and we are very focused on acquiring great companies that can supplement or accelerate our plans. Another secondary goal of ventures is M&A pipeline and/or partnership. So an example of this is Bison Trails. We invested early through Coinbase Ventures. They turned out to be a great company, and so we then acquired them as the foundation of Coinbase Cloud. We've also acquired companies like Xapo and Tagomi, which helped us become the #1 crypto custodian in the space as well as the foundation for our prime offering.

The final benefit of all of this is that we have incredible entrepreneurial teams in place who are running important parts of the business.

[Anil Gupta, VP, IR]

Sorry, I was on mute. The second question is about our NFT marketplace. Have we been pleased with their activity thus far on the platform? Any metrics we can share for investors to get a sense of the progress?

[Brian Armstrong, Co-Founder, Chairman & CEO]

Yes. Happy to share an update. So in general, I've been really pleased with the results so far. We've gotten really positive reaction from customers. There -- a lot of inventory being listed on the site for sale and customers are really engaging with our social-first approach to NFTs, that I think opens up some really interesting strategic opportunities in the future.

So in terms of adoption, we've really been slowly rolling out invites from our waitlist for a while. And then we just recently opened up to the public beta. We haven't actually really connected the NFT product into our main distribution channel yet though, which is through our main retail app, and of course, Coinbase Wallet. So we'll be looking to do that in the near future. And then we're not -- we don't really share metrics about any of our venture bets internally any of our new initiatives.

But I can just say that there's a lot to build and the opportunity in the NFT space is enormous. So there's a lot of features we're planning to add, the ability for people to do NFT drops, mint their own NFT tokens, there's token-gated communities we want to support. And even the option to buy piece just directly with your credit card or any funds that you currently have in your main Coinbase account, which isn't possible today in the app.

We also want to support more change over time. People are minting NFTs across more and more chains and we want to continue to decentralize the NFT experience and really embrace the on-chain native protocols and make sure NFTs don't become a centralized experience. So overall, I've been really happy with how it's gone and this is the beginning of a long journey. We've only still at a small fraction of what we're going to do in the NFT space.

And I think it's probably worth mentioning also that just reminding everyone, I think NFTs it's not just artwork or collectibles, digital collectibles. I think NFTs are going to play a big role in gaming, in music, in the metaverse, decentralized identity. And even in real world, items like tickets to events, proof of attendance and maybe even digitizing real estate in the real world. So a lot to do in the NFT space. Content NFT is really exciting. We're going to keep investing in it.

[Anil Gupta, VP, IR]

Our next question comes from Tom W, who asks, how can we do a better job clarifying Coinbase's vision to investors and the general public? He observes the major narratives as a, competition is growing; b, trading fees are therefore shrinking; and c, Coinbase has no other meaningful revenue. How would you respond to that? And then related Patrick N. also asked what's our biggest competitive moat versus competitors?

[Brian Armstrong, Co-Founder, Chairman & CEO]

Yes. So this is a big question. Let me start off and then I'll turn it over to Alesia. So just zooming out, what is the vision for Coinbase, well, we use a different word, we use mission, but our mission is to increase economic freedom in the world. And I really believe that cryptocurrency is this unique technology that's been invented. And along with the cellphone, it can be used to create good financial infrastructure for people all over the world and to enable this new more Internet-native, global fair and free economy of the world. So that's the vision for what we want to accomplish.

And of course, in that world, Coinbase is going to be the primary financial account, the primary way that people access the crypto economy. It's going to help them not just buy and sell crypto as a brokerage, but also to store crypto and then use it in all of these novel ways. And as I mentioned earlier, we're already seeing that trend play out. 54% of our active users are now doing something other than trading with crypto. And if you're wondering, what are they doing, it's all the things you use money for and more. They're earning money with crypto, they're spending it with merchants using Coinbase card. They're earning yield on their assets, there's borrowing and lending opportunities. And increasingly, there's this huge ecosystem of third-party applications or DApps, decentralized apps, probably over 1,000 of them now that people are creating all kinds of new stuff with games and social and art, music, and all kinds of things.

So in my mind, this is a little bit like the early days of the Internet, where you saw the birth of e-commerce in the late '90s or early 2000s, and now fast forward 20 years, e-commerce, I think, is something like 15% of global GDP. And I think if you fast forward 20 years from here, the crypto economy is going to represent probably a large portion like that, 15% of global GDP. And so Coinbase can help create that vision and make it a reality in the world.

So in terms of our competitive moat, which the question also asked about, there's a couple of main things that I think about. So trust and ease of use are really big moats for us. Trust is -- it comes down to compliance, a concerted effort to go work with policymakers around the world. It comes down to cybersecurity, we're storing more crypto securely for our customers. And so whenever people are coming into a new industry, they generally want to go with the one that has been around the longest. It's trusted by the most people and has the most number of users. Coinbase is really the only crypto company that's public in this environment. And we're starting such a large amount of crypto that I think that's a defensible moat. Because basically, when people trust us, they store crypto with us, and then when they store a crypto with us, they then use Coinbase to go use their crypto in a variety of ways. And so it has a nice kind of defensible position there.

The other piece is ease of use. So crypto is still very complicated and what we really want to do is help bring it to 1 billion people and then eventually, the majority of people in the world. And so most people don't understand exactly how private keys work or -- they don't understand how electricity works either, but there -- or the Internet underneath, but they're able to benefit from it because people have built applications that make it accessible to anyone. And so that's the other big piece that we're doing, trust and ease of use.

I guess the last thing I'll say is that Coinbase is really a multiproduct company. And it's a platform in a way. So many of our products are well integrated. They'll be even better integrated over time. If you have crypto that you buy with us and you start it with us and then it's easy to use things like Coinbase NFT and -- so our suite of products, I think, makes us a little bit unique out there in the sense that you'll see some of those will be in later stages, maturing revenue-wise, other ones will just be starting. And so it makes us a pretty unique company from that point of view as well.

Alesia, let me turn it over to you, maybe talk some about some of these narratives that were mentioned around competition and trading fees and other types of revenue.

[Alesia Haas, CFO]

Thanks, Brian. I just want to underscore what you just said, which is that we are a platform and that we're building suites of products and services around each of our user bases, our retail users, our institutions and developers. And so while we do have increasing competition, which we welcome, we want crypto to be adopted by every business out there, every human out there.

But the competition we see is largely for point solutions and no one is competing against the breadth of our platform offering. So for example, if I look at our institutions, our Coinbase Prime offering provides an integrated suite of products that include custody, trading, and we have the ability to route orders through our broker through our Prime Broker to more than 10 different liquidity venues. That means that you're always guaranteed to find the best price when you're trading on the Coinbase platform.

This is different because we compete with others from just a custody panel in solution. There's other exchanges where you can go and trade direct on that exchange. But if you want the ability to see price across all 11 exchanges, that's best to come from our smart order routers and route your trade to Coinbase and being integrated then settlement back to our cold storage [indiscernible] solution. So this is an example of how we compete and we use the breadth of our product offerings to really serve our customers in differentiated ways.

Similarly on retail, we started our retail app with a very simple experience both to buy and sell crypto. Not many people offer that. You can get crypto exposure on a number of different platforms. However, once you buy what we've seen as our users want to be able to use their crypto who really benefit by that utility that Brian was talking about. So on Coinbase, we're looking to provide all of those transaction experiences on a single platform in an easy-to-use way. And now we have 54% of our users earning yields, so they can stake their assets, they can spend their assets on a credit card, they can receive a loan against those assets. And increasingly, what we're seeing is they're then transferring assets into their wallets and using those with [indiscernible]. We're bringing that all over time into one easy-to-use platform, and we believe that will really differentiate us against these point-to-point competitors.

Now, that speaks to our brand promise to be [indiscernible] to use and it speaks to us growing and why we're so focused on diversification. I want to then bring that back to trading fees. Just actually, our fees actually have not declined. In fact, our blended fee rate is up over the last 2 quarters. Our transaction revenues are down on an absolute basis in Q1, and that reflects the broader weakness in the market, which is not surprising given crypto volatility and price cycles, which we previously talked about. But we're not seeing competition on fees. We are seeing that we want to experiment with different price structures. We've announced a subscription product, Coinbase One, and we're excited about the opportunity to continue to best serve our users and find the price models that work as they use more and more products on our platform.

And lastly, that speaks to why we're focused on revenue diversification. We are diversifying our revenues. We're continuing to invest in new products and services to drive differentiated revenue streams. Our subscription and services revenues accounted for $150-plus million of revenues in Q1 or roughly 13% of our total net revenue, which increased 169% year-over-year. As I mentioned, 54% of those users are engaged with additional products beyond investing. The largest driver of this is staking, where we'll continue to add new assets, and we just added Cardano in April.

Lastly, we touched on it, but we're excited by the launch of the NFT Beta, which opened to general release, and we think this will be a driver of future growth. So to conclude, we are a platform. We're adding more assets and products to enable new ways for users to engage and we will compete by being trusted in using this platform, as Brian said.

[Anil Gupta, VP, IR]

Our next question is from several shareholders who would like to know what we see as the biggest opportunities to drive shareholder value over the next years. Emilie?

[Emilie Choi, President & COO]

Sure. So we often get the question from investors, how do we think about resource allocation and our expense base and how we're going to drive revenue growth over the long term from that. So let me take a moment to talk about our investment pillars. We invest in the 4 pillars mentioned before, crypto as an investment, crypto as a new financial system and crypto as a new type of platform. And we map roughly 70% of our budget at any given time to core activities around those first 2 pillars, such as trading, custody and international expansion. This would also include things like listing more assets and expanding payment rails.

Then we allocate another 20% to strategic products such as wallet and speaking. So for example, we made Cardano Staking available for retail users in Q1, and we would expect to see a revenue impact in coming quarters from that. Wallet, which we also map to strategic is the gateway to entering Web3, and that should drive long-term growth of users, engagement and eventually monetization. And then finally, we allocate roughly 10% of our budget to longer-term bets such as the NFT marketplace.

We listen to our customers in the market to understand which products and features are the most important and then we make best on those products. So a good example of this is Custody, which we knew was going to be an important institutional product. We began building this several years ago, and then we made a bet on acquiring Xapo during the last crypto winter. This now has helped us become the largest regulated crypto custodian. And I think this is what leads to an important point, which is that Coinbase has only been public for a little over a year. So for many of you following the story, this might be the first real crypto market slowdown that you've seen.

I personally signed my offer letter for Coinbase in December 2017, which was kind of peak of the last cycle. And promptly, the market started falling. It was an incredible lesson for me in terms of thinking about long-term crypto cycles. And Brian and others helped me to think through how you power through and not overreact. It's a rare attribute in being able to weather the storm. And I think that's why this company has been around for more than a decade at this point.

What we do is we focus on the things we can control, which is strategy and execution. So we build great products. We onboard more users, and we grow our business. That's what our executive team is focused on. We don't make short-term decisions that jeopardize future growth vectors like Wallet. We're making those big investments. and we don't underinvest in the business generally. We need to maintain foresight and conviction on the product strategy.

Now that said, we recognize that it's imperative to be prudent on the opportunities we pursue. And so we're always going to build in flexibility around headcount or other fixed resources. And if we do all of that, the rest is going to take care of itself. Alesia, anything you want to add on that?

[Alesia Haas, CFO]

Thanks, Emilie. I agree with everything you said. But I also think it's important that we share a little about profitability and unit economics. We've proven that our core products have strong unit economics, and we've demonstrated that Coinbase can be profitable.

For example, we delivered over $4 billion of adjusted EBITDA in 2021. We are highly confident that we could choose profitability over reinvesting in the business. However, we chose investment. As we shared with you last quarter, we are choosing to make 2022 an investment year. And that's because we believe that investing now is key to our future of becoming a multiproduct platform, serving a diverse customer base. And so this is the year we chose to make large bets on NFTs on derivatives, going deep and process international growth and expanding Coinbase Wallet functionality as some key examples.

We could have done more of these sequentially, we could have moved more slowly and focused on profitability, but we have the resources. We have a disciplined approach to managing our business through peaks and valleys, and we are confident at investing now, go through the [indiscernible] diversification in the future and will expand the engagement and revenue opportunities on our platform and market conditions change. And so I do think it's really important that investors understand that we do have the ability to have the profitability, but we've consciously made the chance to focus on growth and diversification.

[Anil Gupta, VP, IR]

Our next question is about India. So some shareholders are curious about the recent developments in India. Can you explain the halting of UPI transfers there? And what impact will that have on your expansion plans in the market? Brian?

[Brian Armstrong, Co-Founder, Chairman & CEO]

Yes, sure. I can give an update on that. So for those of you who may have missed the news, so we launched in -- Coinbase in India on April 7, and this includes ramps into the crypto economy. There's a lot of interest in crypto amongst the people there in India. So we had an integration with what's called UPI. And this was a great example of just our international strategy.

So a few days after launching, we ended up disabling UPI because of some informal pressure from the Reserve Bank of India, which is kind of the Treasury equivalent there. And India is a unique market, in the sense that the Supreme Court has ruled that they can't ban crypto, but there are elements in the government there, including at Reserve Bank of India, who don't seem to be as positive on it. And so they -- in the press, it's been called a "shadow ban," basically, they're applying soft pressure behind the scenes to try to disable some of these payments, which might be going through UPI.

I guess we have a concern that they may be actually in violation of the Supreme Court ruling, which would be interesting to find out if it were to go there. But I think our preference is really just to work with them and focus on relaunching. I think there's a number of path that we have to relaunch with other payment methods there. And that's the default path going forward. So my hope is that we will be live back in India in relatively short order, along with a number of other countries, where we're pursuing international expansion similarly.

I guess just to zoom out for a minute, one of our theories here and my theory is that action produces information. So it's not always clear as we go to these countries all over the world, everybody is in varying states of kind of education or lack thereof about crypto. And there's a lot of work to go meet with policymakers around the world and kind of teach them about what the AML capabilities are and what are the positive benefits. The people of these countries generally really want crypto. And so to me, that says that most places in the free world and democracies, crypto is going to eventually be regulated and legal, but it's going to take time for them to get comfortable with this.

And the way that we push the conversation forward is by taking action. That's why we're going to go launch, even if we're not exactly sure how it's going to -- the reaction is going to be received, we're going to launch because it forces the discussion to be had. Now the press is talking about it in India. Now there's meetings happening that are going to talk about how we get to the next step. So that's generally our approach with international expansion.

[Anil Gupta, VP, IR]

Our next question is about Coinbase Cloud. What update can we provide for shareholders there? Are there other principal hurdles? What are the principal hurdles to growth, education, functionality or anything else? Brian?

[Brian Armstrong, Co-Founder, Chairman & CEO]

Yes. So Coinbase Cloud, I'm really excited about. I mean, if you just again zoom out, crypto is such a new market. That means there's a lot of startups being funded that are coming in to build applications in this space. And it's not just startups. There's actually existing fintech companies, neobanks, traditional financial service companies, they're all thinking about how they integrate crypto. Their customers are asking for it. And even nonfinancial service companies, by the way, is just who want to accept crypto payments or they're integrating crypto into their Web2 companies.

So I actually think, like in the same way that most companies use the Internet now, I think most companies are going to end up using crypto in some way, shape or form in the future. And they don't need to reinvent the wheel. Coinbase has spent a lot of time and energy over the last 10 years building a lot of these core technologies, like how to store crypto securely, and how to connect into all the blockchain to make sure they're staying in sync, how to do blockchain analytics to make sure it's done in a compliant way and how to trade crypto and stake and mints NFTs and index all of the metadata that's out there. It's almost like another segment of the Internet that needs to be -- needs companies need help accessing it.

And so I think for many of these companies, they're not going to want to -- in the same way, they don't want to run their own data center, unless that's their core competency, they're going to use a cloud product. Well, for many of them, crypto is not their core competency, but they do want to integrate crypto products, so they can use the vendor. And my hope is that basically, Coinbase is going through a transition where many of these services that we've had to use internally for our products over the years, we're now in the process of externalizing them through our Coinbase Cloud product and building that in a way it's robust. It actually makes our internal services better to have them cleanly decoupled and architected in a way that any third party can also use them.

The question also asked about growth in education and things like that. So of course, first, we just need to get the product functionality to everyone. I mean, that's a good first step. But we started sponsoring hackathons, engaging with the developer community in various countries around the world, there's -- it's pretty exciting to see the amount of interest from developers. By some indications, the most common elective in computer science programs today is like AI and crypto are the 2 biggest ones. So I think as more and more crypto companies keep being built and the existing companies integrate it, we're just going to sell picks and shovels during this gold rush.

[Anil Gupta, VP, IR]

Great. Okay. Well, let's switch gears and take some live questions from our analysts. Operator, can you start up, please?

[Operator]

Your first question comes from the line of Pete Christiansen from Citi.

[Peter Christiansen, Citigroup]

I was just hoping if you could qualitatively give some color on how funded account retention is looking in cost of acquisition there. Just generally, what trends are you seeing now year-to-date and perhaps how they differed from last year? And then finally, I look at your balance sheet and looks like cash is more than 1/3 of your market cap right now. And I know there's a lot of reserved firepower there. But is there a point where Coinbase would consider repurchasing its stock?

[Alesia Haas, CFO]

Thanks for the questions, Pete. So let me just start with color on funded accounts. We don't give a specific metric on funded accounts, but I think the best way you could look at that in our shareholder letter is to look at our assets on platform. So we ended Q2 with $256 billion of assets on our platform, of which $123 billion were retail and $134 billion were institutional. Now that is down off of Q4 of $278 million, but it's roughly flat to Q3. And so what you'll see there is we had growth in retail funded accounts between Q3 of 2021 and Q1 of 2022, as well as materially higher from earlier in 2021 and beyond. So we continue to see growth in total retail funded accounts.

With regards to the your second question about cash on the balance sheet, we use our cash for 4 buckets. We think about our cash for funding our operating needs, we use it for self-insurance, the potential risks on our platform, we're using a portion of it for lending off of our balance sheet to facilitate bootstrapping, essentially the borrow lens market for crypto and allowing institutions to trade on margin, eventually providing loans to our retail users backed by crypto. And so that is a growth vector for us of that cash. We have not made any commitments to return capital to shareholders that I'm prepared to share today, either in the form of dividends or a share buyback.

[Operator]

All right. Next one on the queue is Ken Worthington from JPMorgan.

[Kenneth Worthington, JPMorgan Chase & Co.]

I would love to follow up on the earlier question on the NFT platform and maybe extending it to the network effect here. My opinion is success, at least can be measured by building users and getting inventory. So maybe fleshing each of those out, how are you marketing the platform to get more users? We can see the e-mails to existing customers and the commission-free trades. I was hoping you could flesh out the social strategy and other things you're doing to build up the users.

And then on the inventory side, you mentioned minting, that seems to be a part of it. But are there steps you're taking to attract either big projects to list on your platform, maybe getting projects to sole list on the Coinbase platform? So what are going to be the drivers also to build the inventory?

And then cleaning up here, can we talk about the network effects of developing the crypto trading, together with the Wallet now together with the crypto NFT platform on a common platform with lots of users engaging globally? It would seem to be something powerful here, but I'm hoping you could flesh that out.

[Brian Armstrong, Co-Founder, Chairman & CEO]

Yes. Thanks for the question. I'll start off and then Alesia, feel free add anything. So I think you're correct. There is a network effect here, both in the traditional sense and that we've added social features to NFTs. And so people are coming in and discussing and liking and there's basically a ranking algorithm that we put in there, which is permitted one today, but it will get better and better over time, recommending NFT content that customers may want to see based on their prior activity on site and also on chain data that's publicly available out there.

But there's certainly a network effect there. And then as you pointed out, there's also -- I'm not sure if it would be a network effect, but you could call it that, which is basically -- I would call it vertical integration, really, which is that Coinbase already has many, many customers where that's where they store their crypto and that's where they bought it. And so if they store their crypto there, then it's just much easier if it was one more click to just buy an NFT that would be much easier than having to, say, move their crypto to another wallet and then connect it to a third-party application, using a Chrome extension or something like that.

And so this piece, you're absolutely correct. We actually -- this is the part where we haven't actually fully leveraged our distribution, and it's on our road map. If we can just natively integrate the NFT app into our existing products your crypto was already on Coinbase, then it's just one more click to buy it, I think that will be really powerful.

You touched on marketing and there's certainly a number of efforts there. I mean, we ran some really cool product ads during the Olympics, for instance. I think some of our marketing around the launch was really cool. I certainly liked it. I think there's a lot more we can do with marketing, especially as the product matures. But I also feel like we haven't even built the majority of the functionality that we really want. And so I think we'll dial up marketing as the product matures a little bit. And the best marketing we can do is kind of what you alluded to earlier, which is just let's leverage our existing user base. That's going to be really powerful. Emilie, Alesia, anything you want to add?

[Alesia Haas, CFO]

No, I think that's all said.

[Emilie Choi, President & COO]

Yes.

[Operator]

All right. Next question comes from the line of Lisa Ellis from MoffettNathanson.

[Lisa Ellis, MoffettNathanson]

Terrific. As painful as this downturn is, I mean, Coinbase seems like they're sitting in a very unique competitive position, meaning in a much stronger one than a lot of other players in the market, given the cash on the balance sheet, talent, et cetera. Can you just discuss or elaborate a bit further, like how as you look out, having lived through these downturns before, how say, a year from now, you anticipate that you'll emerge actually in a much stronger competitive position coming out of it?

[Brian Armstrong, Co-Founder, Chairman & CEO]

Yes. I can start off and then feel free to jump in. So I mean, look, we've been through enough of these where I think in the young markets, people are irrationally exuberant. And then in the down markets, people are irrationally pessimistic, right? And remember, this is just like we had 1 quarter where the market kind of pulled back. I think there'll be real kind of blood running in the street or something like that if it continues for 4 quarters or something like that. And I will say that we -- our cash balance does give us a big advantage here, in the sense that we can actually continue to invest.

In the past, we've seen people get distracted. We've seen people get discouraged. We've seen companies pivot to try to do something unrelated. And it's generally been a mistake. So I -- honestly, I feel like we're better operating in this environment. It's somehow like the long-term focus in the rigor in how we allocate capital and how we plan different scenarios, it's allowed us to really pull ahead in down periods. And so I think coaching the team on that mindset is really important, too, because a lot of our team has joined since -- they've only joined when crypto was in an upmarket. And so people oftentimes have to see their first cycle, then they kind of get it at a deeper level and the future ones are less and less scary.

[Alesia Haas, CFO]

I just want to expand on that, I think that [indiscernible] is important that this was in the range of scenarios that we already planned for. And so we are committed to our product road map. We're committed to build great products regardless of what the market is. And we put on a little bit of a blinder because at the end of the day, we think they're building great products, serving our users will then be the right long-term outcome for Coinbase. And that gives us dry powder than when the market is down to do strategic acquisitions that Emilie alluded to earlier. We bought Xapo in the last crypto winter. When other companies are needing exits, we hope that we'll be sitting strong and be prepared to then expand as well, both organically and inorganically.

[Brian Armstrong, Co-Founder, Chairman & CEO]

Yes. I guess last thing I'll just mention is that there's a pretty big gap between revenue multiples for us as a public company and what we're seeing in private market crypto investments currently. And so I think reality is probably somewhere in the middle of that gap probably needs to close. And so we anticipate probably over the next year or so that we'd see corrections in private markets for that or in both directions, frankly. So as that will take some time to kind of move through the private markets, and I think that could change the outlook on the M&A front as well.

[Operator]

Next question comes from the line of Will Nance from Goldman Sachs.

[William Nance, Goldman Sachs Group]

I appreciate all the color on the -- your thoughts on managing the business in this macroenvironment. I wanted ask a question on just the hiring that you guys have done. One of the stats that stood out to me in the report this quarter was the 1,200 people added. And I know I think Emilie talked earlier about the investment strategy around 70-20-10, which is obviously very helpful. But I guess I'm wondering if you could just provide a little bit more color on what exactly the 1,200 people are doing? How you're kind of allocating? It just strikes -- it's a large number relative to where you guys started off, and I think we know this is all kind of part of the plan at the beginning of the year, but we get the question a lot around what are these investments and where are they actually being diverted to? So any additional color you could have?

And then related, you guys have this guidance for the negative -- the no more than $500 million in EBITDA losses for the year. Could you just talk -- I mean, it looked like the exit run rate for the quarter on ARPU was something like $25 million, if I'm not mistaken. So just any color on how close we are to having to take actions to mitigate the loss? And where would those kind of come from for the remainder of the year?

[Emilie Choi, President & COO]

Why don't I start and then Alesia, you can -- and Brian, you can put in. Thanks for the question, Will. So we -- at the highest level, when we think about adding headcount, we think about how -- what the product goals are and then how do we amplify them through the addition of headcount. And when we think about the composition of headcount, roughly speaking, we're aiming for 50% at any given time of our headcount being in product engineering and design.

And the reason that matters is because we're a technology company, and we want things to be done in as automated a way as possible, thinking nimbly about the suite of products we offer. For example, if we build trading services, we want to be able to use one trading services layer to then power retail and institutional trading and to be as efficient as possible. And then as you mentioned, we think about the 70-20-10 split such that of those 1,200 product engineering design folks and the rest of them, how do we kind of map them against those things.

The other thing I'll mention, and then Alesia, pipe in, is I think that one of the things that we've grown is just making sure that we're building the right infrastructure as we scale up and have ever new increasing requirements on reliability and scalability. And the other thing is, as a regulated company, we invest pretty heavily in compliance. And we know that, that is important to us because it helps us solidify our relationship with our customers and regulators. And so that's another piece of headcount that matters. Alesia, anything to add?

[Alesia Haas, CFO]

I'll just address the ARPU part of the question, Will. So you're correct. As we look at recent times, we're heading into the high 20s and we shared a chart in our shareholder letter on Page 15 that everyone can take a look at, that gives you a sense of 2017 to date, what ARPU has kind of fluctuated that. And you can see on a month-to-month basis, there's a lot of volatility, but it kind of been on an annual average, kind of has hit between the 30s and 40s, with the exception of 2021, which was all-time high levels.

So it has trended down, but it hasn't changed materially from the 2019 kind of other crypto winter time period. The levers that we have at our disposal is we can slow the hiring ramp. We obviously spent a fair amount of our expenses in our CX and BPO costs, which were at very high levels in Q4, given the volumes that we've seen. And so those costs will come down as volumes temper. We also have other levers around other variable cost spend that we will then adjust to ensure that we can try and hit that $500 million EBITDA cap if that's what we need to do.

[Anil Gupta, VP, IR]

Operator, we have time for one more question.

[Operator]

All right. Our final question will be Owen Lau from Oppenheimer.

[Owen Lau, Oppenheimer]

I have two quick questions. The first one is, how will Coinbase potentially participate in the adoption of Lightning Network and the progress of Coinbase integrating the exchange into Lightning Network?

And then the second one is on Coinbase Wallet. Can you talk about the penetration? How do you measure success and the potential next step for Wallet? So like the Network and Wallet.

[Brian Armstrong, Co-Founder, Chairman & CEO]

Yes. I can start off on that. So for Lightning Network, for those who don't know, Lightning Network is a layer 2 solution for Bitcoin, with lower fees, improved payment capabilities. And we think it's a really important innovation that we would like to support. There's, of course, layer 2 solutions across a variety of blockchains. And so Etherium has some layer 2 solutions as well.

And just broadly, I'd say we're seeing a lot of interest from customers in Layer 2 solutions. You could think of it as -- I think it could be as important as the Internet moving from dial-up to broadband in terms of the new applications and utility that it will unlock. So we're working really hard to integrate every layer 2 solution out there that our customers want. We don't have a specific date to share with you about Lightning Network specifically, but it's certainly one of the ones on our road map.

Let's see, you asked about Coinbase Wallet and how we measure success. So we look at similar metrics to give rest of our business. And if we look at MTUs, monthly transacting users, we look at the amount of crypto that's custodied in Coinbase Wallet, we look at revenues, things like that. there's a lot that we're doing on Coinbase Wallet. We have a Chrome extension that's out now, so that can link directly to your mobile wallet. You can connect your ledger to it. We're supporting new blockchains through Coinbase Wallet. We are doing -- making it easier for people to connect to third-party applications both on mobile and through the web browser on desktop and sort of they want to access like the whole wide world out there.

And then similarly, making it seamless to go through the process of buying new crypto or topping up your Wallet to connecting it to an app, using that app without needing to have a computer science degree and then making sure that it's secure. And so people don't accidentally lose their funds or forget their password or anything like that, I firstly think Coinbase Wallet is one of the most important things we're working on because it's going to allow us to offer the same functionality and services that we do with our retail app in a lot of emerging markets, where the regulatory environment is less clear.

It's going to allow people to use the very latest stuff happening in crypto in a more decentralized way, things like decentralized exchanges and DeFi and Dow's and NFTs, like a lot of the stuff is coming first to Coinbase Wallet, self custodial wallets out there. And even Coinbase NFT, we launched first with support only for self-custodial wallets, including Coinbase Wallet.

So we're making a big investment in that. I think trust and ease of use are the core things that we focus on, just like all of our products and anticipate that to be a bigger share of our MTUs over time. Emilie, anything you want to add?

[Emilie Choi, President & COO]

I think that the only thing I'd end with is just that we really do think will it is the gateway to Web3, and that's why we have such a strong belief that making the investment and is the right thing to do for the long term.

[Anil Gupta, VP, IR]

Great. Well, thank you all for joining us today, and we look forward to speaking to you again on our next call.

[Operator]

This concludes today's conference call. You may now disconnect.