Staking, PFOF, and commissions: A look at how Coinbase, Robinhood, and other cryptocurrency platforms make money – Seeking Alpha

Revenue from cryptocurrency transactions at brokerage firms surged the last few months as the price of bitcoin surged.
Bitcoin (BTC-USD) rose roughly 62% in July and August after falling from highs of over $60K and dogecoin's (DOGE-USD) price jumped to 72¢ in May before plummeting over 50% over the next few months.
Firms benefit from the higher crypto prices and volatility.
Ninety percent "of our revenue is heavily correlated with the price of crypto and then the volatility of crypto," said executives from Coinbase (NASDAQ:COIN), the largest cryptocurrency exchange in the U.S. by trading volume.
Coinbase makes 82% of its money through transaction fees, which can vary depending on the coin and volume.
At Coinbase, transaction volumes for bitcoin are falling, while those for ethereum, an important underlying blockchain in the DeFi and NFT ecosystems, are on the rise.
Other revenue streams include custodial fees based on a percentage of assets for securely storing cryptocurrencies for large institutional investors, staking (blockchain) rewards, and partnering with crypto asset issuers.
Staking is a process where coin holders can choose to lock coins in their wallets and receive a return for it, similar to how miners receive rewards in proof-of-work models. The network randomly selects a number of staked users to validate the next block. Users with more coins staked have a higher chance of being chosen and earning the transaction fee reward.
Staking is only available in cryptocurrencies like Cardano, which is now the third-largest crypto by market cap. They use proof-of-stake or delegated proof-of-stake, which is similar to PoS but coin stakers vote on delegates to validate the next block.
Bitcoin uses the PoW model, which requires energy-intensive mining equipment to solve equations and mine the next block. Ethereum is in the process of switching to the more environmentally-friendly PoS system.
Coinbase provides staking for 1.7M users and receives a 25% commission on any rewards earned.
EToro (NASDAQ:FTCV), another popular platform for cryptocurrency trading that is set to go public soon by SPAC merger, also charges commissions of 10-25% for staking. Consumers generally benefit from staking through a platform since pooling holdings with other traders increases their odds of being chosen to validate the next block.
Partnering with asset issuers is another source of revenue for crypto brokers. Through Coinbase's Earn campaign, users can watch videos and pass quick tests about certain coins and receive a small amount of the coin after completion. Coin issuers are able to introduce their assets to a broader customer base and Coinbase receives a commission of the distributed coins.
At eToro, cryptoasset fees accounted for 73% of revenue in its latest quarter, soaring from 7% last year. It receives most of its revenue by charging spreads on asset transactions. For cryptos, these spreads range from 0.75% for bitcoin to 2.90% for cardano (ADA) and higher for some other coins. Those two coins, along with ethereum (1.90% spread), accounted for the majority of eToro's cryptocurrency revenue.
Popular retail brokerage Robinhood (NASDAQ:HOOD) also saw huge growth in cryptocurrency trades this year.
In its second quarter, the platform made 41% of its revenue from customers trading dogecoin, bitcoin and other cryptocurrencies, up from 17% for the three months ended March 31, 2021. And 62% of that revenue was from dogecoin transactions.
For the first time, new Robinhood users were more likely to make their first trade in cryptocurrency rather than in stocks.
Robinhood makes most of its money from cryptocurrency trading the same way it makes money from stock trading: payment for order flow or the compensation brokerage firms receive for directing trades to Citadel Securities and other major market makers to execute.
Higher cryptocurrency trading volume translates into more money paid to Robinhood. PFOF has been under scrutinization for years primarily because of a lack of disclosure to retail investors, potential conflicts of interests and allegations that market makers don't find the best possible price for buyers.
PFOF is a common practice, however Robinhood is highly reliant on the revenue source compared to other firms. The company doesn't release PFOF disclosures for cryptocurrencies, but Citadel paid Robinhood 31.9 cents per 100 shares to receive consumer's S&P 500 company trades so we can assume that Citadel is able to earn more than that.
Robinhood made, on average, $112 per user in the second quarter, with nearly 80% of that from PFOF.
The long-term cryptocurrency outlook appears promising, although trading transaction growth is expected to slow in the third quarter. Robinhood expects revenue to drop after dogecoin's price roughly halved to 30 cents and trading generally slows in the back half of the year.
“We expect seasonal headwinds and lower trading activity across the industry," Robinhood Chief Financial Officer Jason Warnick said.
Coinbase lowered its active user growth in its high-case scenario to 8M from 9M, citing a slowdown in growth during July that was more in-line with its medium and low cases.
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