What should you know about Coinbase (COIN)?

Coinbase Logo with Bitcoin

Jim Stewart        April 15, 2021

Coinbase (COIN) is generating lots of hype. The online exchange where investors buy, sell, and store cryptocurrencies went public this week with a direct listing on the NASDAQ. Shares closed down following the first day of trading despite a scorching market for Initial Public Offerings (IPOs) and direct listings.  What should you know about Coinbase (COIN)?

The company earns money through trading fees, which make up about 90% of its revenue. Coinbase earns a commission every time one of their clients exchanges coins on its platform. The commission averages roughly ½ to 1% of the transaction value. The company has seen explosive growth over the last decade as popularity in cryptocurrencies spreads. Coinbase boasts an impressive 56 million users with Bitcoin and Ethereum comprising 56% of all trading volume on the exchange.

The company bypassed the traditional IPO process with a direct listing yesterday. They have joined the likes of Palantir, Slack, and Roblox in doing so. The direct listing method allows early investors and employees to sell shares to the open market from the get-go. COIN shares were priced at $250/share. Trading started at $381 before jumping to $429 in afternoon trading. Shares however later sank to finish out the first day of trading at $328 marking a 26% fall from its intra-day high. Coinbase finished its initial day of trading with a market cap of $85.8B.

They had a fledgling opening though their timing is particularly good – most every major cryptocurrency is at or near its all-time highs. MicroStrategy and Tesla gave additional credence to crypto when they invested some of their idle cash in Bitcoin. Mastercard, Visa, Square, and Paypal are now allowing transactions in Bitcoin too. It was no surprise when COIN announced last week that their revenue surged ninefold year on year. The company that was worth $8bn in 2018 is now worth $85bn.

Not sure how much $85bn actually is? Stack it up next to the other major exchanges. CME group, which is the world’s largest financial derivatives exchange, is worth $74bn. The Intercontinental Exchange, which operates the New York Stock Exchange in additional to 11 other major exchanges, is worth $66bn. By comparison, the NASDAQ is worth a paltry $25bn, less than 1/3 of COIN! It’s hard to see Coinbase as a bargain at $85bn.

The other exchanges have seen headwinds that Coinbase has so far escaped. Commissions on equities over the last decade have compressed so greatly that they are now at or close to $0. I expect Coinbase to face similar headwinds. Fat commissions and wider adoption will likely bring in new competition. Traditional brokerage houses like Schwab and Fidelity don’t currently offer crypto custody or trading. What will it mean for Coinbase when they do? Coinbase appears to be on a trajectory for compressed margins and tougher competition, both of which will impact profits.

Despite all of this, the most concerning thing in the company’s filing (S-1) came directly from CEO Brian Armstrong: “We may earn a profit when revenues are high, and may lose money when our revenues are low but our goal is to roughly operate the company at break-even, smoothed out over time, for the time being.” Will investors remain patient with an $85bn valuation when the company operates at break-even levels and fails to recognize exponential earnings growth? Of course, it is possible that no new entrants come to market with a competing product. Coinbase could somehow manage to escape basic economic principles though this is unlikely.

Cryptocurrencies and the exchanges used to trade them are here to stay. What isn’t known is just what market structure will come to dominate crypto trading. Coinbase could somehow manage to hold onto its early de facto monopoly position. I believe it’s more likely that some type of oligopoly structure unfolds similar to equity market exchanges. The genesis of Coinbase rests firmly with crypto, but its future will depend on multiple business lines and diversified revenue streams similar to the other exchanges. The commoditization of crypto trading seems inevitable.  The company is in great shape today but has major challenges ahead of it.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but is intended to help manage risks and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax, or financial advice. Please consult a legal, tax, or financial professional for information specific to your individual situation.

You're Finished!

Thank You!

Your checklist is on the way! Don’t forget to check your spam folder if you don’t see it soon.

Almost Done...

Tell us where to send our Newsletter.

Where shall we send your Retirement Readiness Checklist?