Coinbase: A Worthy Investment Or A Risky Gamble?

Coinbase (COIN) is a leading US cryptocurrency exchange that allows users to buy and sell Bitcoin and other cryptocurrencies. In this era of booming cryptocurrency, Coinbase has emerged as a trusted platform for investors, slowly building its reputation as a reliable and secure platform. The company's stock has surged 250% in the past year, and its revenue is highly correlated with cryptocurrency prices. Coinbase's exchange business has witnessed a significant increase in trading volume, and the company has successfully diversified its revenue streams, reducing its reliance on trading activity and transaction revenue. However, investing in Coinbase stock comes with its own set of risks and uncertainties, including the volatile nature of the cryptocurrency market and potential regulatory issues. So, is Coinbase a good investment? Let's explore further.

Coinbase's business model

Coinbase is a marketplace for buying, selling, and storing cryptocurrencies. The company's business model revolves around the fees it charges for these services. Coinbase's revenue streams include:

• Trading fees: Coinbase charges fees for buying, selling, and converting cryptocurrencies. The fees vary based on the location and volume of transactions.
• Maker and taker fees: When a user places an order that is immediately filled, they are deemed a taker and pay a higher fee. If the order is placed on an order book and matched later, the user is considered a maker and pays a lower fee.
• Interchange fees: Coinbase earns interchange fees when customers use their Coinbase Visa debit card to make purchases.
• Interest on cash: Coinbase lends out the cash residing in user accounts and collects interest from the borrowing institutions.
• Sales of software tools: Coinbase offers various software tools, such as Coinbase Analytics and Coinbase Commerce, to individuals and businesses.
• Interest on personal loans: Coinbase offers personal loans to users, with their crypto holdings as collateral, and earns interest on these loans.
• Custody services: Coinbase Custody holds and stores crypto-related assets on behalf of individuals and institutions, charging an implementation fee and an annual custody fee.
• Referral and promotional fees: Coinbase offers educational courses about new cryptocurrencies, and users receive these currencies as a reward upon completion. Coinbase may also charge referral fees for promoting certain crypto projects.
• Venture investments: Coinbase Ventures invests in early-stage companies in the blockchain and cryptocurrency space, and may sell shares in these companies for a profit.

Coinbase's profitability

In 2023, Coinbase's revenue declined to $2.9 billion, a 6.4% decrease from the previous year. However, the company made a net profit of $95 million, reversing a $2.6 billion loss in 2022. This improvement can be attributed to cost-cutting measures and increased trading volume due to rising crypto prices. Coinbase's profitability is also influenced by its ability to expand into new business segments and its competitive position relative to other exchanges.

Coinbase's revenue and earnings beat expectations in the fourth quarter of 2022, with $629 million in revenue compared to the expected $590 million. However, its user base continued to shrink, with 8.3 million monthly transacting users (MTUs) during the quarter, down from 8.5 million previously.

Overall, Coinbase's profitability is closely tied to the performance of the cryptocurrency market and the trading volume on its platform. While the company has taken steps to improve its cost structure and expand its business, the inherent volatility and regulatory risks associated with cryptocurrencies can significantly impact its financial performance.

Coinbase's success

Coinbase has enjoyed a great deal of success since its launch in 2021, becoming the largest US cryptocurrency exchange. The company has been able to capitalise on the growing popularity of cryptocurrencies, with Bitcoin and Ethereum up 155% and 94% respectively in 2023. Coinbase's revenue is highly correlated with cryptocurrency prices, and the company's leaner cost structure has put it on a stronger financial footing.

Coinbase has established itself as a reliable and secure platform in an industry fraught with risk, weak security practices, and spotty regulatory enforcement. This has allowed the company to charge higher fees than its peers. Coinbase's reputation as a trusted counterparty has been further bolstered by the collapse of its rival FTX due to financial fraud.

The company has also diversified its business beyond transaction revenue, with a growing proportion of its revenue coming from subscriptions and services, including custodial services, blockchain rewards, and stablecoin revenue. Coinbase's exchange business has regained market share, and it is now the second-largest global player behind Binance.

Additionally, Coinbase has been a key player in the creation of stablecoins, particularly USDC, which has the seventh-biggest market cap of all cryptocurrencies. The company earns millions in interest on the assets backing USDC.

Coinbase has also expanded into new markets and products, such as derivatives and more mainstream offerings. It is the leading custodian of crypto exchange-traded funds (ETFs) and is working with big banks as a trading platform and custodian for their customers.

Coinbase vs. Bitcoin

Coinbase is a business centred around crypto, whose main focus is operating an exchange where market participants can buy and sell Bitcoin and other cryptocurrencies. Bitcoin, on the other hand, is a digital asset or currency that allows for secure peer-to-peer transactions on the internet.

Coinbase's results are highly correlated with cryptocurrency prices, as strong crypto markets lead to higher trading volumes and higher asset-based fees from its custody business. In contrast, Bitcoin's price depends on its demand and supply, and its performance is not tied to the success of Coinbase or any other company.

Coinbase's business results depend on the performance of the crypto market. If Bitcoin's price goes up and people start buying, that's good for Coinbase. If Bitcoin's price goes down and people start selling, that can also be good for Coinbase. Coinbase also has the ability to expand into other business segments or even innovate new ones.

Bitcoin, on the other hand, is an unproductive asset. It just sits there, and it can't create any value on its own. You can only make a return on your investment in Bitcoin if its price goes up, which is far from certain.

Coinbase is the leading U.S. cryptocurrency exchange and has established a strong reputation for security in an industry filled with risk. However, Coinbase's fortunes are deeply intertwined with the boom-and-bust cryptocurrency market. Transaction revenue is nearly half of Coinbase's total revenue, and some of its non-transaction revenue ultimately depends on sustained interest in cryptocurrency.

In summary, Coinbase has the advantage of being a business that can generate real returns and is not wholly dependent on the performance of any one cryptocurrency. Bitcoin, on the other hand, is a digital asset that may have a place in an investment portfolio but is subject to the risks of regulatory action and competition from newer digital currencies.

Coinbase's reputation

Coinbase has established itself as the leading US cryptocurrency exchange and has a strong reputation for security in an industry filled with risk. It has survived the collapse of its rivals, FTX and Binance, and has slowly but surely built a reputation as a trusted party in the crypto ecosystem. Coinbase operates by the letter of the law or challenges the law when it is unclear. This means that Coinbase will grow more slowly in a boom period, but it is less likely to go bust in down periods.

Coinbase is the largest US cryptocurrency exchange. It lists about 50 cryptocurrencies for trading, led by Bitcoin and Ethereum. Bitcoin is the largest digital coin by market value and was up about 155% in 2023, according to MarketWatch. Ethereum was up around 94% in 2023, as of December 29.

Coinbase's exchange business was being overrun by rivals in recent years as they offered more aggressive products and leverage. However, as we saw with FTX and Binance, aggression isn't always a good thing. During the past year, Coinbase has won back market share and currently holds the number two position globally behind Binance. Revenue in the exchange business jumped 64.3% to $529.3 million in the fourth quarter of 2023, and it looks like trading activity is picking up in 2024.

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