Coinbase: A Worthy Investment Or A Risky Gamble?

Coinbase is a cryptocurrency exchange that allows users to buy popular coins like Bitcoin, Ethereum, and Solana. It is one of the most popular cryptocurrency exchanges, with tens of millions of users. Coinbase's revenue is primarily generated from transaction fees, so its performance is closely tied to the volatility of the cryptocurrency market. Its stock is valued at nine times this year's sales and 19 times its adjusted EBITDA, which seems reasonable relative to its long-term growth potential. However, Coinbase's stock will rise and fall with the broader cryptocurrency market. Therefore, it may be a good investment option for those who are bullish on cryptocurrencies.

Coinbase's revenue and growth rates

In 2017, Coinbase added several new coins to its exchange and saw its revenue approach $1 billion. The following year, in 2021, Coinbase's revenue surged by 513.66%, reaching $7.839 billion. This surge was attributed to factors such as stimulus checks, social media buzz, and a fear of missing out (FOMO) that drove more investors to the cryptocurrency market.

However, in 2022, Coinbase's revenue took a hit, declining by 59.25% to $3.194 billion. This drop was due to rising interest rates that burst the crypto bubble. The decline continued into 2023, with a further 2.69% revenue drop to $3.108 billion. Despite this, Coinbase remained resilient, and in the second half of 2023, its net revenue surpassed that of the entire year of 2022, coinciding with the recovery of Bitcoin's price.

Coinbase's revenue for the quarter ending June 30, 2024, was $1.450 billion, marking a 104.78% increase year-over-year. This growth is a positive sign for the company, and it expects its subscription and services revenue to increase by 3%-17% sequentially and 57%-79% year-over-year. Analysts predict that Coinbase's full-year revenue for 2024 will rise by 77% to $5.5 billion.

The crypto winter

The "crypto winter" refers to a prolonged period of pricing weakness in the cryptocurrency market. The phrase is likely derived from the popular TV series "Game of Thrones", where the motto of the House of Stark, "Winter is Coming", served as a warning of impending conflict.

The 2022 crypto winter was triggered by surging US inflation, which prompted the Federal Reserve to aggressively raise interest rates. This led to investors selling risk assets, such as cryptocurrencies, and exposing over-leveraged crypto lenders, exchanges, and hedge funds. The collapse of cryptocurrencies Luna and TerraUSD in May 2022 set off a domino effect, with crypto lenders Voyager Digital and Celsius Network filing for bankruptcy soon after. This was followed by the downfall of FTX and the arrest of its founder, Sam Bankman-Fried. Crypto lender BlockFi also filed for bankruptcy in November 2022.

During a crypto winter, investors may experience a period of extreme value loss, with crypto markets stagnating or deflating considerably. This can be unnerving for crypto investors, and there may be a sense of impending chaos or uncertainty. However, crypto winters have always come to an end, and they are not caused by bear markets or stock market cycles.

While the crypto winter creates challenges, it also has a silver lining. Leading cryptocurrencies like Bitcoin have demonstrated resilience, and downturns purge the industry of its weakest links, including mismanaged exchanges and nefarious actors.

Coinbase's subscription services

Coinbase is the world's largest cryptocurrency exchange platform. In 2021, the company started testing a subscription service called Coinbase One, which offers commission-free trades, higher staking rewards, priority support, and other perks. Coinbase One is a response to competitors like Robinhood, which offers a similar subscription service without trading fees.

Coinbase One provides members with exclusive benefits, including zero-fee trading and priority phone support. The subscription also includes enhanced account protection, reimbursing users up to $1 million if their accounts are compromised and funds are stolen.

The monthly subscription fee for Coinbase One is currently unknown, and the service is only available to a small number of users. Coinbase has stated that it is still in the early stages of testing and will shape the final product based on user feedback.

Coinbase's subscription and services revenue is expected to grow by 3%-17% sequentially and 57%-79% year over year, assuming crypto asset prices remain stable. Analysts predict that Coinbase's revenue will rise by 77% to $5.5 billion in 2024, with its adjusted EBITDA jumping 181% to $2.7 billion.

The SEC lawsuit

On June 6, 2023, the Securities and Exchange Commission (SEC) charged Coinbase with operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency. The SEC also charged Coinbase with failing to register the offer and sale of its crypto asset staking-as-a-service program.

The SEC's complaint alleged that since at least 2019, Coinbase has made billions of dollars unlawfully by facilitating the buying and selling of crypto asset securities. The complaint also alleged that Coinbase intertwines the traditional services of an exchange, broker, and clearing agency without registering any of those functions, as required by law. Through these unregistered services, Coinbase allegedly:

• Provides a marketplace and brings together the orders for securities of multiple buyers and sellers using established, non-discretionary methods under which such orders interact.
• Engages in the business of effecting securities transactions for the accounts of Coinbase customers.
• Provides facilities for the comparison of data regarding the terms of settlement of crypto asset securities transactions, serves as an intermediary in settling transactions in crypto asset securities by Coinbase customers, and acts as a securities depository.

The SEC further alleged that Coinbase's failure to register has deprived investors of significant protections, including inspection by the SEC, record-keeping requirements, and safeguards against conflicts of interest, among others.

In addition to the unregistered exchange, broker, and clearing agency charges, the SEC also alleged that Coinbase has been engaging in an unregistered securities offering through its staking-as-a-service program. This program allows customers to earn profits from the "proof of stake" mechanisms of certain blockchains and Coinbase's efforts. Through this staking program, Coinbase allegedly pools each type of customer's stakeable crypto assets, stakes the pool to perform blockchain transaction validation services, and provides a portion of the rewards generated from this work to its customers whose assets were part of the pool.

Coinbase failed to register its offers and sales of this staking program as required by law. The SEC Chair, Gary Gensler, stated that "Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions." He added that "Coinbase’s alleged failures deprive investors of critical protections, including rulebooks that prevent fraud and manipulation, proper disclosure, safeguards against conflicts of interest, and routine inspection by the SEC."

On March 27, 2024, Judge Katherine Failla of the US District Court for the Southern District of New York ruled in favor of the SEC on all but one argument raised in Coinbase's motion for judgment on the pleadings. The ruling found that the Commission adequately alleged that the tokens at issue and Coinbase's staking services are securities, and that Coinbase has been operating as an unregistered broker, exchange, and clearing agency. The ruling allowed the SEC's claim that Coinbase engaged in unregistered sales of securities to proceed to trial.

Coinbase's fees

Coinbase offers a free cash and Hosted Cryptocurrency balance service, allowing users to store their cash and supported cryptocurrency at no cost. Users can transfer crypto from one Coinbase user's primary balance to another user's primary balance without any charges. However, Coinbase does charge fees for various other services, which are outlined below:

Network Transaction Fees

Coinbase pays network transaction fees for transactions on cryptocurrency networks (i.e. transfers of cryptocurrency off the Coinbase platform). When users send cryptocurrency from their Coinbase wallet to another wallet, Coinbase charges a fee based on its estimate of the prevailing network fees for a standalone wallet-to-wallet transfer. The final fee paid by Coinbase may differ from the estimated fee due to factors such as batching transactions or changes in network congestion levels. All fees are disclosed at the time of the transaction.

Lightning Network Processing Fee

The Lightning Network is a micropayment network that enables the transfer of Bitcoin without incurring the transaction fee associated with the Bitcoin blockchain. When users send Bitcoin from Coinbase via the Lightning Network, a processing fee equal to 0.1% of the amount of Bitcoin transferred is charged.

Adding Cash and Cashing Out

When adding cash or cashing out, users may be charged a fee depending on the payment method selected. It is important to review the fee details before completing the transaction to understand any associated charges.

Trading Fees and Spread

When buying, selling, or converting cryptocurrencies on Coinbase, fees are charged. These fees are calculated at the time the order is placed and can be influenced by factors such as the chosen payment method, order size, market conditions, jurisdictional location, asset, and other costs incurred to facilitate the transaction. Before submitting a transaction, users can view the fees in the trade preview screen. It is important to note that fees may vary for similar transactions. By completing an order, users agree to pay the applicable Coinbase fees for that transaction.

Coinbase includes a spread in the quoted price when placing simple buy and sell orders. The spread is also included in the exchange rate when converting from one cryptocurrency to another. The spread helps increase the likelihood of a successful transaction and allows Coinbase to lock in the quoted price temporarily while processing the order. Coinbase may retain any excess spread from a transaction, and the spread may vary for similar transactions.

Coinbase One Subscription

Coinbase One is a subscription product that offers fee-free buying and selling of cryptocurrencies, with certain limitations. Members may still have a spread included in their quoted prices. Changes to trading fees and spreads are occasionally tested and may be rolled out across different regions, assets, order sizes, and types of trades.

Coinbase shows users the total amount, including spread and fees, each time they preview a trade and afterward in their transaction history. Spending with the Coinbase Card incurs no transaction fees.

Staking and Unstaking

There is no fee to stake or unstake. Coinbase takes a commission based on the rewards received from the network. The standard commission is 35% for ADA, ATOM, AVAX, DOT, MATIC, SOL, and XTZ. For ADA, ATOM, DOT, SOL, and XTZ, the commission is 26.3% for eligible Coinbase One members. The APY and rewards shown in the account always reflect the earnings received after the commission.

Recovery of Unsupported Cryptocurrency

If a user sends an unsupported cryptocurrency to their Coinbase account, it may be eligible for recovery. Coinbase will charge a network fee for the recovery attempt. For recoveries with an estimated value of over $100, a 5% recovery fee is charged on the amount over $100. The estimated value of the recovery may differ from the actual market value of the recovery.

Frequently asked questions