Coinbase Stock: A Smart Investment Decision?

Coinbase is a major US-based cryptocurrency exchange that went public in 2021, marking a milestone in the world of cryptocurrencies as the first pure-play crypto trading company to list on a US exchange. Coinbase stock gives investors exposure to the cryptocurrency market without directly investing in cryptocurrency. However, the company's stock price has been on a downward trajectory since its IPO, and the cryptocurrency market has been battered. Coinbase's fee structure has also been criticised for being complex and expensive. So, is Coinbase stock a good investment?

Coinbase's IPO

Coinbase chose to go public via a direct listing on the Nasdaq stock exchange—an unusual transaction where no new shares are issued or sold; they simply start trading. This was a popular choice for well-funded Silicon Valley start-ups that don't need to raise cash from public market investors. In a direct listing, there is no pre-set price decided by investment bankers, and the market on the initial trading day influences the starting price. On the day of initial trading, there is a 10-minute "display only" period in which interested buyers enter their bids, and sellers (Coinbase's existing shareholders) enter their offers.

Coinbase's direct listing did not fill its coffers with cash, but it made it easier for the company to raise capital going forward. Direct listings are also more volatile than IPOs in initial trading because they do not count on the support of large institutions, which would commit to buying a certain size tranche in an IPO.

Some crypto fans see Coinbase's IPO as another example of digital currency becoming increasingly legitimized. However, investing in Coinbase comes with a catch: if you believe in the applications and value of a decentralised public ledger, do you have confidence in Coinbase, a centralised company?

Coinbase's valuation

Coinbase's unique position as a leading cryptocurrency exchange has contributed to its high valuation. It is the first pure-play crypto trading company to list on a U.S. exchange, and its user base has grown significantly since its inception in 2012. As of 2021, Coinbase served 43 million retail users, 7,000 institutions, and 115,000 ecosystem partners in over 100 countries.

The company's revenue streams, including transaction fees, subscriptions, and services, have also played a role in its valuation. In 2020, transactions generated 86% of total revenue, with the remaining 14% coming from subscriptions and services. Coinbase's revenue more than doubled from $7 billion in 2018 to $1.3 billion in 2020, showcasing its rapid growth.

However, it is important to note that Coinbase's valuation and share price have been subject to fluctuations due to the volatile nature of the crypto market. The company's financial performance is heavily dependent on the demand for cryptocurrencies, and a slowdown in this demand could impact its revenue.

Overall, Coinbase's valuation has been influenced by its position as a leading crypto exchange, its global user base, and its revenue streams. Despite fluctuations in the crypto market, Coinbase's growth and position in the industry have contributed to its high valuation.

Coinbase's business model

Coinbase is a marketplace for buying and selling cryptocurrencies. The company's business model is centred around the fees it charges for trading cryptocurrencies. Coinbase's revenue model primarily moves around three main streams: transaction revenues, subscription and services revenue, and other revenues (crypto-asset sales revenue and corporate interest income).

Coinbase's commission system is tiered, which means its fees differ based on location and volume of transactions. The company breaks it down as follows:

• If the total transaction amount is less than or equal to $10, the fee is $0.99 | €0,99 | £0,99
• If the total transaction amount is more than $10 but less than or equal to $25, the fee is $1.49 | €1,49 | £1,49
• If the total transaction amount is more than $25 but less than or equal to $50, the fee is $1.99 | €1,99 | £1,99
• If the total transaction amount is more than $50 but less than or equal to $200, the fee is $2.99 | €2,99 | £2,99

Coinbase also offers a variety of other products to both consumers and businesses. The company's own cryptocurrency, USD Coin (USDC), is pegged to the US dollar, meaning 1 USDC can always be redeemed for $1.00. Coinbase users can buy and sell the USD Coin within the app and on over 10 other trading platforms.

Coinbase also offers a physical VISA debit card called the Coinbase Card. The card is accompanied by an app that allows users to track their spending. They can use the card to spend their amassed cryptocurrencies in the physical world.

Under Coinbase Commerce, the company also offers tools for other companies to accept digital currency payments. Similar to other payment providers like Stripe or PayPal, Coinbase has built plugins for any major eCommerce platform, including Shopify, WooCommerce, or Magento.

Coinbase Custody is a service that holds securities on behalf of other clients. The tool can be directly integrated with Coinbase Pro and Prime while offering a variety of features, such as financial reporting tools, audited statements, capital insurance, or four-hour withdrawal SLAs.

Coinbase also offers Coinbase Earn, a service that allows users to take courses about new cryptocurrencies, such as Dai or EOS. Upon completion of a course, users will receive these currencies as a reward.

The bulk of the revenue Coinbase generates still comes from the fees it charges for buying and selling cryptocurrencies. In its S-1, Coinbase stated that fees make up over 90% of its revenue.

Coinbase's competitors

Coinbase is a major US-based cryptocurrency exchange and the first crypto company to go public. It is also the largest US cryptocurrency exchange, listing about 50 cryptocurrencies for trading. Coinbase stock gives investors exposure to the cryptocurrency market without directly investing in cryptocurrency.

However, Coinbase has faced competition from other cryptocurrency exchanges, including Binance, Kraken, Crypto.com, Gemini, Bitstamp, and Kucoin. These exchanges offer various features such as low fees, a wide range of coins, and user-friendly platforms. Some users have also expressed frustration with Coinbase's customer service, slow transaction times, and other technical issues, leading them to seek alternatives.

Binance, in particular, has grown explosively since its launch in China four years ago, offering more than 350 coins and generating spot trading volume ten times that of Coinbase. Kraken and Crypto.com are also mentioned frequently as alternatives, although users have noted that Crypto.com has a massive spread and high fees.

Coinbase's direct listing in April 2021 was a significant moment, putting crypto firmly in the mainstream. However, as the industry matures and the mainstream warms up to crypto, the competition among exchanges is becoming more intense, and Coinbase's position as a leader is being challenged.

Coinbase's future

Coinbase is a major US-based cryptocurrency exchange that went public in 2021, marking a milestone in the world of cryptocurrencies as the first pure-play crypto trading company to list on a US exchange.

However, Coinbase's future success is heavily dependent on the performance of the crypto market. The company's revenue is largely transactional, meaning a slowdown in demand for cryptocurrencies could significantly impact its financial performance. Coinbase's fees are also a drawback, with a complex fee structure that can be challenging for beginners to understand.

Looking ahead, Coinbase has significant opportunities for growth. The company has a global reach, serving 43 million retail users, 7,000 institutions, and 115,000 ecosystem partners across 100 countries. Coinbase can also add new crypto assets to its platform, with plans to expand its services.

In summary, Coinbase's future is promising, given its strong position in the crypto market and global presence. However, its success is closely tied to the volatile crypto space, and its complex fee structure may deter some users.

Frequently asked questions