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In 2021, crypto’s most important company, Coinbase, went public at a $100 billion valuation, with a trading price around $430.
A few months after its IPO, the crypto market came crashing down and so did the $COIN stock.
Despite launching at a valuation higher than Shopify’s, Airbnb’s, and Paypal’s current respective market caps, $COIN tumbled as low as ~$35, to a sub $10 billion market cap.
This tremendous dump and heavy correlation to the crypto market has left many investors wondering: Is $COIN actually a good investment?
I’ve always been certain that it was a good investment. I even shared this message, telling PRO subscribers I was buying $COIN back in July, when it traded around $60.
It’s funny how I predicted $ETH to outperform $COIN, yet $ETH is up only 70% YTD and Coinbase is up 250% YTD. 🤯
Can't get 'em all right I guess.
But in all seriousness, I wish I would’ve told you more. I wish I sent you this report back then in July because $COIN has been on a complete tear since. Sorry, I didn’t.
$COIN is up 100% in the last 6 months and 250% since the beginning of the year.
It has completely outperformed most other stocks and even most of crypto, including $BTC. Insane.
But despite its massive surge, there’s still a long way to go until all-time highs. $COIN needs to pump another 233% to get there.
But will it get there? I think so…
And will it continue to outperform $ETH? Probably not…
So why am I even writing this report? Why analyze a stock when buying $ETH is simply a better idea?
Here’s why.
Firstly, because $COIN is a stock, I can hold it in my Tax-Free Savings Account (TFSA) and pay 0 taxes on the gains that $COIN generates for me.
Secondly, I see $COIN acting as an ETF of the crypto market. When the markets are bullish, so is $COIN, and because I’m confident we’re entering a bull market, I see $COIN as a very good investment, especially for institutional investors who want to get exposure but can’t buy the tokens because of regulation.
So let’s dive deep into the fascinating business of Coinbase and see if this thing is a good future investment.
P.S. - I know some of you think you’ve missed the train because $COIN surged so much lately, but stick around until the end of this report. I’m sharing some technical analysis predicting what’s likely to happen next with its price. Hint: it’s kinda bullish. 🐂
But first, I want to start with the argument against Coinbase. What are the skeptics saying about $COIN and do they have a point?
When Coinbase went public, many tradfi investors argued that it’s not a good investment because of how dependent Coinbase was on the performance of the crypto market.
In 2021 (bull market), Coinbase generated a profit of $3.6 billion, while during the bear market of 2022, it lost $2.6 billion.
The reason for this is due to the nature of Coinbase’s business. They mainly generate revenues from trading fees, taking a cut from every swap that occurs on their exchange.
When they IPO’d back in 2021, they heavily relied on these fees, making up about 88% of Coinbase's ~$7.4 billion in revenue.
So when Coinbase went public, many were wondering if they could diversify their revenues to not depend solely on trading fees. If that were to happen, Coinbase would become a great investment.
Well, in 2022, the amount representing transaction fees from total revenues decreased to 74% ($2.35 billion from $3.2 billion yearly revenue).
And today, according to Coinbase’s latest (Q3) earnings report, only 42.8% of their total revenues come from transaction fees.
The reason for this decrease in ratio was led by the creation of 5 different (soon to be 7) income streams, which makes $COIN much more appealing than when it first IPO’d. Despite this, its price is down by 66% from those levels.
So by reading this report, you’re very early.
Let me break down all of Coinbase’s revenue streams for you and let’s see just why $COIN is such a good business.
Coinbase charges 0.5% to 4.5% – depending on the cryptocurrency, transaction size and payment method – on each swap happening on their platform.
In 2021, Coinbase’s main revenue driver was platform fees. And that was dangerous for 2 reasons.
Firstly, because of competition.
Coinbase is charging significantly more than its competitors (Binance, Kraken etc…). This raises concerns about market share, which could be eaten up by others offering the same services at lower fees.
Secondly, because nobody swaps tokens when prices are down.
During bear markets, people sit patiently in stablecoins (USDC/USDT) or blue chips like Bitcoin and Ethereum.
During bull markets, when every other shitcoin goes up 10x every day, people tend to FOMO and they continuously swap between tokens to not miss the next big pump.
In other words, Coinbase makes money from fees during bull markets but struggles during bear markets.
It’s why they made $3.6 billion in profit in 2021 and lost $2.6 billion in 2022.
That’s clearly not sustainable. As a business, you must be making consistent profits year after year to remain relevant.
This is even more true for public companies that have shareholders to please.
So after going public, Coinbase went to work to create additional income streams.
To understand how Coinbase makes money from $USDC, you must understand the business model of $USDC.
Here it goes…
When you swap your dollars for $USDC, Coinbase mints 1 $USDC for every $USD you give them.
You’re happy because you get onchain dollars which you can use in web3, while they take your dollars and invest them in short-term treasuries.
Short-term treasuries are low-risk, government-issued debt securities with maturities of one year or less, offering a safe investment option with modest returns.
Lately, they've been offering roughly a 5% yield, as you can see on the chart below.
These are also very liquid, meaning that at any point, Coinbase can exit if they need liquidity, so there’s no real danger in doing this.
And by investing all of these dollars into these treasuries, Coinbase keeps all of the yield that’s generated.
Initially, this was the business model of Circle (founder of $USDC). However, they’ve partnered with Coinbase in an agreement that allowed both parties to mint $USDC for users.
The $USDC minted via Coinbase generated yield that Coinbase kept for themselves.
The $USDC minted via Circle’s platform generated yield that Circle kept for themselves.
This has been a very profitable business for both parties for a long time. For example, in the first half of 2023, Circle generated $779 million in revenue.
But recently, Circle and Coinbase decided to switch up their agreement.
Now, Coinbase owns a part of Circle, and gains exposure by owning the company rather than minting $USDC for users and benefitting from the yield.
The reason they did this was to simplify things. This allows Circle to focus on their business of minting the stablecoin and investing the dollars to make yield, while Coinbase can shift their focus on other things while owning a hefty chunk of Circle.
How much Coinbase owns of Circle remains undisclosed but I’m guessing it’s a significant piece.
While all of this sounds exciting, it raises some concerns about long-term durability.
This model depends heavily on interest rates.
Interest rate = Yield
Interest rate = Yield
Since the FED has started to increase interest rates (2021), Coinbase and Circle have been able to profit more and more off of this.
However, rates are paused and likely to go lower in the coming months to years, which means that Coinbase is exposed on this part.
But here’s where the power of diversification comes in. While falling interest rates are bad for yield generation, it is generally VERY good for crypto prices.
If crypto prices are going up, so is trading (remember income stream #1?), which means Coinbase benefits either way from a double-edged sword.
If you own $ETH and would like to stake it, here are your options:
By owning 32 $ETH or more, you can run your own node. This is called solo-staking and it requires you to be somewhat technical.
If you’re not that person, you can go the easier route and let a staking service provider like Lido, Rocketpool, Coinbase or Binance stake your $ETH for you.
But there’s a catch. They charge a fee.
The decentralized protocols (Lido & Rocketpool) take about 15% from the rewards generated from staking.
However, Coinbase charges 25%. Why that much? Because they can.
The mainstream crowd, aka newbies and institutions don’t mind paying a premium fee if that means not needing to interact with onchain applications (Lido & RocketPool) that are more difficult to use.
Coinbase is providing an ease of mind regarding convenience and security, which is why they can charge a premium.
They’re also a publicly listed company, which means people trust them and will use them regardless of the fees they decide to charge.
Right now, 4 million $ETH – $8.25 billion – is being staked via Coinbase.
Assuming that these numbers remain the same, based on the current $ETH staking rate of 3.8%, they’re making around $313 million.
Out of that, they keep 25% (reward fees), which translates to a $78 million yearly revenue.
A spot Bitcoin ETF is coming. Right now, there are a total of 12 applications pending with the SEC.
Coinbase has been chosen as the custodian for 9 out of the 12 prospective issuers of Bitcoin ETFs in the U.S.
This includes firms like BlackRock, Franklin Templeton, and WisdomTree.
How much Coinbase will earn by custodying Bitcoin for ETF providers is still unclear because we have no idea what fees they’re going to charge.
But one thing’s for sure. Coinbase has invested massively in protecting assets for both institutions and retail investors. Because of their efforts, they're now the go-to choice for the biggest firms in terms of custody of assets.
Regardless of the revenue that they’ll generate from this business, the fact that the likes of BlackRock are trusting Coinbase is huge for their reputation, which helps them grow other parts of the business.
Coinbase is looking to join the derivatives market to fill the void of bankrupt FTX & Mt.Gox.
This is Coinbase’s extra ‘soon to be’ income stream, as they’re considering launching an off-shore platform, allowing users to trade crypto with leverage.
While we don’t condone the use of leverage in crypto, and recommend sticking to spot trading instead, we can’t overlook the fact that the derivatives sector is by far the biggest one in crypto.
It is 3x the size of the spot market.
Also, during bull markets, the volumes are totally nuts. Check this out. In just 1 day (2021), Binance, Bitmex, Bybit & a few other exchanges providing futures trading options, recorded over $440 billion. IN 1 DAY.
In terms of revenue, Binance for example is charging a 0.05% fee from the volume settled on its platform.
While we don’t know exactly how much Binance is making per month (they’re numbers aren’t public), a couple of Coinbase researchers went on the Bankless podcast recently and did some calculations. Here’s what they said.
“If we assume that Coinbase will charge a premium fee of 0.1% instead of Binance’s 0.05% (like they often do for all their products)...
And if we also assume that Coinbase would reach to settle just 25% of Binance’s market share in the derivatives market…
Then Coinbase would make around $3 billion per year. That’s double their current revenues.”
Now, I’m not saying this will happen. I have no idea what market share they will gain or what fees they’ll charge. They’re yet to launch this service.
But it’s coming and the potential is huge.
From these 5 revenue streams that I’ve outlined so far, Coinbase sounds a lot like a bank, doesn’t it?
They take your money and invest it into short-term bonds and treasuries and keep all that yield.
They charge huge fees by staking your $ETH for you.
They custody assets (Bitcoin) for institutions and charge fees
They take fees for providing financial services (futures trading) for you
Well, plot twist, it’s true. Coinbase is very much a bank in many ways. And the same is true for all other centralized exchanges, which is why we always urge you to move your assets onchain, in a non-custodial wallet.
With that said, Coinbase understands that the world is migrating onchain, which is why they’re also building onchain products.
Coinbase Wallet is one of those products – a non-custodial web3 wallet which you can use to interact with the onchain world.
At the moment, Coinbase doesn’t charge any fees , however, in their terms & conditions it is stated that they “reserve the right to change these fees at their discretion and will disclose the amount of fees for the applicable service at the time you access it.”
I imagine that at some point in the future, Coinbase will add a swap fee similar to Metamask, but that’ll likely be when millions of people start using this app.
So the Coinbase Wallet is another ‘soon to be monetized’ product, just like the derivatives platform discussed earlier.
At the moment, the role of the Coinbase Wallet is much more important. It’s the portal to the onchain world for Coinbase users. The portal to Base. 👇
In July, Coinbase launched their own Ethereum layer 2 blockchain; Base.
Fast forward to today (4 months later) and Base has accomplished:
2.6 million users…
71.5 million transactions…
Total valued locked of $467 million…
And a whopping $5.5 million in profit for Base, which counts towards Coinbase’s total revenue.
Now keep in mind that an extra $5.5 million for Coinbase is insignificant. It’s less than 1% of their total revenue of $623 million in Q3 2023.
However, remember how value flows onchain. We showed this to you in our PRO report on FriendTech.
Base made $410k profit (from Aug 10 - Sept 13th) from FriendTech alone – that’s just 1 application.
From now on, Base will generate an income from all future applications that are built on top of Base, which will likely be in the thousands in a few years.
Base’s current numbers are still very low because they’re still very early. But despite that, I think that Coinbase wants to have Base as one of their products to use as a hedge against their centralized services.
At the moment, Coinbase is a very centralized entity, providing many different centralized products, as I showed above.
But what happens when people want to move onchain? How can Coinbase capitalize on that?
Well, by having a web3 wallet and a fast and cheap blockchain, they can send anyone onchain, and still benefit from their activity.
Essentially, Coinbase is expanding their ecosystem and basket of products to satisfy the needs of those who wish to migrate onchain.
The worst case scenario for a centralized exchange like Coinbase is for people to buy crypto on the platform and immediately move it off to a self-custodial wallet
When this happens, it’s leaking value out of the exchange. Remember, because Coinbase works similarly to a bank, they benefit when you hold your assets on their platform.
If you move it off, they only benefit from the swap fees that you paid initially to swap your FIAT into crypto.
They don't like that. To fix it, centralized exchanges (Coinbase, OKX, Kraken & Binance) have started to build the onchain infrastructure (blockchains) upon which developers can build apps, which generate value back to the blockchain.
It’s why Coinbase now has both a web3 wallet & an L2 (Base).
Now, they can satisfy multiple needs, for both retail investors and institutional players and monetize both.
Newbies enter crypto: Coinbase makes money off platform fees.
Users want onchain dollars ($USDC)? Circle makes a 5% yield on that and Coinbase owns Circle.
Users want to stake $ETH? Coinbase simplifies it for them in exchange for 25% reward fees.
Institutions want to launch Spot ETFs? Coinbase can custody their assets.
Institutions want to move into crypto? Coinbase will sell them crypto & hold it for them.
People want to move onchain? Coinbase has built a web3 wallet with great UX that you can use.
You want to interact with apps onchain? You can on Base & Coinbase makes money with every transaction you take onchain.
If you’re just starting off there’s no easier way to experience the onchain world than through Coinbase.
So all in all, Coinbase has built a really robust ecosystem, which they use to monetize in many different ways.
Now let’s go back to the main, burning question…
I think so!
I think it’s set up to be one of the most important companies in crypto. I see what Coinbase is to crypto very similar to what Apple was for personal computers and the internet.
In terms of an investment, here’s the TL;DR as to why I think it’s a winner:
Firstly, Coinbase has now built 5 sustainable income streams that can help them thrive regardless of market conditions.
Secondly, Coinbase acts like a proxy – an ETF if you will – to the wider crypto market. If the market does good, so does $COIN and vice versa.
If you think crypto is here to stay, then Coinbase will succeed.
Thirdly, $COIN is an easier way for anyone to get exposure to crypto without buying tokens.
“Okay Kyle, I get it… You’re bullish on $COIN. But should I still buy it at current prices? It went up 250% this year…”
It’s hard to say what happens in the short term after a run-up like that. A pullback or a pause are definitely in the cards. But from the medium to long-term, here’s what I’m seeing:
First up, $COIN is currently breaking out of a 1.5-year inverse head and shoulders chart pattern.
The technicals on this suggest a $200 price point, not to mention there is no resistance until $207.
$200 $COIN is coming…
Now, I’m not saying $COIN is going to $200 tomorrow. I’m just sharing with you what the technical analysis shows.
Secondly, as I’ve shared in the introduction, Coinbase is 233% from all time highs. I have no doubts that $COIN will reach these levels again and go even beyond.
So, to conclude, I’ve said that $COIN was a good buy when it was $60 and I’m saying it again at these levels.
I see Coinbase positioning itself as the number 1 company for the new onchain world.
Just how Apple did for the online world, Coinbase is building the UX and tools (CEX, Staking, Derivatives, L2, Wallet etc…) for everything in the onchain world and are monetizing each product successfully.
It can only get better from here. Super bullish. LFG.
Disclosure: I own $COIN
Thanks for reading. And remember, you're strong, you’re powerful, you’re alpha! ❤️
Kyle Reidhead
Founder of Web3 Academy and Impact3
Find him on Twitter
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