- INVESTMENT IDEAS
Investment idea – Coinbase Global Inc.
- Coinbase is one of the world’s largest cryptocurrency exchanges.
- It has experienced meteoric growth as cryptocurrencies increasingly enter the mainstream.
- It is vulnerable to reductions in trading volumes, institutional sentiment towards crypto and a landmark lawsuit by the SEC.
- Coinbase may be interesting to those wanting general exposure to the industry.
Coinbase is a US cryptocurrency exchange. It was founded in 2012 by a former engineer at AirBnB, Brian Armstrong, and a former trader at Goldman Sachs, Fred Ehrsam. It is the second largest cryptocurrency exchange in the world by trading volume. It supports 83 tradable assets as well as 142 assets for custody and is available in over 100 countries. Coinbase has no company headquarters as a result of its remote working arrangements.
In a landmark moment for the crypto industry, it went public on the Nasdaq in April 2021 with the ticker COIN. In their latest quarter, they reported 68m verified users. Of these, the retail users who transacted on a monthly basis rose to 8.8m, up 44% from the previous quarter. They also count over 9,000 institutional clients. Coinbase currently holds $180bn worth of assets on its platform. This accounts for approximately 11% of the total market cap of all crypto assets.
Coinbase has experienced exponential growth. In Q2 2021, they executed $462bn worth of trades. This generated $2bn in net revenue, which represents a tenfold increase year-on-year. Net income rose over 50x and adjusted EBITDA over 19x in the same period. Maintaining this rate of growth is unlikely, but Coinbase still has upside potential as an increasing number of individuals and institutions enter the crypto space. Another potential growth driver is the company’s international expansion. They recently obtained licenses to operate in Japan and Germany.
Coinbase is also well positioned to handle any upcoming regulatory onslaught due to its substantial resources. In addition, it is gradually diversifying the sources of its trading income as Bitcoin’s dominance on the platform declines. Bitcoin’s share of total trading volume decreased from 57% to 24%, year-over-year, while Ethereum’s share rose from 15% to 26%. Other crypto assets accounted for the remaining 50%.
As Coinbase’s shareholder letter warns, their “business is inherently unpredictable.” Their business model is highly dependent on trading volumes. Volatility in the crypto markets, therefore, may be less of a threat to their financial success than hodling. Coinbase is also vulnerable to institutional sentiment as institutional trading accounted for 69% of their trading volume last quarter.
CNBC recently reported numerous alleged incidents of poor customer service following some users being hacked. This was not helped by Coinbase subsequently sending 125,000 mistaken security notifications. Hopefully, these are teething problems that will be resolved with improved security measures.
As governments tighten their regulatory grip on cryptocurrency, this could adversely impact Coinbase. The SEC’s recent action against Coinbase needs to be followed very carefully. Other risks include increasing competition and keeping up with the breakneck speed of innovation in the sector. Finally, if one listens to the doom-mongers, the entire industry may suddenly collapse, which could prove inconvenient.
Nothing in this article constitutes professional and/or financial advice. The content is provided exclusively for informational and/or educational purposes. Nothing is to be construed as an offer or a recommendation to buy or sell any type of asset. Seek independent professional advice in regards to financial, tax, legal and other matters.