Before the haters begin raiding the comments section, no I'm not a Bitcoin hater. I'm fully in support of Bitcoin (BTC-USD) and Ethereum (ETH-USD), and crypto as a viable currency, which is actually why I'm so attracted to Coinbase (NASDAQ:COIN) in the first place.
The purpose of this article is to highlight the value of having Coinbase in your portfolio, and why it's a safer play for those wanting a piece of the crypto/blockchain pie. And yes, I get the irony that Coinbase's success heavily depends on people buying Bitcoin in the first place, but more on that later.
What is Coinbase?
In brief, Coinbase serves as a platform for users to easily buy and store cryptocurrency. Despite being around for over a decade, Bitcoin was largely inaccessible and deemed risky to touch due to the 'no-regulation' intricate structure of blockchain. Even if your average Joe wanted to buy Bitcoin or other cryptocurrencies, it was hard to determine which platforms were trustworthy.
Furthermore, encrypted crypto banks forced users to jump through hoops to even access their accounts. Consequently, stories of users being locked out of their multi-million dollar worth accounts began plaguing the internet, further deterring people from jumping aboard the crypto-train.
Coinbase eliminates uncertainty and pessimism in the crypto market. Much like Robinhood appeals to young, first-time investors, Coinbase is newbie-friendly. Coinbase specializes in taking complex blockchain and crypto systems and making it simple for newcomers.
According to their website, Coinbase "charges a spread of about one-half of one percent (0.50%) for cryptocurrency purchases and cryptocurrency sales." The more transactions made on the platform means more revenue for the company.
Image source: Coinbase S-1
Coinbase is keen on building their customer base and increasing trust among them. As this increases, Coinbase is also expanding the assets available on their platform, which in turn leads to further innovation in bringing new products for their customers. Coinbase's full potential remains untapped.
Coinbase numbers
This is where things get extremely exciting. First-quarter revenue climbed nine-fold from last year, jumping from $190.6 million to $1.8 billion. Net income also skyrocketed from $32 million to between $730 million and $800 million over the same period. Simply put, these YoY numbers are insane. In just one quarter, Coinbase earned more than in the entirety of 2020.
Image Source: CNBC
This monumental growth was not just restricted to the most recent years. Revenue in 2016 was just $16 million but in 2017, revenue shot up to $927 million. Yes, revenue dipped in 2018 to $520 million and $483 million in 2019, but these numbers are still incredibly impressive.
Image Source: Business of Apps
Profitability reflected a similar pattern over the years, with 2018 and 2019 dipping in to the red. Nonetheless, 2020 saw profits of $322 million and $765 million by Q1 in 2021.
Image Source: Business of Apps
Some may regard these numbers as volatile, but Coinbase's growth in users has been headed in only one direction: stratospherically upwards. In 2018, monthly active users sat at 0.7 million. Users then climbed to 1 million in the next year, 2.8 in 2020 and to 6.1 million by 2021.
Image Source: Business of Apps
Other areas of consistent growth are Coinbase's AUM and transaction volumes. Assets under management increased from $25 billion in 2019 to $90 billion in 2021. Transaction volume also rose from $135 billion in 2017 to $335 billion in 2021.
Image Source: Business of Apps
To put this into perspective, leading competitor Binance's $35 billion AUM is only a fraction of Coinbase's $223 billion AUM.
Why so volatile?
Coinbase's numbers are certainly impressive but what accounts for its volatility in 2018 and 2019? This directly links to interest in cryptocurrency. More interest in Bitcoin and other cryptocurrencies means more interest in Coinbase. Looking at the price volatility of Bitcoin, it's clear just how correlated the cryptocurrency is to Coinbase's revenue. In 2018 Bitcoin peaked at around $15,000 before plunging closer to below $4000 in 2019.
Image Source: Coindesk
Another reason for Coinbase's weaker performance in 2018 and 2019 is that institutional investor interest in cryptocurrency was low during that time. Just $11 billion of institutional investor money was being spent compared to $45 billion retail. This sank to $3 billion and $4 billion respectively in Q1 2019. Fast forward to Q4 2020, institutional investors spent $57 billion on transactions compared to $32 billion retail. Institutional investors have now overtaken retail investors in cryptocurrency interest. This is promising looking ahead.
Image Source: Coindesk
Valuation
At the time of writing, Coinbase's stock price is $291.6, giving it a market cap of $54.2 billion. On its IPO day, Coinbase's stock price hit $429.54 before settling at $328.28. This rather large drop 32% is reflective of the recent decline in cryptocurrency value, as well as IPO over-excitement. Bitcoin's price hit an all-time high of over $63,000 around mid-April but has since plunged to sub-$50,000 (it's gradually increasing at the time of writing). Sentiment towards Bitcoin is heavily correlated with that of Coinbase.
Image Source: Coindesk
However, at below $300 or even around that mark, Coinbase is valued at a strong buy in my opinion. A $60 billion valuation for Coinbase is certainly reasonable, considering its position as the leading crypto trading platform. Coinbase super-bulls were expecting a $100 billion valuation ahead of their IPO, which is ludicrous right now, but is not unachievable in the future.
Coinbase's future
Blockchain's decentralizing capabilities and the disruption of traditional transaction systems is truly remarkable. Throughout the pandemic, physical cash transactions have been discouraged and dependence of digital payments has given the world a glimpse into what a digital monetary universe would look like. Cryptocurrencies push this further and offers a viable and more transparent form of payment that strips power from traditional banks.
Coinbase not only facilitates this transition from traditional to digital payments, but also offers a gateway into an entire alternative digital economy. In a similar fashion to banks, Coinbase could offer interest payments, investments lending programs. It could even expand its base beyond crypto and into new blockchain-based assets such as NFTs. Coinbase would play an integral part in this new digital world.
Coinbase has already grown at an immense pace, but even more excitingly, it has even further to grow.
Coinbase vs. Bitcoin
So if you're bullish on cryptocurrency and blockchain why choose Coinbase over Bitcoin? Well, unlike Bitcoin, Coinbase has fundamental and intrinsic value. Yes, its business structure at the moment is heavily dependent on Bitcoin, but at least analysts can value Coinbase based on their assets. Bitcoin is more volatile than Coinbase, which can lead to higher profits, but Coinbase is a much safer play.
Additionally, betting on Coinbase is a bet on the role of cryptocurrencies as a whole, rather than just one type of cryptocurrency. If the interest in Ethereum increases, the price of Bitcoin could be negatively impacted, but Coinbase would reap the benefits of Ethereum transactions on its platform. Furthermore, as already discussed, Coinbase can offer so much more than just cryptocurrency plays.
Coinbase is a safer play for the risk averse. For those with a bigger risk appetite, Bitcoin is your play.
Coinbase risk
The main attraction of Coinbase's is its immersion in decentralization. This requires users to fully trust Coinbase's system but their accountability is questionable. Unlike traditional banks which are required by governments to have a reserve if things go pear shaped, Coinbase is playing somewhat in the Wild West. It's believed that Coinbase would give users time to withdraw their money and assets if things were to go south for the company, but the legalities of the crypto world are still being discussed.
A greater risk is if Coinbase gets hacked. Due to its decentralized nature, if a significant hack were to occur, its users' assets would be at risk more so than a traditional bank. In order to mitigate such risk, Coinbase stores 98% of its customers' funds offline. The company is also innovating various methods including verification mechanisms to secure access to their customers' funds.
As mentioned, volatility is a significant risk for Coinbase's success. However, as interest in cryptocurrencies increases and the embrace of blockchain warms, this volatility should settle in the long run.
Conclusion
At a time when cryptocurrencies are gaining immense traction and interest, Coinbase is positioned perfectly. It plays into the strong belief that cryptocurrencies are not just a fad, but a revolutionary form of money structures. Through its simple UI and noob-friendly approach, Coinbase opens the door for newcomers to enter the ever-expanding world of digital currency. In the future, Coinbase can bring aboard other digital assets, offering its customers a wide breadth of opportunities to diversify their wealth digitally. At below or around $300 a share, Coinbase is definitely worth picking up. Bitcoin could see higher returns but those whose risk appetite is lower should seriously consider Coinbase.
This article was written by
Cohan Chew
797
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I'm a long-term investor - managing my own wealth whilst managing my own online publication company.
Analyst’s Disclosure: I am/we are long COIN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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