Yesterday, I wrote the bear case for Coinbase’s public listing on the Nasdaq — citing increased competition, a business that’s dependent on the bull market, and a singular point of failure in their trusted brand.
Today, I’m going to say “thanks, but no thanks” to all of those points, and list the bull case for the company going forward.
As I stated yesterday, Coinbase is a very rare, late stage company that is not only growing at a rapid clip, but also making a lot of money while doing it.
Earliest last week, Coinbase posted its Q1 2021 numbers ahead of its public listing:
- Trading Volume of $335 billion
- Total Revenue of approximately $1.8 billion
- Net Income of approximately $730 million to $800 million
Each of these metrics vastly surpassed Coinbase’s numbers for the entire year of 2020 — when the company brought in $1.2 billion revenue with a profit of $332 million on $193 billion of volume.
And while I can dive deeper into the financials of the company and talk about its competitive moat and project its future earnings…
Frankly all of those things bore me, and I’ll save that analysis to a r/wallstreetbets DD or a hot take thread from a VC twitter account.
Instead, I’m going to do something way way more fun and talk about three squishier bull arguments:
- The ethos of Coinbase and Web3
- Other growing revenue streams
- The potential for self-disruption and cannibalization
Coinbase and Web3
Hopefully by this point, you understand Web3 from the myriad of other posts I’ve made about it.
If not, no worries, here’s a quick primer:
Web3 is the next era of the internet founded on the values of being open, permissionless, and trustless; blockchains are one of the driving technological forces in the Web3 movement.
Before Web3, we had (and still have) Web 2.0.
Web 2.0 was mobile-first, social-first, and cloud-only — giving us interactive experiences, user-generated content, and marketplace economics that spawned us tech giants like Uber, Facebook and Twitter.
Coinbase — along with Binance — are THE poster children for Web3.
You can include Bitcoin and Ethereum on that list as well, but those are more technologies — whereas Coinbase and Binance are companies and entities with personalities assigned to them.
As the world becomes more involved in Web3, and more companies spring up to create a Web3-native Internet with decentralized primitives like identity, social networks, etc. — more and more people will learn about Web3 and will thus have Coinbase and Binance on the top of their minds.
In other words, investing Coinbase is investing in the inevitability and widespread impact of Web3.
Much like Google and Amazon were the bridge companies that connected the world from Web 1.0 to Web 2.0, Coinbase has the same role in bringing the world to Web3 — with potentially the same monetary value.
And yes, there were other Web 1.0 -> 2.0 bridge companies like Yahoo, but I believe that Coinbase is cut from the same cloth as a Google or Amazon rather than a Yahoo.
And I say that confidently because they are unafraid to innovate and disrupt themselves.
Other Revenue Streams
Just for the sake of completeness, I wanted to quickly point out that even if transaction fees (which constitute 85% of Coinbase’s current revenue base), there are other ways to monetize their transaction volume through a crypto version of PFOF a la Robinhood or through margin lending — like what Fidelity and other traditional brokerages do.
But I’d rather double click into another revenue lever of Coinbase’s — one that they call “Subscription and services revenue” in their S-1.
“Subscriptions and services” is revenue from Coinbase’s custody and staking services — meaning they charge for the service of securely holding and staking users’ and businesses’ crypto.
While this business only generates an order of magnitude smaller revenue than the transaction revenue, it’s growing rapidly.
This revenue stream is a function of Coinbase’s total assets under management. In 2020, AUM was $90.3 billion — a 500% increase from 2019. In contrast, trading volume was only up 200% in the same timeframe.
Currently in Q1 2021, Coinbase has $223 billion of AUM, representing 11.3% of the total crypto market cap — and more than doubling in the span of three months.
By staking these assets outright, Coinbase can make a 1–1.5% spread on what it receives in the form of staking rewards and what it has to pay out to users and businesses.
Brian Armstrong and the founding team are crypto natives. They founded the company in 2012 when Bitcoin was $12.
They had to fight tooth and nail to even have a bank account to their name — since no bank would work with a crypto startup at the time.
And nine years later, they created a company that became integral to the crypto ecosystem.
But they also know that the company they needed to create in 2012 will not be the company they need to be in order to be successful in 2030.
The world will look a lot different then, so the company must be a lot different as well.
I have a high level of conviction that any crypto-native team understands where the industry is moving.
Brian Armstrong and his team must be looking at DeFi and seeing it — not as a threat — but as the next opportunity to enter.
Because they realize that DeFi is serving the mission of open finance better than Coinbase ever can.
“Coinbase’s mission is to create an open financial system for the world. This means we want to use cryptocurrency to bring economic freedom to people all over the world.” — Brian Armstrong
In doing so, they will be cannibalizing their own, incredibly lucrative CEX business.
But in not doing so, they risk losing at the hands of a newer, leaner, and more capital efficient DEXes and other DeFi protocols.
1200 people can’t possibly compete against millions of developers and users that are building the Web3 Internet.
And Coinbase has already been dabbling in some bets in the DeFi space.
They have a mobile wallet with a great dApp explorer. So they’ve already been cannibalizing their own sales by directing traffic to DEXes.
They created WalletLink, an open source platform to easily sync crypto wallets with Web3 applications.
And they created Rosetta, an open source framework to build and deploy blockchains across an ecosystem of platforms — like Coinbase’s listings.
Purely conjecture, but I see a huge potential in Coinbase — leveraging its renowned brand for simplicity and trust — to become the one-stop shop for DeFi.
With the combination of its on-ramps (i.e., ability to transfer USD or other currencies from local banks onto Coinbase’s platform to convert to cryptocurrencies) and its staking service and its wallet, Coinbase can be quite powerful as a one-stop shop.
The flows is as follows:
- I easily deposit my USD from Chase onto Coinbase. I even can get the Instant Deposit feature + some additional margin from Coinbase so that I can instantly trade.
- I use Coinbase’s dApp explorer to find the best way to earn yield. Perhaps I give my money to a decentralized asset manager like Yearn, or I actively trade my money on a DEX like Uniswap.
- All of those strategies have some element of risk. I see, however, that Coinbase has a staking service that is basically risk-free. 4% p.a. risk free? I’ll do that.
In this scenario, Coinbase becomes less of a CEX and more of an aggregator of users to siphon into this own value-added services, or to DeFi protocols.
DeFi protocols become products that Coinbase can offer without having to build out its own capability — while still capturing some spread on connecting its users to those protocols.
It’s a much more capitally efficient and high operating leverage business than its existing form.
“Since its inception, Coinbase’s primary position in the industry has been that of an aggregator: accumulating users with its accessible product, then selling more advanced offerings over time.“ — Mario Gabriele, creator of the Generalist