Coinbase: Business model and latest IPO
Hi, this is Viram from Vested and today we are going to talk about Coinbase, a very interesting cryptocurrency company that’s going public on the Nasdaq on 14th April at a valuation of $68 billion.
First up, let’s look at what is it that exactly Coinbase does
So, Coinbase is the largest cryptocurrency exchange in the US. It allows its users to invest, spend, use and earn over 25 cryptocurrencies. But one important thing is that Coinbase is actually at the center of a future emerging trend. A trend that will see the world digitize, tokenize and invest across any and every physical asset.
Over the last couple of years, Coinbase has also been growing its B2B business wherein it provides hedge funds and money managers access to cryptocurrency trading as well as its custodial technologies.
Next up, let’s look at how it all started?
So Coinbase actually started its journey by trying to make Bitcoin a digital currency and it got its initial traction when it signed up a few large businesses to actually accept bitcoin as currency.
However, overtime this really hasn’t really panned out. Bitcoin is way too volatile and slow to be able to replace money. For example, on Bitcoin you can do about 7 transactions per second. Now if you compare that to Visa’s network you can do 24,000 transactions per second on Visa’s network.
But what instead has happened is that Bitcoin has emerged as a store of value, and that store of value allows for buying and selling and speculative trading and that is the trend that Coinbase has taken advantage of.
Next up let’s look at how actually Coinbase makes money
Their business model is quite simple. The majority of the revenue comes from crypto currency transactions. Whenever you place a transaction on Coinbase, it basically makes money from two ways:
The first is a Margin Fee. It basically adds a fee on top of the buy/sell rate going on for a cryptocurrency.
The second is a Percentage Commission Fee, which it charges on every trade that somebody places.
So combined both of these earn Coinbase 0.59% of the total cryptocurrency trading volume that happens on Coinbase.
Now while this transaction-based revenue is good, it also has its downsides, and the downside is that it’s highly dependent on the price of the cryptocurrency and the cryptocurrency market. Especially the largest cryptocurrency in the world, Bitcoin.
For example, In 2017 Coinbase posted a revenue of $1 Billion and this was the year when the cryptocurrency bubble was in full force. In 2018 as the bubble burst, Coinbase revenue also dropped equivalently. In 2018 they posted a revenue of $520 million only compared to $1 billion dollar in the previous year. And in 2019 they again posted a revenue of just $530 million.
However the price of Bitcoin in 2020 started creeping up and that led again to a significant increase in the Coinbase revenue. In 2020 it posted a revenue of $1.3 Billion along with a handsome profit of more than $300million.
So what this means, is that as an investor you should be prepared to face share price volatility as the prices of underlying cryptocurrencies change.
One interesting fact about Coinbase is that it has acquired 90 percent of its users until now without using any sales or marketing. So, going forward there’s a lot of new users that it can acquire as it starts spending across marketing channels.
Last but not the least we looked at how Coinbase faces revenue volatility. There’s also another risk Coinbase faces which is regulatory risk, given that cryptocurrencies are very new.
So that is all we wanted to cover about Coinbase.
The company can be a great way for you to get exposure to the growing cryptocurrency market, however there are a lot of risks that come with it.
Stay tuned for more!