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Hello readers,
If you look outside of crypto, we’ve seen very little innovation in the arena of finance over the last 20 years — largely due to regulatory capture and closed, proprietary data networks. Of course, the permissionless, open-source nature of public blockchains has brought with it a Cambrian explosion of innovation & experiments — but we’ve yet to see this truly impact traditional finance and the general public.
We believe this will change dramatically over the next 5-10 years.
And we think Coinbase is positioned to be a major player.
In this week's report, we analyze how Coinbase is integrating throughout the Web3 tech stack and diversifying its revenue sources with the goal of answering the following question:
Is Coinbase on track to become a trillion-dollar company?
Disclaimer: Views expressed are the author’s personal views and should not be relied upon as investment, legal, tax, business, or any other advice.
Let’s go.
Data: Coinbase 2024 10k, Q2-21 10Q
Coinbase is starting to look like a bank. The exchange has over $400b of customer assets on its platform (12% of the total crypto market cap today). They’ve monetized this via staking ($215m in revenue in Q4) and via interest & fee income ($65m). This was nearly 13% of their top-line revenue in Q4. These categories represented just 2.8% of revenues in Q2-21 (the company’s best quarter prior to Q4).
Coinbase is starting to look like a payments company. They did $225m in stablecoin revenue in Q4 — which was almost 10% of top-line revenue. Stablecoins represented just 1.58% of revenue in Q2-21.
Coinbase is starting to look like a financial infrastructure company. Base, the Ethereum L2 did $85 million in user fees in 2024 and is the fastest-growing L2 across all key metrics. Base didn’t exist in 2021.
Coinbase has turned on a subscription model via Coinbase One. Users get reduced trading fees, tax support, priority customer support, account protection, boosted USDC rewards, gasless transactions on Base, and more. It has over 600,000 paying customers.
We haven’t even gotten to Coinbase Wallet or Coinbase Commerce — which could ultimately open up a massive data monetization opportunity similar to Google Search + make Coinbase the go-to support team to onboard other businesses (brick & mortar + internet companies) for crypto payments.
Data: Coinbase 2024 10k, Q2-21 10Q
Coinbase was able to grow its revenue and expand into several new business lines over the last few years — while keeping operating costs below ‘21 levels. That’s impressive.
Key areas of focus (and spending) in 2024: sales & marketing programs, legal (included in SG&A), and technology development.
We think Coinbase learned a valuable lesson in the ‘21 bull market when they over-hired staff (many coming from TradFi) before ultimately laying off over 20% in June of ‘22 (1,100 employees). They went on to lay off another 950 employees in January of ‘23. They’ve been shipping non-stop since this period while completely revamping their hiring processes.
Data: Coinbase 2024 10k, Q2-21 10Q
Coinbase has built up a considerable war chest over the last few years. It’s now sitting on $8.5 billion of cash.
The company currently has $4.3b of outstanding long-term debt. $1.3b is .5% convertible notes due in ‘26. $1b is 3.3% of senior notes due in ‘28. $1.3b is .25% convertible senior notes due in 2030. $.7b is 3.6% of senior notes due in 2031.
Despite growing long-term debt by 207%, total liabilities are up only 10% compared to ‘21 — largely due to a $3b reduction in custodial funds due to customers.
Data: Coinbase 2024 10k, Q2-21 10Q
Retail trading volumes were down 35% from the prior high-water mark. Meanwhile, institutional volumes were up 9%. Why is retail volume down? We think many users are now onboarding directly via self-custody wallets — on Solana. But also on Base/Coinbase. In many ways, Coinbase has disrupted itself via its L2. We cover this in detail later in the report.
Ethereum volume was actually higher than BTC back in ‘21 — making up 26% of total trading volume in the 2nd quarter. ETH was just 10% of trading volume in Q4.
As noted, Coinbase has over $400b of assets on the platform today — up 124% from ‘21. They are monetizing these customer deposits via staking, stablecoins, and interest fees.
Coinbase had 9.7 million monthly transacting users in Q4. According to senior leadership, almost 50% were new or “resurrected” users (those who came back after years of inactivity).
Data: Coinbase 2024 10k, The DeFi Report
We think Coinbase has a clear path to a $1b + valuation across eight to ten business lines.
The base case above is our current forecast for the projected valuations by 2030. Please note that it does not include Coinbase Commerce (services to help businesses offer stablecoin payments), interest income, or gains on crypto asset holdings (approx. $1b of holdings today).
Investors should be clear-eyed about the fact that Coinbase is disrupting itself in many ways via its L2. In essence, Coinbase Exchange users are being routed onto the L2, where they are more likely to utilize Coinbase Wallet across DeFi and other applications. This is where Coinbase can monetize its other business lines, including stablecoins/payments, tokenization, Coinbase Commerce, and Coinbase Wallet.
For this reason, while we expect the crypto trading business to remain profitable, we anticipate the lowest growth and revenue multiple for this part of the business.
While not disclosed as far as we can tell (Circle is still private), we think Coinbase owns roughly 50% of Circle based on reported revenues and outstanding USDC supply. We anticipate the stablecoin business to grow exponentially and be larger than retail crypto trading by 2030. We also believe tokenization/RWAs could be a massive growth channel. The adoption of the Base L2 is critical to their success here. That said, we think both categories will be quite competitive (which we cover later in the report).
Our Base L2 valuation is purely based on cash flows. In other words, we did not factor in the potential for Base to launch a token and gain a monetary premium as an add-on with the cash flow valuation. Arbitrum currently has an FDV of $4.4b for reference.
We did not factor in any interest or “banking service revenue” besides staking. With that said, we think Coinbase may offer bank-like loans collateralized by crypto assets such as BTC/ETH/SOL in the future.
Coinbase has yet to offer indices products, paid research, or other sell-side offerings — which could be bundled into its custody/prime brokerage offering.
Coinbase Wallet is the big wild card that nobody is talking about. Given the volume of increasingly rich data flowing through crypto wallets, we think there could potentially be a data monetization opportunity here — because wallets + onchain data may ultimately become the “perfect cookie” (think “Google Search” type data for wallets). We think there will be lots of interest in this type of data in the future. We also think it’s possible that DeFi protocols will pay for “asset flow” from Coinbase/Coinbase Wallet — which could be tracked and paid for via Coinbase Wallet.
Coinbase Ventures has invested in over 500 web3 start-ups. We believe they can leverage their VC arm to seed developers on Base L2, and also to gather learnings throughout the ecosystem. Not to mention, it’s possible they’ve seeded multiple unicorns.
Investors should be mindful of the “analogy trap” when forecasting the valuation potential of new technologies and industries. Uber is instructive here as some investors thought it was ridiculous for Uber to have a higher valuation than the entire cab industry before they went public. Of course, Uber didn’t own any cars or permits, but it had network effects. These network effects ultimately led to the creation of entirely new markets while redefining personal transportation. We think Coinbase could ultimately follow a similar track.
Amazon launched in 1994 as an online bookstore. By 1998, they had aggressively expanded beyond books — to music, DVDs, movies, home improvement products, etc. By 2000, they had opened their own marketplace — enabling third-party orders.
But they never stopped innovating. Kindle. Amazon Prime. Streaming services. Original content. The products and services never stop. Along the way, Amazon started offering web2 infrastructure services to others. In other words, Amazon realized it could take its learnings as a first mover and help others build internet native products and services.
12 years after launching the online book store, AWS was born — a cloud computing platform serving as infrastructure for web2 app developers, enterprises, and governments. AWS does about $90 billion in revenue today — representing about 16% of top-line revenue for Amazon.
We think Coinbase’s growth arc is taking a similar shape to Amazon’s.
Coinbase launched as a Bitcoin-only exchange in 2012. The second asset listing didn’t hit the exchange until 2015, when Ethereum launched.
Since that time, we’ve seen a frenzy of activity within web3 — with Coinbase sitting at the epicenter of it all. That said, up until Coinbase’s IPO in ‘21, retail trading fees dominated the business model — making up 87% of top-line revenue in Q2-21.
As demonstrated, Coinbase has since diversified its business lines while integrating throughout the tech stack via Coinbase Wallet and Base L2.
Somewhat lost in the news cycle last week was the announcement that the SEC has dropped its lawsuit against Coinbase — the first time in history that the SEC has withdrawn a lawsuit without imposing fines or requiring a settlement.
Moving forward, we anticipate the firm having a privileged position in terms of its ability to influence forthcoming policy.
While this may not result in a clear “regulatory moat,” it does remove a cloud of uncertainty for investors while giving Coinbase a seat at the table with regulators moving forward.
Data: Yahoo Finance
Per Brian Armstrong's comments in the Q4 earnings call, Coinbase is projecting 10% of global GDP to run on public blockchains by 2030 — significantly increasing its addressable market.
They want to capture as much of this as possible, but they also view themselves as a key service provider to TradFi firms that will be entering the space.
Similar to how Amazon grew along with the internet/web2, Coinbase is positioning itself to do the same by owning both the application layer + the infrastructure/platform (via Base, stablecoins, tokenization) for others to onboard web3.
For example, Coinbase recently rolled out “Coinbase Commerce” — a service that allows businesses to accept crypto payments using Coinbase Wallet.
With that said, there are significant threats to consider. For example:
What role will Coinbase/Circle play if banks in the US launch their own stablecoins (similar to how they have their own money market products today)?
What role will Coinbase Exchange play if firms such as Fidelity expand their brokerage service into the long list of crypto assets? More competition is coming with the announcement yesterday that Citadel Securities will be entering crypto trading.
Will the growth of trading and payments on Base L2 offset potential losses from retail trading on Coinbase Exchange?
As traditional finance firms start tokenizing existing equities and bonds, will Coinbase play the role of service provider? Will clients want to partner and use Base? Or will they instead seek to build their own L2s?
In summary, the market structure is going to evolve as regulatory clarity comes to crypto. Coinbase has a big lead but will still need to navigate the coming sea change.
We’d be remiss not to acknowledge Robinhood’s growing presence in crypto.
Data: Robinhood Q2-21 10Q, Q4-24 10K
Robinhood launched 1 year after Coinbase — offering (primarily) millennial users a superior “no fee” trading experience in the traditional markets via its user-friendly mobile application.
They broke into crypto in ‘20, growing like a weed during the mania of ‘21 due to their slick UX and young user base. In fact, the rise of Dogecoin in Q2-21 was largely driven by retail users on Robinhood. The firm did $233m in crypto trading revenue that quarter.
While their user base has dropped since the mania of ‘21, revenues are up (both TradFi + crypto).
In addition to crypto trading, Robinhood has now rolled out a wallet (integration with MetaMask) while announcing a partnership with Arbitrum last year with the intent of offering DeFi services such as staking and yield farming.
In June of last year, the firm acquired BitStamp — a global crypto exchange with 4.4 million users.
What’s next? We’re watching to see how Robinhood continues to integrate into the web3 stack. Will they launch an L2 so that they can own infrastructure for tokenized trading of stocks? Will they launch a stablecoin? Will they offer staking services to app users?
In summary, we’re keeping an eye on Robinhood — which is the fastest-moving TradFi firm in crypto right now and Coinbase’s primary competition (along with web3 exchanges such as Binance and Kraken).
In summary, Coinbase has:
Diversified its revenue lines while integrating throughout the tech stack. We think Coinbase has several $1b + lines of revenue in the making as a result.
A strong balance sheet (over $8b in cash on hand).
Managed its OPEX spending well and has learned from past hiring mistakes.
A privileged position that could help them influence new regulations for the industry.
Strong leadership and access to some of the best talent in the industry.
Meanwhile, Coinbase shares still tend to trade with the price of BTC — revealing a more simplistic view of the firm from the broader market.
We spend a lot of time thinking about where value will ultimately accrue throughout the web3 tech stack. As time goes on, it’s becoming increasingly clear that having a sticky relationship with end-users and the ability to integrate throughout the stack is the golden ticket.
COIN is one of the few ways for investors to express a broad bet on the growth of web3 and the onchain economy.
Unsure if you should buy BTC, ETH, or SOL? Wondering if you should have access to L2s? Stablecoins? Tokenization? DeFi? Wallet infrastructure?
You get it all with COIN.
Of course, that doesn’t mean now is the time to buy the stock. That’s your decision to make (it’s currently 24% off the November high, trading at a 23.9 P/E). But we wanted to provide this analysis now so that you can decide if you want to put COIN on your bear market shopping list.
Will Coinbase ultimately reach a $1 trillion valuation over the next decade or so?
We think it has the best shot of any publicly traded crypto company out there right now.
Thanks for reading.
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Disclaimer: Individuals have unique circumstances, goals, and risk tolerances, so you should consult a certified investment professional and/or do your own diligence before making investment decisions. The author is not an investment advisor and may hold positions in the assets covered. Certified professionals can provide individualized investment advice tailored to your unique situation. This research report is for general educational purposes only, is not individualized, and as such should not be construed as investment advice. The content contained in the report is derived from both publicly available information as well as proprietary data sources. All information presented and sources are believed to be reliable as of the date first published. Any opinions expressed in the report are based on the information cited herein as of the date of the publication. Although The DeFi Report and the author believe the information presented is substantially accurate in all material respects and does not omit to state material facts necessary to make the statements herein not misleading, all information and materials in the report are provided on an “as is” and “as available” basis, without warranty or condition of any kind either expressed or implied.