Coinbase Global (NASDAQ:COIN) has been a fantastic growth story, as they have definitely taken advantage of first mover status in cryptocurrency trading. Founded in 2012, Coinbase is the top cryptocurrency exchange platform in the U.S., and COIN stock has tumultuously followed the trends in cryptocurrency prices. The company’s goal is to be a safe and regulation-focused entry point for retail investors and institutions into the evolving global cryptocurrency economy.
Unlike traditional brokerage firms, users can establish an account directly with the firm instead of using an intermediary but can also choose to have Coinbase to act as a custodian for their cryptocurrency. This is a feature that differs from more traditional market exchanges.
How Coinbase Makes Money
The company generates the majority of its revenue from commissions and transaction fees charged to its customers. However through acquisitions, COIN continues to expand into others areas such prime brokerage, data analytics, and collateralized lending.
The company claims to have 68 million verified users, 9,000 institutional customers, and 160,000 ecosystem partners in over 100 countries. During 2020, COIN processed over $193 billion in trading volume, generated $1.28 billion in total revenue and had over $90 billion of assets on its platforms. Revenues in 2021 are expected to grow to over $6.5 billion.
There are over 5,000 cryptocurrency assets in COIN’s charts, but users of the platform currently only have trading access for less than 2% of those assets. Many more cryptocurrencies will likely gain trading capabilities in future years.
The vast majority of COIN’s revenues are currently derived from its large retail base. However the company sees future growth opportunities from its institutional customers. The company claims to have 9,000 institutional customers as of Q2 2021 such hedge funds, investment managers and corporations.
Services offered to these institutional include the security infrastructure and trading tools necessary to transact in cryptocurrencies. Coinbase recently disclosed that 10% of the top 100 hedge funds are now their clients.
Market share gains are expected to grow going forward for Coinbase. Despite the company being an early adopter in crypto trading, trading volume on the site is only a fraction of the global crypto market, which comes to around $120 billion per day.
With Coinbase’s profitability and cash flow providing opportunities to invest in technology as well as marketing, the company should be able to gain substantial market share, particularly against lower capitalized companies.
International growth seems to be a bright spot for Coinbase. About 76% of their revenues are derived from the U.S., so penetrating international markets seems to be a great opportunity. The platform is already available in over 100 countries, a good sign, but each country has its own network issues, regulations and intricacies. Nonetheless, the growth runway appears to be real.
Headwinds for COIN Stock
As noted, Coinbase’s revenue growth has been very strong. Year-to-year net revenues jumped 792% in Q1 2021 and accelerated to 1,040% in Q2 2021. Revenues are segmented into transaction revenue which represent 95% of net revenues and subscription and services revenue for the remaining 5%. Revenues are derived from the mix of crypto trading volume, total users, frequency, and type of transaction. During 2019, COIN had $80 billion in total trading volume, which grew 142% to $193 billion in 2020.
Remember, though, that these recent growth numbers were primarily a result of having the first-mover advantage. Although 2021 is expected to be another fabulous growth year for revenues, 2022 is expected to show declining growth rates according to consensus estimates. After that, revenues and EBITDA are expected to grow at low double-digit rates. Competition is a key factor in this stabilization of growth rates.
If cryptocurrencies like Bitcoin become mainstream payment methods, that will come with intense regulation by every government on earth. As the cryptocurrency asset class becomes widely adopted, all sorts of regulatory frameworks are likely to surface on many levels.
There are inherent risks in this type of asset, perhaps more than traditional stocks and bonds, so this will not go unnoticed by those in charge. Also, most of Coinbase’s institutional clients are already highly regulated financial institutions, which means these companies will be subject to even more oversight and examination as they interact with Coinbase. This new regulatory environment may or may not slow down their growth rates, but it will certainly raise their costs.
Coinbase supports over 80 crypto assets, but its revenues are still very sensitive to the prices of Bitcoin (CCC:BTC-USD) and Ethereum (CCC:ETH-USD) which represents around 24% and 26% of trading volume and 47% and 24% of its assets on COIN’s platform, respectively.
Despite all the growth opportunity hoopla, COIN stock will still be driven by the price of Bitcoin in the near-term. In fact, the company recently announced that it is doubling down on that concept by investing $500 million in cryptocurrencies as an investment on its balance sheet and allocating 10% of profits to add to this position. So if you buy COIN stock, you should be aware that you are essentially making a very big side bet on the world’s largest cryptocurrency and its counter parts.
I predict that the prominent cryptocurrency will be extremely volatile for at least a decade. Some even think Bitcoin could someday be worth zero.
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On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other investment related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University.
