Bitcoin (CRYPTO:BTC) has been on fire, whether you like it or not. Bitcoin has risen fourteen-fold from a low of $4,106 during the coronavirus market meltdown to over $58,000. Following COVID-19, an increasing number of notable investors see Bitcoin as a hedge against monetary inflation. Tesla and Square have both joined the Bitcoin bandwagon. The rise of bitcoin has paved the way for cryptocurrency exchange Coinbase to go public at a valuation of roughly $100 billion. Given that Coinbase was valued at $8 billion in October 2018, this is astounding.
Coinbase’s listing is a significant step toward mainstream crypto adoption for Bitcoin holders. Its debut on the stock market will also bring attention to one of today’s most contentious investment topics. Here are three things you should know about Coinbase ahead of this highly anticipated event.
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1. An early adopter of the cryptocurrency economy
Coinbase was founded in 2012 to allow individuals and businesses to send and receive Bitcoin from anywhere on the planet. Since then, it has grown into a one-stop shop for cryptocurrency finance.
Coinbase offers “crypto-based products” for staking, spending, saving, and borrowing, all using crypto assets, in addition to its popular trading platform. As a result, the company “powers the crypto economy,” a new, open financial system based on Bitcoin, Ethereum (CRYPTO:ETH), and tens of thousands of other crypto assets.
Customers can purchase and sell over 45 different types of crypto assets on Coinbase, as well as send these crypto assets to other Coinbase users. Customers can fund Coinbase Cards, which are debit cards that can be used to pay at any merchant that takes Visa, with their crypto assets. They can even put certain crypto assets to work by holding them in their Coinbase account and collecting interest.
Bitcoin was not nearly as well-known when Coinbase first debuted. Coinbase’s risky bet on the cryptocurrency Wild West has paid off. Coinbase currently supports 43 million retail customers, 7,000 institutions, and 115,000 “ecosystem partners,” which include merchants, developers, and asset issuers, according to its IPO prospectus. Coinbase has customers in over 100 countries, giving it a truly worldwide reach.
2. How does Coinbase earn money?
Transaction fees, as well as subscriptions and services, are how Coinbase makes money. Transactions will account for 86% of overall income in 2020, while subscriptions and services will account for 4%.
A transaction fee is charged every time a user buys, sells, or withdraws assets from Coinbase. These fees are determined by the price and quantity of crypto assets used in the transaction. As a result, transaction revenue is determined by Coinbase’s trading volume and the volatility of cryptoasset prices. Consider the year 2020. Trading volume increased by 142 percent, resulting in a 137 percent increase in transaction revenue year over year. While this is impressive growth, investors can expect revenue from this category to swing wildly, depending on the vagaries of the unpredictable crypto market.
The subscription and service business at Coinbase, on the other hand, provides a more consistent revenue source. The corporation makes money by charging fees for the crypto assets it has in its custody and by validating crypto transactions. License revenue comes from the company’s data analytics product, which is used by law enforcement agencies and financial organizations to monitor blockchain transactions. While this business only accounts for 4% of Coinbase’s total revenue, it is expanding at a rapid rate of 126 percent per year. Coinbase will need to expand this company in order to have a more consistent stream of revenue.
3. Coinbase is still in its infancy.
Assets on Coinbase’s platform increased more than tenfold between 2018 and 2020, from $7 billion to $90 billion. Coinbase’s revenue more than doubled to $1.3 billion in 2020, as more investors poured money into Bitcoin.
While Coinbase’s recent growth has been extraordinary, what lies ahead is much more so.
As of December 31, 2020, the overall market cap of crypto assets was $782 billion, according to its IPO prospectus. That’s less than 1% of the global financial system, which is worth hundreds of trillions of dollars. The crypto economy should only increase as the technology that powers crypto assets evolves and new use cases arise. Coinbase is well-positioned to ride this once-in-a-lifetime boom, with a 12 percent market share of all crypto assets.
Coinbase can accomplish this in a variety of ways. To begin with, it has a lot of space to expand retail accounts from its present 43 million user base. The company envisions “everyone with a smartphone” as a potential customer, resulting in a 3.5 billion-person addressable market.
Coinbase has the ability to add additional cryptocurrency assets to its platform. According to CoinMarketCap data, it now supports roughly 90 crypto assets for trade or custody, or about 1% of the 8,859 crypto assets available. Furthermore, it may introduce new services, such as a means for developers to integrate payments into their applications, thereby increasing the volume of crypto transactions.
While Coinbase has a lot of potential, the path ahead isn’t entirely apparent. The expansion of the crypto economy will be determined by a variety of factors, including adoption and regulation, as well as technological advancements. Furthermore, the majority of Coinbase’s revenue is still transactional. This means that a drop in Bitcoin’s — or other cryptocurrencies’ — demand might have a significant influence on its financial performance.
The price of bitcoin may have increased by 300 percent in 2020, but no one knows what will happen in 2021. Likewise, there’s a chance Coinbase’s future growth won’t be as strong as it was last year. Investors could expect a range of earnings results.
Coinbase has a long path ahead of it.
Coinbase hopes to take advantage of its large head start to become an even greater player as interest in crypto assets grows. It will go public at a good time, with a market capitalization greater than that of the New York Stock Exchange’s parent company, Intercontinental Exchange (NYSE:ICE), Nasdaq, and the London Stock Exchange.
Coinbase, on the other hand, is forging new ground in a nascent sector. Technology shifts, competition concerns, and regulatory issues might all jeopardize the company’s long-term growth prospects. Coinbase’s investors may find themselves on a roller-coaster ride unless they have a crystal ball. For the time being, it’s probably best for most of us to remain on the sidelines.
This post is the author’s own view, which may differ from a Motley Fool premium advice service’s “official” recommendation position. We’re a mishmash! Questioning an investing theory, even our own, encourages us to think critically about investing and make decisions that will make us smarter, happier, and wealthier.
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