The case for Coinbase
Recently, I had a conversation about the paradox that some of the existing crypto platforms face. They are a space for clients to purchase and trade decentralized crypto currencies, but have to be centralized and adhere to the rules and regulations of centralized governments and financial institutions. We want to believe that they are all about decentralization, but in order to function on this present world, they have to operate in a centralized manner. On April 14th, Coinbase, an American company founded in 2012 by Brian Armstrong and Fred Ehrsam, which operates a cryptocurrency exchange platform that operates remote-first without an official physical headquarters went public on the centralized Nasdaq exchange via a direct stock listing. Coinbase the largest cryptocurrency exchange in the United States by trading volume, priced their IPO to the public at $350 dollars per share, a substantially high amount when compared to the recently, technology companies that have gone public.
Facebook, which enjoys 1.5 billion daily visitors went public in 2012 for $38 and days after that it dropped to $17 a share. More recently, Airbnb which operates an online marketplace for lodging, primarily homestays for vacation rentals, and tourism activities had to lay off 25% of its workers due to the pandemic impact on traveling. They went public in December of 2020 for $146 a share. Door dash, an online food ordering and food delivery platform based in San Francisco, it has a 56% market share, it is the largest food delivery company in the United States and also has a 60% market share in the convenience delivery category. DoorDash priced its initial public offering at $102 a share, in early December of last year, above an already increased price range of $90 to $95 a share. Many of the tech companies that have gone public the past year have yet to turn a profit. Coinbase does not fall into the profit-less category, when they initially filed its Form S-1 with the SEC, it said it took home a $322 million profit in 2020, with over $1.2 billion in revenue. That was in February. Last week, the company announced profits between $730 and $800 million on revenue of around $1.8 billion in Q1 of 2021 alone.
The fact that it’s turning a profit at all means it’s doing better than a lot of tech unicorns like Uber, Lyft, DoorDash, and Snap—and it's why many analysts say the stock will be a hit. The company has 1,700 employees, 56 million verified users, and saw 6.1 million monthly active users in Q1, a huge spike compared to 2.8 million in Q4 2020. The spike is definitely due to the cryptocurrency price increase and mass adoption we have seen the past few months. Between January and March, the price of bitcoin — the most popular crypto coin — jumped from less that $30,000 to more than $58,000, while the price of ethereum more than doubled. Exactly a year ago, Bitcoin was trading at around $6k (clocking an almost 900% increase during the last year).
“We have seen all-time high crypto asset prices drive elevated levels of user activity and trading volume on our platform,” Coinbase chief financial officer Alesia Haas said.
The main difference between a crypto bank like Coinbase and other tech companies, is that it is clear where their main source of revenue comes from. Most of it derives from transaction fees, but they also bring a lot of cheese from custody, staking fees, and so on, which is largely driven by assets under management (AUM). Other revenue is when they sell their treasury of BTC, ETH, and other cryptocurrencies. As blockchain technology evolves, these exchanges have the option to create many other sources of income such as; loans, yield farming, DeFi, and maybe even from creating NFT platforms and smart contract services… Sky is the limit.
A question I have been getting a lot lately is: Should I buy shares of Coinbase or Crypto? Well, i guess it depends, if you want to diversify, it may be a good idea to buy both, shares and crypto, but it also depends on what your feelings are with regards to crypto and with regards to buying shares in the stock market. In that sense, centralized crypto platforms that allow the trading of decentralized crypto in the stock market is a win-win for all. It adds to the popularity of crypto, more mass adoption is inevitable, it adds to the validity of cryptocurrencies. On the other side of the equation, investors that are still wary of cryptos are able to still invest in industry by way of companies like Coinbase.
The future is definitely bright as there are many other crypto exchanges that offer more services than Coinbase or more coins to be traded. Binance is the perfect example of an exchange which has a stronger global presence and offer a larger number of cryptos for purchase and trade. Binance and Coinbase are both massive exchanges. While Coinbase appears to have a much larger appeal for retail investors, Binance has dominated the global institutional trading market. Many exchanges will follow the steps of Coinbase and will choose to go public.
Projecting forward, Binance is on a path to overtaking Coinbase in a big way. While Coinbase has a clear hold on the US market, this will become an exciting battle zone for these two exchanges as Binance.US competes with the established US exchanges.
This is an ever changing space, we shall see what tomorrow brings.