In this issue of Moneyball Investing I’ll be covering Coinbase (COIN). Coinbase went public in April 2021 and it has been a wild ride since it hit the tape. Let’s dig into who Coinbase is, what is does, and what the future may hold.
What is Coinbase?
Today, basic financial services such as investing and payments are oftentimes cumbersome, inaccessible, expensive, and regionally isolated. The legacy financial system is struggling to keep pace with the velocity of technological advancements and a global digitally interconnected society. Coinbase is a natively digital financial infrastructure to power the cryptoeconomy.
In the early days of the internet, Google democratized access to information through its user-friendly search engine, enabling virtually any user with an internet connection to discover the world’s information (just ask Jeeves 😛). Similarly, Coinbase is democratizing access to the cryptoeconomy by enabling anyone with an internet connection to easily and securely invest and use crypto assets.
Coinbase draws retail users, institutions, and ecosystem partners to its platform, creating a powerful flywheel. Retail users and institutions store assets and drive liquidity, enabling Coinbase to expand the depth and breadth of crypto assets offered on the platform. Additionally, this liquidity allows Coinbase to launch new, innovative products and services that attract new customers (we’ll get to this in more detail in a bit).
In turn, the Company has scaled dramatically since it was founded in 2012 and has established itself as the de facto leader powering the cryptoeconomy. This brand equity has fueled a myriad of ecosystem partners to connect with Coinbase’s millions of customers, further enhancing the value of the platform.
Coinbase Products
Coinbase’s transaction volume is derived from two sources: Retail Investors and Institutional Investors. For Retail investors, the Company aims to serve as the primary financial account for a users crypto needs. For Institutions, Coinbase provides hedge funds, money managers, and corporations a one-stop shop for accessing crypto markets through advanced trading and custody technology.
Invest: Coinbase’s interface is very easy to use. The Company has done an outstanding job simplifying the process to invest in crypto. As you can see below, simply choose which cryptocurrency you want to buy or sell, select your bank, and finalize the transaction.
Coinbase Card: Coinbase Card allows U.S. users to convert and spend crypto from their Coinbase account at more than 70 million merchants where Visa debit cards are accepted, and earn crypto rewards from partners on their spending.
Send & Receive: Coinbase’s payment products allow users to send crypto assets to other users on its platform using their email, phone number, or a crypto wallet address.
Stake: Certain blockchain protocols rely on staking, which is an alternative way to validate blockchain transactions. Network participants can designate a certain amount of their crypto assets on the network as a stake (similar to a security deposit) to validate transactions and get rewarded in kind from the network.
Store: A huge concern for crypto market investors is safe storage for their crypto assets. Coinbase addresses this concern with a highly secure cold storage solution made available through its custodian, which offers institutional grade audits, governance, digital key management, and physical security. Coinbase’s solution is vertically integrated with its investing platform, providing institutions with access to liquidity and trading services.
Financial Results
The image below is Coinbase’s P&L for the full year 2020 and YTD 2021 results through Q2. As we can see, the Company generated nearly $1 billion of trading volume in 2020. This equated to $1.1 billion in Transaction Revenue, and $1.3 billion in Total Revenue.
What I find very interesting is that this growth came with minimal outbound sales and marketing effort, as the Company only spent $57 million in Sales & Marketing in 2020. Additionally, we can see that the majority of Transaction Revenue has come from increasing the Retail user base.
2020 was a year of meme stocks, “to the moon” aspirations, and casino-style speculations fueled by WallStreetBets. Many of these wagers revolved around Bitcoin and other cryptocurrencies. There is no doubt that Coinbase directly benefitted from this dynamic.
Taking a deeper look into the financials, we can see that just in the first quarter of 2021, Coinbase surpassed its Total Transaction Revenue when compared to all of 2020. This was driven by astronomical growth in the retail user base. Although we are in the very early innings of crypto, these results serve as indicators that more and more people are embracing crypto as an asset class and are turning to the Coinbase platform. Moreover, given the growth in Subscription Services and Other Revenue, the user-friendly interface that Coinbase offers is propelling network effects as more people take advantage of the suite of services offered. This allows Coinbase to keep Sales & Marketing costs low as a percentage of Revenue and re-invest into the technology side of the business, providing users a better experience.
NFT Landscape and Potential Growth Drivers
Although meme stocks haven’t disappeared, 2021 has introduced a new asset that has garnered a lot of attention: Non-Fungible Tokens, or NFTs for short.
An NFT is a unique unit of data stored on a blockchain. NFTs can be used to represent easily-reproducible items such as photos, videos, audio, and other types of digital files as unique items.
When you buy a cryptocurrency such as Bitcoin or ETH, it’s sort of like buying a stock in that it sits in an account and fluctuates in value. However, there is very little that you can do with it besides using it as a means to purchase something. NFTs are another component of the cryptoeconomy and offer some really interesting features, hence the popularity. NFT Roadmaps could include access to private online communities, exclusive merchandise, gamification, and more.
The chart below illustrates that for the first half of 2021, nearly $2.5 billion of NFT transactions occurred. NFTs are typically purchased using ETH or SOL, both of which have seen dramatic price increases this year. These trends are positive catalysts for Coinbase because they lead to more transaction volume and higher commissions for the platform.
The activity in NFTs has become too big to ignore. So much so that Coinbase recently announced plans to create its own NFT platform. In less than 1 week, Coinbase’s NFT waitlist surpassed 1.4 million people.
Sign up here if you’re interested.
Coinbase’s decision to launch its own NFT marketplace should be taken seriously. For one, the Company is already an investor in OpenSea, the leading NFT marketplace, through its Coinbase Ventures business. Although details around Coinbase’s NFT platform are sparse, the Company’s blueprint appears to mimic their crypto template. Similar to how Coinbase built a one-stop shop to buy, sell, store, and save crypto, the Company stated that they want to create digital marketplace where you can mint, collect, discover, and showcase NFTs, all in one place.
The potential revenue stream from NFTs cannot be underestimated. We can see below that monthly volume on OpenSea doubled from $150 million in June to more than $300 million in July, and then exploded by more than 10x in August with over $3 billion of transaction volume. Given Coinbase’s already sticky and engaged customer base, the introduction of an NFT marketplace is another lever they can pull to cross-sell multiple products and features and generate high-margin for the business.
Coinbase Risks
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Expect volatility in Coinbase’s financials given the price cycles of cryptocurrencies (e.g. crypto winters, crypto flash crashes, memes/social media). If you are going to take a position in Coinbase, my belief is that it should be because you have a long-term perspective on crypto-adoption.
The video below was featured on CNBC’s Half Time Report. I really like Josh Brown and highly recommend his newsletter (The Reformed Broker). He makes it very clear that Coinbase is currently a trade and not an investment for him. However, if you listen to his thesis for taking a position, he outlines several factors that would align with a long-term buy.
Additionally, before you take a position in Coinbase I highly recommend heading over to the Company’s education page Coinbase Learn and subscribing to their newsletter Coinbase Bytes.
For me, a position in Coinbase is a way to gain exposure to the crypto world without having to identify a specific token (Bitcoin, ETH, SOL) or movement (NFTs) to purchase.