On Wednesday, April 14, 2021, Coinbase, founded in 2012, launched an initial public offering. The offering was a direct listing on the Nasdaq stock exchanged using the ticker symbol COIN. The first trade expectations were that the company could be valued as high as $100 billion. Coinbase is regulated in the United States by the Department of Treasury and the Financial Crimes Enforcement Network as a money transfer business. The company is also licensed to operate as a money transfer business in each state in the US. Coinbase relies heavily on crypto trading to generate most of its revenues and income.
What is Coinbase?
Coinbase is a digital wallet and trading platform used to trade over 50 cryptocurrencies. Ahead of their IPO, the company stated that it had 56 million users and serves 7,000 institutional customers and 115,000 ecosystem partners in over 100 countries. The digital wallet portion allows you to use Coinbase to make payments directly to other or vendors. It also provides users with a trading platform that will enable them to trade cryptocurrencies. You can buy and sell cryptocurrencies versus sovereign currencies as well as other cryptocurrencies making cross cryptocurrency trades. The platform also provides access to charts and studies, allowing traders to make informed trading decisions. Coinbase says they have a secure trading environment requiring two-step verification and biometric fingerprint logins. Additionally, the company is secured by the Federal Reserve. Coinbase, like a money transfer insured organization, is FDIC-insured on USD balances and standard encryption for digital wallets.
Revenues and Income
As of December 31, 2020, Coinbase had generated over $3.4 billion in total revenue. In its latest fiscal year filing, the company reported $1.14 billion up 139% year over year and a net income of $322 million compared to a loss of $30 million in 2019. Its preliminary Q1 2021 results show that the company generated $1.8 billion in revenues for the quarter and net income of $730 to $800 million. Coinbase also reported that it has 6.1 million monthly transacting users, a trading volume of $335 billion, and over $223 billion in assets. Coinbase expects monthly transacting users to range between 4 million and 7 million in Q2, depending on crypto market capitalization and crypto-asset price volatility.
How Does Coinbase Generate Revenue?
Coinbase generates nearly all of its revenues from transaction fees on its platform. This revenue is generated from the purchases and sales of cryptocurrencies. The costs are robust. US investors pay 1.49% for conversions using a bank account or Coinbase's USD wallet, 3.99% for purchases with a debit card, up to 1.5% of any transaction. Additionally, customers pay a minimum of $0.55 for instant card withdrawals and $10 for wire transfers. According to its filings, the company also generates revenue from subscription products and services. One of the critical pieces of information related to investors in the company filings is how they generate revenue and their outlook. With nearly 56% of Coinbase's revenue driven by Bitcoin and Ethereum, the company must see volatile cryptocurrency markets. The company warns in its prospectus that if cryptocurrency prices decline or demand falls, its business could be severely impacted. On the day before the IPO, CNBC said that on the open Coinbase would be worth as much as The Intercontinental Exchange.
The Rally in Bitcoin and Ethereum
The breakout in Bitcoin and Ethereum the day before the Coinbase IPO was fortunate for the company. Higher prices and additional volatility will draw attention to the company as their business model is rare. While PayPal and Square are financial companies that provide access to the cryptocurrency business, they do not focus on a trading application business.
The question for investors is whether the business model can hold. There is likely to be competitive as the market develops and becomes mature. There are other financial trading providers that are planning to come to market that provide similar features. The one difference is that the digital coins that are traded on Coinbase are not derivatives. You hold the actual digital currency in your digital wallet. Just as with PayPal, you can buy, sell and transfer digital coins to other digital wallets.
The Bottom Line
The upshot is that Coinbase has come to the market at a very reasonable time. The products that make up the bulk of the revenue are surging higher on high volatility levels, generating robust revenues. With Bitcoin and Ethereum surging, the company is likely to gain further attention. The company makes the lion's share of its revenues from commissions generated through cryptocurrency trades. The company is regulated tightly by the Department of Treasury as a money transfer business throughout the United States in nearly all jurisdictions. The IPO has generated a significant amount of fanfare, providing investors with a strong market value.