Is Coinbase a Good Investment? In-Depth COIN Stock Analysis
Coinbase (ticker: COIN) started trading on the NASDAQ on April 14, 2021. The stock price reached an all-time high that day of $428 – but it currently trades for less than $100. Last Thursday, the crypto exchange released its third-quarter earnings report. So, I’ve gone through it with a fine tooth comb to check if Coinbase is a good investment right now. Here’s what I found.
Is Coinbase earning enough money?
As a crypto exchange, Coinbase gets paid by earning trading fees from its customers. The more crypto traded on the exchange, the more cash it can make from fees.
Back in the 2021 crypto bull run, people were trading way more crypto volume on Coinbase than they are now. That year, customers traded over $1.6 trillion worth of crypto on the exchange. Last year, that trading volume halved to about $800 billion. And this year? Only $313 billion worth of crypto has changed hands on the platform so far.
Sure, there’s another quarter left to bid up this year’s number. But it doesn’t look too good right now. Even if Coinbase customers trade more crypto this quarter than they did in the first 3 of this year, the exchange would still have lower trading volume than last year.
Still, there are two ways that Coinbase makes money: 1) by earning trading fees from customers (blue, chart below), and 2) everything else (yellow). The “everything else” bit represents subscription and service revenue on the company’s books. This includes things like custodial fees, interest income, stablecoin revenue, and blockchain rewards. Notice in the chart how the yellow bars have trended higher over the past 3 years. And lately, they account for about half of Coinbase’s net revenue.
This tells a good story for Coinbase, and speaks to the strength of the company’s management team. They knew trading revenue would crash in the bear market, so they found other ways to earn. And come the next big bull market, Coinbase could still rake in those trading fees once more.
Is Coinbase protecting its pennies?
On the other side of the coin (excuse the pun), Coinbase has been shrewdly cutting back costs as trading volume declined. The crypto exchange forked out over $10 billion of operating expenses in the glory days of 2021. This year (again, with one quarter still to go) that number is down to just $2.4 billion. And they’ve done this while doubling their employee headcount from 1,717 in Q1 2021 to 3,427 now.
This cost cutting has helped stop the bleeding from lower revenue. And last quarter, Coinbase just about broke even for the first time since 2021 – with a net loss of $2 million.
Despite its current losses, Coinbase has a $5.5 billion safety net of cash and other easily accessible funds. They’ve also been smart by buying back some of their own debt last quarter when it was cheap to do so. This means they now owe $263 million less of senior note debt to lenders. And it only cost them $177 million to reduce that debt burden.
Building in the bear market with 3 pillars
There’s an OG phrase in crypto: “to build in a bear market”. And Coinbase has stuck to this mantra relentlessly. It now has a suite of products and services that make it much more than just a crypto exchange. To quote its last shareholder letter, it wants to “help bring economic freedom and opportunity to over 1 billion people”. It aims to do this through its “three pillars” strategy.
Pillar 1: advance crypto as an asset class.
Coinbase wants to make storing and trading crypto as seamless and secure as possible – for retail and institutional investors alike. I’d say its already a market leader in this area.
One of the things that impresses me about Coinbase is its banking relationships. Sending money back and forth between my UK bank and Coinbase is instant, and free. But banks won’t work with Binance and other competitor exchanges anymore. If the banks are going to play nice with a crypto exchange, it’s going to be Coinbase.
That’s because Coinbase has built its entire business strategy around being the world’s most compliant crypto exchange. With regulators circling the industry more and more, this strategy is now starting to pay off.
Coinbase has also just secured regulatory approval from the National Futures Association to offer leveraged crypto futures trading to eligible US customers. This is a first for a crypto exchange, and I think Coinbase has played this hand very well. When it comes to trading leveraged crypto futures, the strategy of most crypto exchanges has been to “offer first, ask the regulator later”. But the regulator always catches up in the end.
US traders can’t trade crypto futures on Binance or Bybit any more. But as of this month, they can trade them through the Coinbase advanced platform. It will likely be the same story in the UK and other developed countries – where the “offer first, ask the regulator later” futures exchanges are also jumping ship. If Coinbase can someday house Binance-like futures volume, it’s going to make a lot of money in trading fees.
Pillar 2: update the financial system with crypto.
Coinbase has been clever with its marketing here. The company’s adverts and branding play on the frustrations most people have with the current financial system – it’s slow, expensive, and not fit for the digital age. I’ve embedded one of these adverts below if you want to check it out.
But it’s not just their marketing. Coinbase is actually making real steps to update the financial system. They’re betting big on stablecoins like USDC because they offer the perks of crypto—fast, global, and open to all—without the wild price swings. They’ve tightened their partnership with Circle, the company behind USDC, to work more efficiently and have a clearer role in managing USDC.
With USDC expanding to six more blockchain platforms, Coinbase will now get a cut of the profits from USDC activity – based on how much is stored and used through their service. This could mean more stable earnings for Coinbase and potentially more value for shareholders.
Pillar 3: empower the future of the internet with crypto.
In August, Coinbase launched Base – a “Layer 2” blockchain that works with Ethereum (Layer 1). Ethereum users can do all kinds of things: decentralized finance (DeFi) transactions, mint and trade NFTs, and even play games in blockchain virtual worlds.
You can read our Ethereum guide to learn all about Ethereum, DeFi, NFTs, and blockchain games. But for the point of this article, just understand that Base essentially plugs into Ethereum to make it faster and cheaper to use. And Base users still keep the good stuff of Ethereum – like its security.
Base has gained decent traction so far. Each time someone uses the Base blockchain, they pay a small transaction fee. According to data from Token Terminal, Base has already earned $7.4 million in fees since launching in August. And over the past 90 days, that makes it the 3rd biggest Layer 2 blockchain earner.
Source: Token Terminal. Screenshot taken on November 6th, 2023.
Keep in mind that Base transaction fees aren’t pocketed by Coinbase itself. Instead, fees are spread out amongst the Base validator network who keep the blockchain running smoothly. But remember: Base is a Coinbase product. And that means Coinbase probably has plans to leverage its potential further down the road.
How Coinbase plans to monetize Base is yet to be seen. But it’s worth noting that Coinbase never created a token for Base. So, I’m guessing Base’s value will somehow end up in Coinbase stock instead.
Could Coinbase be the real Bitcoin ETF winner?
There’s one major opportunity that wasn’t mentioned in the latest shareholder letter: Coinbase’s potential role as the custodian of most Bitcoin ETFs (exchange traded funds).
BlackRock, Wisdom Tree, Franklin Templeton, Invesco, 21 Shares, and ARK Invest are all currently applying for a Bitcoin ETF. In their ETF filings, each firm has also listed Coinbase as the custodian to safeguard all the bitcoin in those ETFs. And this makes perfect sense: why risk using a different crypto custodian to your competitor?
As for Coinbase, it would charge each of these institutions custody fees to keep their ETF assets safe. I’m not sure how much Coinbase would charge here, but given the complexity of storing bitcoin, it might be at least 0.1% of ETF assets under management per year.
Given the amount of interest we’re already seeing in the market, I’d speculate that bitcoin ETFs could one day hold hundreds of billions of dollars in assets. That could give Coinbase hundreds of millions of dollars in yearly ETF custody fees. They’d be selling pickaxes and shovels in a gold rush.
Of course, Bitcoin ETFs would still need to be approved by the US Securities and Exchange Commision (SEC) for that to happen. But given the caliber of ETF applicants, it seems like a matter of time before their ETFs get approved.
Technical analysis: how is the Coinbase price chart looking?
It’s hard to know if Coinbase is a good investment without some technical analysis of its stock price. In the chart below, each red or green candle represents one week of movement in the price of COIN.
To me, this chart suggests that the price is forming a longer-term low. It’s been in a technical uptrend since the start of this year, making higher lows in the price. And the 50-week simple moving average (blue) is now starting to act as support for the price (instead of resistance).
Keep in mind that this is a weekly chart. Coinbase stock is extremely volatile and can easily drop in the short-term. But so long as it continues to make higher lows on the weekly chart, the bigger trend is up.
Verdict: is Coinbase a good investment?
As with any investment, Coinbase has its fair share of risks. It has the usual regulatory risks of crypto, plus the risks that come with owning shares in a company that – let’s face it – isn’t too profitable right now. Like it or not, its success goes hand in hand with the long-term outlook for crypto.
But from where I’m standing, Coinbase seems like a pretty good long-term bet. I’m ok with the stock’s volatility, and hold a decent amount of Coinbase shares in my portfolio. Just keep in mind that I’m a long-term crypto bull – while you might not be. And if you’re not bullish on crypto in the long run, it makes zero sense to own Coinbase shares.
I believe crypto will become a much bigger asset class in the years ahead. If I am right in this, it would make sense to own shares in the world’s most compliant crypto exchange.
Disclaimer: As always, none of this is investment advice. It’s just my opinion. My opinions can and will be wrong sometimes because I can’t predict the future.
Key points
- Trading volume decline: Coinbase’s trading volume dropped from over $1.6 trillion in 2021 to just $313 billion so far this year. This shows a clear downturn in crypto trading activity on the platform.
- Diversified revenue streams: Despite the trading slump, Coinbase has smartly diversified its revenue, with subscriptions and services now accounting for about half of its net revenue.
- Cost-cutting: In response to the bear market, Coinbase has reduced its operating expenses from $10 billion in 2021 to $2.4 billion so far this year, while still managing to double its workforce.
- Innovative growth strategies: Coinbase is actively building for the future. It recently secured regulatory approval for leveraged crypto futures trading and launched Base, its own Layer 2 blockchain.
About the author: Jonathan Hobbs holds the Chartered Financial Analyst ® designation. Jon once managed the investments for a boutique crypto hedge fund, and is the author of three investment books. Before that, Jon came from the traditional finance world, working at firms like Morgan Stanley, HSBC, and M&G Investments.
