May 19, 2021

In 2020 we saw the beginning of another bull run in the cryptocurrency asset class, with the price of Bitcoin reaching $30,000 by January 2021 and currently having raised to around $57,500. This swift rise has benefited many businesses in the industry significantly. One of these businesses, Coinbase, is aiming to capitalise on the rise of crypto by listing onto the Nasdaq. With a total valuation of $100 billion, the planned direct listing has unsurprisingly caught the attention of many investors.

Company overview

Coinbase was founded in 2012 by Brian Armstrong (the current CEO) and Fred Ehrsam. The company acts as a cryptocurrency exchange and broker for Bitcoin, Bitcoin Cash, Ether, Litecoin and others and is currently the biggest US cryptocurrency exchange.

The business model is based on two core products. The first being an exchange for trading cryptocurrencies, known as Coinbase Pro. The second being the cryptocurrency wallet, a user-facing platform for trading different cryptocurrencies. Coinbase offers accounts to potential clients for cryptocurrency trading, boasting over 25 cryptocurrencies to its users, some of which are more niche opportunities known as altcoins. (1)

Coinbase charges a commission fee for its users for transactions that they make and its users can trade with leverage. It also has two different account options: regular, which is for users who are more new to cryptocurrency or users who want to keep it simple, and pro, for users who want to trade with more complex instruments and use leverage. The regular account charges higher commission fees for users than the pro account.

Coinbase generated $1.3 billion in revenue last year, up from $534 million the year prior, enabling the company to turn a profit of $322 million in 2020 despite losing $30 million in 2019. Coinbase now has 43 million verified users, and 2.8 million monthly active users. An explanation for the success of Coinbase is their ability to provide a user-friendly service and the way they have avoided security problems and regulatory headaches that have plagued their rivals. (2)

Bitcoin’s boom and its positive effect on Coinbase

If Bitcoin or other cryptocurrencies become able to achieve widespread adoption, the user base would likely multiply. Coinbase has also emerged as a major player in institutions purchasing Bitcoin. For example, Coinbase’s institutional trading wing handled electric car-maker the $1.5 billion investment Tesla made into Bitcoin last month. Coinbase also handled MicroStrategy’s multiple investments into Bitcoin. There are also reports stating that the exchange has more than five Fortune 500 firms as clients. There is a likelihood that this will lead to institutions choosing to work with Coinbase over other exchanges, bringing significantly more revenue for the firm. (3)
Coinbase has a market size of 3.5 billion people, meaning there is huge potential for further growth. Alongside Bitcoin’s rise at the start of the bull run to $41,000 in January, searches for Bitcoin doubled in just a month. This led to a massive increase in inflows from retail investors, with institutions following shortly after. This has contributed to the establishment of cryptocurrencies as an asset class.

Furthermore, with enormous fiscal stimuli being provided by governments across the world, for example, the USA’s $1.9 trillion stimulus package this month, more inflation is not unexpected. Cryptocurrencies are a good hedge against inflation, this means that they can protect wealth from being eroded by rising price levels. Also, with very low interest rates, and in some countries even negative, there has been more investment into stores of value such as Bitcoin which can provide a higher yield than gold. This has led to greater adoption from many and with this greater adoption of crypto, Coinbase’s user base and revenues will grow as a result.

Coinbase risk factors

There were some risk factors detailed in the S-1 document filed and sent to the SEC (Securities and Exchange Commission). One risk that is described is the volatility of cryptocurrencies and the possibility of another crypto winter, a term which is used for a bear market that lasts several years. If another bear market were to arise, Coinbase’s revenues would suffer as a result and there may be potential losses being made for several years. However, if Coinbase does manage to adapt and navigate the bear market successfully then once the bull run starts again they would be back to making record profits.

Regulation and not receiving backing from governments is also a big risk factor attached to crypto. For example, Janet Yellen, United States Secretary of the Treasury, sounded a warning saying Bitcoin is an ‘extremely inefficient’ way to conduct monetary transactions. She also stated she fears that it is often used for illicit finance, these comments are damaging to the reputation of cryptocurrencies. Some governments have banned or are considering banning cryptocurrencies which could damage the potential growth of Coinbase. For example, there are rumours that India is preparing to ban cryptocurrencies. (4)

Looking ahead

Coinbase’s aim is to list in April. The company’s public debut will be the first for a large US cryptocurrency exchange, and is likely to rank as one of this year’s largest new tech listings across any industry and would mark a milestone for those who have backed the emerging sector. Coinbase aims to make the complex and defiantly anti-establishment world of cryptocurrencies accessible to the mainstream. Going public would be a big step forward in making this possible as an increasing number of people will be made aware of this asset class.

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