Coinbase Global is going public just as enthusiasm for the digital currencies it trades is exploding. Investors should brace for a wild ride.
Coinbase, which revealed its financials last week ahead of an anticipated direct listing, said it handled nearly $200 billion worth of trading in digital assets like bitcoin and ether last year, and stored or held in custody about 11% of the total market capitalization of crypto assets at the end of last year. Trading volume surged in the fourth quarter, nearly doubling from the third quarter. Coinbase earned $322 million in net income in 2020, versus a loss of $30 million in 2019.
A lot of what Coinbase does today will be familiar to many financial investors: It is an exchange, a custodian, a retail brokerage, a prime brokerage, a digital wallet and more—but for crypto.
For now, activity is predominantly monetized via individual customers who buy, sell and hold crypto via Coinbase. Of its more than 43 million retail users at the end of 2020, 2.8 million were transacting monthly in the fourth quarter. Retailtrading volume was $73 billion last year, less than 40% of Coinbase’s overall volume. But retail transaction revenue was just over $1 billion, or about 90% of total revenue. That comes from transaction fees plus spreads charged to retail brokerage customers.
Individual-investor activity is lucrative. But it is also “more influenced by bitcoin price” and crypto volatility than institutional activity, Coinbase says. “You can expect volatility in our financials, given the price cycles of the cryptocurrency industry,” Chief Executive
Brian Armstrong
wrote in the company’s prospectus. In the past, those swings could be big. Coinbase’s retail volume was $45 billion in the first quarter of 2018; it was just $4 billion in the first quarter of 2019. The first quarter of 2021 could be big, with bitcoin hitting new price records.
Some investors may simply believe this activity can keep up. Skeptics may try to divine a more normalized level of volume or think about revenue across each cycle, betting the next peak and trough will be higher. Others may try to assign a value to a wider array of financial services such as lending that Coinbase may offer its users, mirroring other digital-wallet providers such as
and
Coinbase also can be a play on long-term institutional interest in crypto, for which it generates revenue for investment, custody, credit and more.
Institutional trading volume on Coinbase grew at a faster pace than retail from the third quarter to the fourth and was near its peak as a percentage of total volume. But transaction revenue from institutions is far smaller as a percentage of volume than retail. Subscription-and-services revenue is growing even more rapidly than transaction revenue, though off a far smaller base, and “will also fluctuate based on the price of crypto assets,” according to the company.
Then there is the potential of crypto to eventually generate revenue related to applications in gaming, contracts, identity and beyond. Coinbase’s venture unit invests in the wider digital-asset ecosystem, for which Coinbase could be the on ramp to a mass audience. The more money Coinbase makes today, the more bets it can place on that future.
Coinbase offers plenty of long-term exposure to bitcoin and crypto’s potential integration into the broader economy. But its primary revenue source today may ultimately also be among its most volatile and least predictable.
Write to Telis Demos at telis.demos@wsj.com
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Appeared in the March 5, 2021, print edition as ‘Coinbase Offers New Bitcoin Ride.’