Summary Coinbase's revenue is split into transactions and subscriptions & services, with the latter showing consistent growth and becoming increasingly important for long-term profitability. Transaction revenues are expected to decline following BTC price trends, while subscription revenues are projected to grow steadily. Competition from crypto ETFs is not seen as a significant threat. Current valuation suggests a 36% upside by 2028, but I recommend waiting for a price pullback to $220-240 before buying. This is my first cover of Coinbase (COIN). In the article, I will describe Coinbase's business areas and my opinion on how they will affect the company's future. I will try to provide a valuation based on the current state. Introduction Coinbase is a financial services company that does business in everything related to cryptocurrencies. It offers users crypto trading, allows them to stake their crypto and earn a stable income from it, and offers crypto wallets and crypto payment services. Coinbase separates its business into two categories: transactions and subscriptions & services. I want to dig deeper into both and try to extrapolate current results into the future. Transactions Q4 was a perfect quarter for Coinbase as transaction revenues reached $2,197 million. This was due to BTC price appreciation, the election of Donald Trump, and overall optimism around cryptocurrencies. I believe revenues from transactions will go down from here, similar to what happened in 2021 when revenues reached $7,354 million before retreating to $3,148 million in 2022. 2021 was similar to 2024, a year when BTC's price increased exponentially. In the next few years, when BTC price stagnated, it was also Coinbase's revenues that stagnated. In my opinion, this story is bound to repeat, so I will do my projections accordingly in the valuation section. Subscription & Services Subscriptions and services revenue, as this part of Coinbase's business, is becoming increasingly important with high growth and, even more importantly, consistency of revenues. As we can see from the picture below (Picture 1), in the last four years, this sector grew with a CAGR of 167%. The most important parts are stablecoin revenue and blockchain rewards, so I will concentrate on those and try to estimate how they will perform in the future. I believe that, due to the consistency of revenues, this part will, in the long term, be more essential than transaction revenue. Picture 1 (Coinbase) USDC revenues USDC is a stablecoin pegged to USD in a 1:1 ratio, created by Circle and Coinbase in 2018. Revenues from this stablecoin are primarily derived from interest income from USDC holdings. As USDC gains popularity and its market cap increases, so do Coinbase's revenues. I will not go into more detail here because I liked Mike Fay's article and his thoughts on USDC and Base, so I'd advise you to go read that article if you are unfamiliar with the topic. Blockchain rewards revenue - Staking Coinbase is offering cryptocurrency staking (which is the main part of the revenues marked as ''blockchain rewards revenue'') which is a stable and predictable revenue source for Coinbase and the crypto investor. Before we go further, let me explain what staking is for those unfamiliar with the matter. Staking is a term used when a cryptocurrency owner participates in a Proof-of-Stake (PoS) blockchain network by locking up his cryptocurrency. This is used to secure and validate transactions. Coinbase allows the user to stake his crypto in exchange for a fee-currently 15-25% of the staking reward. Below is a list of crypto that can be staked, and we can see that the ''interest rate'' is quite significant (Picture 2). Picture 2 (Coinbase) This part of the business is quite stable, as long-term crypto investors like to stake their currency for longer periods, earning them and Coinbase steady revenues. And just to be clear, this is in addition to any price appreciation of the cryptocurrency. Note that in time, staking rewards decline, as more people stake their cryptocurrency, the reward per stake decreases. For example, below is a chart representing Ethereum's staking rate in percentages - Y axis. (Chart 1). Chart 1 (CompasFT.com) I believe that since staking rewards are a part of investors owning crypto for the long term, it will be a business that will be consistently profitable, provide reliable revenues, and will slowly grow over time. This will be very beneficial for Coinbase as it makes them, as Warren Buffett would say, a tollbooth business. Competition with ETFs In January 2024, there was the first BTC ETF made available for US investors. After that, more BTC ETFs got approved, and in July, we got Ethereum spot ETF. Naturally, there is a worry that ETFs tracking crypto will take away customers from Coinbase. I do not believe this will be the case. Let me give a comparison between ETFs and buying spot crypto on Coinbase so that we may better understand it. The obvious one is that investors will directly own crypto should they buy it on Coinbase. That has several benefits, and in my opinion, the most important one is the availability of staking. As I explained before, in addition to underlying crypto price appreciation, one will also earn revenue from ''interest.'' On the other hand, investors that bought Bitcoin ETF cannot stake cryptocurrency and have to pay management fees , which range from 0.12% up to 1%. I believe that the possibility of staking is the main reason investors would prefer Coinbase compared to ETFs. Upcoming market catalysts In my opinion, resurging inflation is the most important catalyst for crypto investing. Bitcoin and other cryptocurrencies act as a hedge against inflation. We have seen in the last few months that the inflation rate rose from 2.4% in September to 3% in January, and due to Trump's tariffs, it is only logical to assume that it will continue to increase. That will be quite beneficial for crypto. One could argue that Trump's creation of the crypto reserve is another positive catalyst. But I do not believe it will be that important. First US doesn't have the money to buy additional crypto, in 2024 US deficit amounted to $1.8 trillion, which represented 6.4% of GDP. I believe this makes US crypto investments unlikely. The second would be the crypto that the government will keep after seizing it in criminal or civil cases. David Sachs, a crypto and AI tzar selected by Trump, said that the US currently has about 200,000 BTCs, which is worth $16.2 billion at the current price of $81,000 per BTC. This only amounts to 0.00056% of the US GDP. I believe it will not create a meaningful difference for the crypto market. Valuation Coinbase stated in the Q4 earnings release that they generated $750M in transaction revenues through February 11th. That would mean around $1,500M of transaction revenues in Q1. That would be a slight decrease from Q4 (Table 1), and if we believe the story from 2021 is to repeat, this trend will continue and transaction revenues will continue to go down. A reasonable assumption would be that the revenues from transactions for the rest of the year 2025 would be somewhere in between Q1-Q3 2024 and Q4 2024. I will use a conservative figure of $900 million for the rest of 2025 (without Q1). That would mean that in 2025, Coinbase would make $4,200 million in 2025. I will be conservative and will estimate that transaction revenues will fall to $4,000 in 2026 and not grow thereafter. Table 1 (Coinbase) Next, we have to do estimates for subscriptions and services. Coinbase estimates that in Q1 they will generate between $685 million and $765 million in revenues. Since so far, they usually beat their forecasts, I will use $765 million as my estimate. That would mean about 50% YoY growth from Q1, 2024. I believe this trend of growth will continue independently of BTC price, due to the facts stated in the introduction chapter. I will use a conservative 25% YoY growth for 2025 and 15% thereafter. Below is a table estimating transaction and subscription revenues (Table 2). Table 2 (Author's Work) Now we have to figure out the expenses. The company estimates that transaction expenses will be in the mid to high teens as a percentage of transaction revenues. From Q1 to Q4, they were between 14 and 15%; I will use 16% as a conservative estimate for Q1 and thereafter. The company expects other Q1 operating expenses (this includes technology & development, general & administrative, and sales & marketing) to be between $985 and $1,175 million. Since in Q4, they were on the high end of the guidance, I will use $1,175 million in my estimates. This would represent 52% of the total revenues. In Q4, this was 42% of the total revenues. I estimate that operating expenses will stay at 52% of the revenues for the rest of 2025 and then slowly fall to 40% as the company grows and becomes more efficient. I put all of my estimates into a table and tried to calculate the upside (Tables 3 & 4). Table 3 (Author's Work) Table 4 (Author's work) If my estimates are correct, there is a 58% upside by 2028. Note that I used conservative estimates for the future services & subscription revenues, and the true upside is probably a bit higher than I calculated - probably in the 70-80% range. Risks I believe the highest risk for Coinbase would be additional crypto regulation. Since Coinbase does most of its business in the US, and with Trump being pro-crypto, this risk is minimal. Second is the competition. Players like Robinhood (HOOD) added the possibility to trade crypto. But I believe that with all the other services that Coinbase offers, a true crypto investor will choose Coinbase over the competition. One could argue the real danger for Coinbase is that Robinhood will take investors who mostly invest in stocks but also want some crypto exposure. Yet, I believe even these investors might choose Coinbase if they want to stake their coins. Note that Coinbase offers higher staking returns compared to Robinhood. In the end, I do not believe there is much danger for Coinbase from the competition. Competition from decentralized exchanges Decentralized exchanges operate by users trading directly with each other, essentially cutting out the middleman, like Coinbase. They are not regulated and offer safety from potential government seizures. However, as a downside, they are more complicated to use and provide less liquidity for trading. Thus, they are more suitable for crypto holders than for crypto traders, especially institutional traders. Most users went to decentralized exchanges to avoid possible government regulation. However, with the SEC dropping lawsuits against Coinbase and Robinhood, the necessity to avoid government regulation and going to decentralized exchanges is now much lower. Still, even before the drop of lawsuits Coinbase's blockchain rewards revenues, which are mostly from the crypto holders staking their crypto, were consistently increasing as can be seen in Picture 1. Note that one can also stake their crypto on a decentralized exchange. According to the facts stated above, I do not believe decentralized exchanges pose a risk to Coinbase, especially now with crypto-friendly government. Plan Due to my estimates in the valuation chapter, I believe the current price warrants a buy. Additionally, there are possible catalysts for crypto like inflation, and a crypto-friendly US government, which might increase crypto adoption. I have a position in Coinbase, and I plan to add it if the price continues to drop due to bearishness in the broader market.

2025-03-09 08:41

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