What we think about Coinbase (COIN)
Coinbase in Three Words: Sane, Crypto, Regulation
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Background
Coinbase’s mission is to increase global economic freedom by building the world’s “cryptoeconomy.” They envision a more fair, accessible, efficient, and financial system that is enabled by cryptocurrencies.
To achieve that vision, it has built an exchange platform that allows individuals, corporations, and institutions to buy and sell popular cryptocurrencies like Bitcoin and Ethereum. It currently has more than 110 million verified users and supports more than 100 unique cryptocurrency assets.
90%+ of revenue comes from charging fees tied to transactions. Whenever you buy or sell Bitcoin, Coinbase charges a fixed 0.5% spread on the overall amount as well as an additional fee based upon the region and the size of the transaction. Altogether, users typically pay 2% on each transaction. Discounts are available for higher-volume traders.
This means that Coinbase’s fees and overall revenue are directly tied to the current prices of popular cryptocurrencies. Bitcoin and Ethereum together account for the majority of trading volume, and both have increased in price significantly in recent years.
In addition to the core trading exchange, Coinbase also offers a variety of supplementary services for anyone who owns cryptoassets on the platform. Users who own Ethereum — a blockchain built upon a proof-of-stake consensus mechanism — can use their assets to verify other network transactions and earn additional cryptocurrency. Coinbase then takes a 25% commission of those staking rewards. Coinbase also offers attractive interest rates for borrowing cryptocurrencies (often 6% APR or higher) or even offers loans that use Ethereum or Bitcoin as collateral.
In short, if you’ve bought any cryptocurrencies on Coinbase, you have a lot of options on how you can use it to enhance your investment returns even further.
But Coinbase is also encouraging users to take things a step further, and help to fulfill its vision of using cryptocurrencies for retail transactions. Their Coinbase Card — literally a plastic Visa debit card that fits in your wallet — can use your existing account balance to make purchases anywhere Bitcoin and cryptocurrencies are accepted. It allows you to easily track your spending over time, and Coinbase takes a 2.5% fee for each transaction.
And additionally, Coinbase Prime allows businesses to transact using cryptocurrencies. Its Smart order routing allows them to tap into other exchanges to ensure the best pricing, while its offline cold storage provides excellent security that has operated for eight years without incident.
If all of this sounds like Greek or madness to you, just think of Coinbase as a stock brokerage that provides a whole lot more options. What if instead of buying Apple stock only with the intention of selling it for a future gain, you could choose to lend it out to others, to use it as collateral for borrowing money, or even to sell small portions of it for buying your coffee every morning?
This is the vision of the cryptoeconomy. Cryptocurrencies aren’t just investments but are unlocking a new digital economy…one that’s decoupled from our existing financial infrastructure built upon credit scores, banks, and credit cards.
In short, Coinbase’s growth playbook boils down to:
1) Get users on the platform
2) Encourage and reward users for buying cryptocurrencies
3) Attract more sophisticated users
4) Increase operating leverage by driving trading volumes
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