Coinbase is becoming crypto's super app
Vintage: this rewrites a research document from May 2, 2024, the day Coinbase posted Q1 2024 earnings. Every number below is as of that date, and nothing here accounts for anything that happened afterward.
FTX had already collapsed. Binance had already left the US.
That leaves Coinbase as the only crypto exchange trading on US public markets.
Coinbase is quietly turning into a crypto super app.
Wall Street still prices it on earnings and a multiple, like any exchange, numbers that can be accurate and still miss what's compounding underneath.
Brian Armstrong and Fred Ehrsam founded Coinbase in 2012, when $BTC traded under $10.
$ETH became its second listed asset in 2015, and the company went public through a direct listing in April 2021.
The stock is up 216% in the trailing six months.
Where the money comes from
Investing in Coinbase is a bet on the whole crypto market growing, wider than a single-asset trade on Bitcoin or Ethereum.
It stacks revenue across custody for spot ETFs, an international derivatives exchange, a Layer 2 called Base, liquid staking through cbETH, and Coinbase Cloud.
Total crypto market cap peaked near $3 trillion in 2021, and Coinbase's market dominance is still below where it was then.
The years since went toward diversifying: new revenue lines, international expansion, a growing role as ETF custodian.
BlackRock and Fidelity both use Coinbase as their custodian, one of nine spot ETF issuers Coinbase now holds custody for.
ETF creation and redemption drives custody revenue and trading volume, and a bigger crypto market cap benefits Coinbase regardless of where the shares sit.
Future $ETH or $SOL ETFs would extend the same effect.
Coinbase also built an international derivatives exchange: low fee, around 3 basis points, but growing, roughly $1.1 billion a day.
Its 30-day volume sits at $34.52 billion, with an all-time daily high of $6.14 billion on March 20, 2024.
Base is turning into Coinbase's AWS
Base is what I find most interesting.
It's Coinbase's Layer 2, and its first priority is being a platform developers can build on, picking up teams that can't decide which L2 to deploy on.
The AWS comparison is the report's own. Coinbase started by running a consumer product and an exchange that demanded first-rate infrastructure, and it is now pointing internal resources at growing Base the same way.
Daily active addresses went from 92,000 on March 13 to 350,000 on April 23.
It hosts more than 200 projects and over $1.5 billion in TVL, with more than $100 million in stablecoins.
Base is the second chain by USDC bridges available, behind only Ethereum, and more USDC on Base means a bigger share of the interest revenue Circle generates on it.
Returning daily active addresses average above 75%, and most of those users have no token or incentive to chase yet.
The business model is simple: transaction fees minus Layer 1 settlement and data-availability costs, and that math produces a 68% profit margin Coinbase can capture every year.
Base represents roughly 1% of Coinbase's headcount.
Take its fee revenue, subtract what it owes the Superchain and what it pays Ethereum for settlement and data availability, and you get its real on-chain earnings. Annualized from the last 30 days, that's roughly $8 million, about 8% of Coinbase's 2023 net revenue, before off-chain costs.
A speculative $BASE token would let Coinbase capture value the way $OP and $ARB do for their own chains, pushing Base toward more real decentralization.
The bear case, because it's real
Coinbase trades expensive: roughly 10x forward sales and 93x forward earnings.
That's a rich multiple next to brokerages, banks, and exchanges that have years of trailing earnings Coinbase doesn't have.
New accounting rules from FASB work against the bear case too: companies can mark crypto holdings up as prices rise instead of holding them at cost, and that's likely to move Coinbase's net income and EPS more than analysts are pricing in.
Its EPS has beaten estimates four straight quarters. Take that streak with a grain of salt: analysts tend to set the bar low on purpose, which protects their own track record and makes beats easier to come by than the streak alone suggests.
Coinbase Ventures, a leading venture arm since crypto's early days, still books its stakes at cost. Some of those bets were made in the hundreds of millions and could be worth billions today.
Coinbase says as much itself: its fortunes are tied closely to crypto market swings and volatility.
Much of its subscription and services revenue concentrates in Bitcoin, Ethereum, and USDC-related stablecoin transactions. If that slows without a replacement, results take a hit.
There's live regulatory risk too: Coinbase has argued its platform transactions aren't securities. A US district judge sided with the SEC: some of those trades count as investment contracts, and that's still hanging over the stock.
Global expansion adds its own version of that risk. Complying with different countries' laws gets more complex as Coinbase grows, raising investigation and enforcement risk from US regulators and international ones.
Good news may already be priced into the stock: don't chase a good earnings print, wait for weakness, and treat post-earnings dips as the entry point. None of it depends on how the stock trades right after the print.
Immediate post-earnings action doesn't reliably predict what a stock does next. Meta beat and still dropped, on spending concerns. Tesla missed and still jumped, on Robotaxi and humanoid robot speculation.
Coinbase's own stock swung after its May 2 report too, and the trade was never supposed to hinge on which way it moved.