Coinbase Addresses Future Revenue Concerns With Plans to Become Crypto’s Amazon

A well-received Nasdaq debut from Coinbase last week opens what many hope to be crypto’s cross into the mainstream. Nonetheless, controversy has surrounded its IPO, including valuing the firm on a fully diluted basis. Using this methodology, a higher number of shares is included in the company valuation, essentially overvaluing the company by some $20bn.

But perhaps the biggest controversy lies in Coinbase’s ability to maintain and extend its profitability going into the future. With concerns that high spreads and trading fees will see a race to the bottom as the competition heats up, some analysts have warned against investing in $COIN.

Coinbase CEO Brian Armstrong said he plans to increase the firm’s product lineup over the next five to ten years in a bid to combat these concerns.

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Coinbase hourly chart

Coinbase hourly chart

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Analysts Sound Alarm on Coinbase Future Profitability

In the run-up to last week’s IPO, Coinbase released its Q1 2021 figures, revealing an impressive set of numbers. Highlights include $1.8bn revenue and the doubling of its monthly active user base to 6mn.

Its biggest money-spinner is trading fees, which came in at $1.1bn and accounted for 86% of its total revenue last year. This equates to 0.57% of every transaction.

“In 2020, Coinbase collected about 0.57% of every transaction in fees, which totaled $1.1 billion in trading revenue on $193 billion in trading volume. These trading fees made up 86% of revenue in 2020.”

But competition from the likes of Kraken, Gemini, Bitstamp, and Binance, will see trading fees fall away in a race to the bottom. Some analysts have pointed out, based on Q1 2021’s figures, this is already in motion.

“If we assume a similar breakdown of Coinbase’s reported $1.8 billion in total revenue in the first quarter of this year, trading fees would equal around $1.5 billion on $335 billion in trading volume, or about 0.46% of every transaction.”

To address this, Coinbase CEO Brian Armstrong said he expects 50% of the company’s revenue to come from non-trading sources over the next five to ten years. But is this a reasonable expectation?

The Amazon of Crypto

Speaking to Laura Shin, Gil Luria, the Director of Research at D.A. Davidson, said the goal is to generate more revenue in custody and managed staking. But he conceded that this wouldn’t happen overnight.

In terms of achieving the switch to 50% of revenue from non-trading sources, Luria was confident that Coinbase could pull this off. He likened this situation to what Amazon has managed to pull off since its IPO.

In 1997, Amazon was an online bookseller. Not only did it diversify into selling anything and everything, but the firm also helped other people sell, moved into entertainment with Prime, and set up a cloud business.

“Jeff Bezos may have imagined it but we sure didn’t. We just knew Amazon was way ahead of the pack. They had tremendous leadership and they were so customer-centric, which was the absolute key to their success. And I see a lot of parallels with Coinbase.”

By understanding the crypto game and being open to working with regulators, Luria thinks Coinbase is in a good position to bring to market more products to replicate what Amazon did.


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Coinbase’s $86bn Valuation Has Been Grossly Exaggerated by Misleading Media

Coinbase shares closed at $327 on their Nasdaq debut, giving the crypto exchange an initial market cap of $86bn on a fully diluted basis.

Fully diluted refers to the total number of common shares outstanding and available to trade on the open market after all possible sources of conversion. But some feel this measure gives an inaccurate valuation as it includes options and restricted stock, therefore overstating the number of shares used in the valuation.

In the buildup to the IPO, some analysts expected Coinbase to achieve a $100bn valuation. While its closing valuation wasn’t a million miles away, it was still less than expected.

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Coinbase Listing is a Watershed Moment For The Cryptocurrency Industry

Coinbase is the first major crypto company to test the U.S. public market. Its IPO was hailed as a turning point in cryptocurrency going mainstream. Analyst Dan Ives wrote:

“Coinbase is a foundational piece of the crypto ecosystem and is a barometer for the growing mainstream adoption of bitcoin and crypto for the coming years in our opinion.”

COIN opened at $381 on the Nasdaq Global Select Market. Early on, buyers pushed the price as high as $429, but bears soon took over to dip the price as the day wore on. It ended the session at $327.

Source: COINUSD on

The firm had released some impressive figures before its public debut. It showed a spike in revenue and a doubling of its monthly active users from the previous quarter.

But market research firm New Constructs had already sounded the alarm on a severe overvaluation at $100bn. They believe a valuation this high takes no account of a future squeeze on its transaction margins.

the company has little-to-no-chance of meeting the future profit expectations that are baked into its ridiculously high expected valuation of $100 billion.”

The Actual Valuation Should be $65mn

While Coinbase’s fully diluted valuation came in at $86bn, pretty much in the middle of pre-debut expectations of between $60bn – $100bn, CIO at Arca Jeff Dorman said this figure is grossly overstated.

Dorman slammed the media for “misinformation” and “horrible reporting,” saying they were using the wrong share count. Based on 198mn class A and B shares, Coinbase’s closing valuation should be $64.7mn.

That math is wrong — There are 198mm class A and class B shares o/s, not 261mm. If we use fully diluted share count, then every stock on the planet has infinite shares due to no restrictions on how much stock a company can issue.

On the matter of ever reaching a $100bn valuation, researcher Larry Cermak expects this to happen as long as the bull market continues.

Direct listings almost always trade down in the next few days because of the high float that’s being dumped. As long as the bull market continues, it will eventually recover and go $100B+ IMO. Low volume today is somewhat surprising though.”

At this point, it’s unclear whether an overstated Coinbase market cap is a help or hindrance to crypto. While an overstated valuation is likely to drum up interest, the spin side sees additional pressure on Coinbase to live up to the hype.


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