Disclaimer: this is not investing or financial advice.
Tl;dr
- Buying Coinbase represents buying a stake in the ever-growing cryptoeconomy
- Investing in Coinbase can be similar to buying a crypto index fund, e.g. getting exposure to a basket of cryptocurrencies beyond Bitcoin and Ethereum
- Competition will drive down transaction fee revenue; companies like Coinbase will have to differentiate. Luckily, Coinbase operates in a huge addressable market and can offer new crypto versions of any financial service
- For investors: the valuation of Coinbase might be a bit rich out the gate. If Coinbase starts out as high as $100B in market cap, I don’t have high conviction that the stock could 10x.
Coinbase runs a very meta business. Since 2012, the cryptocurrency exchange has helped people buy and sell cryptocurrencies like Bitcoin and Ethereum. By nature, it makes money from transaction fees. Buy some Bitcoin, and Coinbase will charge you a fee for the privilege. Coinbase’s existence is orthogonal to the mission of cryptocurrency: decentralize finance and cut out the middle man.
Users pay Coinbase to be the middle man to access an alternative financial system that wants to cut out the middle man.
Orthogonal, but not totally off-base. Here’s why:
Trust & Tailwinds
Today, Coinbase is the biggest cryptocurrency exchange in America – and the most trusted. It has earned this trust by never getting hacked and working directly with the government. That’s saying a lot, because the crypto world has been rife with security breaches and regulatory risk.
For all the crypto maniacs’ hand-waving about decentralization and trustless systems, people want trusted systems to get onboard to something new.
As someone who works in user experience, I tip my hat deep bow to Coinbase. They have killer design that makes Bank of America look like a graveyard in comparison. Ease of use cannot be understated in a field as misunderstood as crypto.
As a tech unicorn, Coinbase has also achieved an unusual feat: profitability.
These factors alone make Coinbase at least a healthy business.
The true story begins after the general public gets on board to crypto. Can Coinbase be as more than just a middleman? What would it take for Coinbase to exceed its $90 billion private valuation – and then multiples of that – after going public?
What buying Coinbase represents
Buying Tesla is a bet on the future of transport and energy. Buying Beyond Meat represents a stake (heh) in the future of food. What does buying Coinbase represent?
Buying Coinbase represents buying a stake in the ever-evolving crypto world.
If you go on CoinMarketCap today, you’ll see over 8,000 cryptocurrencies. Coinbase today offers trading of ~42 cryptocurrencies on the platform. That number is only poised to grow, and cryptocurrencies are just the beginning.
Founder Brian Armstrong describes Coinbase as “the primary financial account for the crypto economy.”
Want in on the NFT craze, DeFi, or staking? You’ll need a crypto account to get started. Coinbase is one of the dominant gateways through which new inventions in the cryptoeconomy can flow through.
If you’re going to pick a company with a huge addressable market, it’s hard to go wrong with finance. For example, a company like Lemonade (LMND) can continue expanding by offering all types of insurance.
There’s nothing stopping Coinbase from creating its own financial products and entering new markets. As the crypto economy grows, we’re going to see blockchain twins of existing financial services like lending, insurance, and even hedge funds.
Why not just buy Bitcoin?
Given the opportunity to buy Coinbase stock, why wouldn’t I just buy Bitcoin instead?
In 2020, I sold off a lot of random altcoins for Bitcoin and Ethereum. I have to resist FOMO because altcoins can often shoot up 50%, 100% or more in a day—and also crash. It’s similar to large cap vs small cap stocks. But what if I wanted exposure to some of this action?
Coinbase continually offers trading of new cryptocurrencies, so owning an crypto exchange could be like owning a crypto index fund.
Imagine there’s a hot new crypto project and new investors want in—Coinbase will be one of the usual suspects that people look to get in on the action. (Note: Bitwise and Crypto20 are two examples of crypto index funds, but these are OTC stocks not widely available for trading on apps like Robinhood yet.)
On the other hand, many investors aren’t comfortable holding cryptocurrency directly, and seek exposure through companies like MicroStrategy, Square and Grayscale’s Bitcoin Trust. These companies mostly use Bitcoin as a reserve asset. Coinbase would not only be the first cryptocurrency exchange you can invest in via the stock market, but it also provides exposure to crypto without holding actual crypto.
Coinbase’s business is particularly sensitive to Bitcoin’s price, so Iong-term investors will have to bet that Coinbase can diversify its business beyond Bitcoin.
My stance: I’ll continue to buy Bitcoin & Ethereum, and Coinbase as a way to capture broader value in the crypto ecosystem.
Concerns and competition
There’s a good stretch of time that Coinbase can just print money from transaction fees. Eventually, the competition will drive fees to zero (hey Robinhood!) The company’s future will ride on its ability to innovate and stay competitive.
Gemini is a close second to Coinbase, then there’s Kraken, Binance, and what do you know—decentralized exchanges (DEXs) that require no intermediary to transact. Let’s just say those other exchanges go public. I would probably still put my money on Coinbase. It’s the closest to a household name that crypto has.
One of the most interesting features about Bitcoin is that it has little operational risk. The network is decentralized and is set up to run itself. On the other hand, any company like Coinbase has operational risk. Management changes, security breaches, and thousands of different factors can affect a company’s performance. Looking from outside, it seems like Coinbase is a well-run company. I consider it a plus that Coinbase is a founder led company. CEO Brian Armstrong founded the company and has been regarded for his laser focus on the company mission. That has caused some controversy, but my ultimate takeaway is that Armstrong has thick skin and is willing to go against popular opinion. Plus, they have bigger fish to fry.
ALL YOUR COINBASE ARE BELONG TO U.S.
Coinbase and Bitcoin’s biggest existential risk is the government. The U.S. government cautiously allows crypto, so long as its able to regulate it. Multiple countries have banned Bitcoin, and others like India are teetering on the edge. It makes sense governments, which control the money supply, are threatened by decentralized financial systems. The risk is capped due to the large number of institutions that hold Bitcoin, but it’s an existential risk nonetheless.
Verdict? It’s a buy…with a limit
I’ll ultimately buy Coinbase when it IPOs because it’ll be the automatic category leader in crypto. How much I’ll buy will come down to the share price and market cap.
In it’s S-1 filing, Coinbase listed 114,959,000 shares for purchase. There are reports that Coinbase has been internally valued between $90B—$100B.
Yahoo Finance reports “shares have changed hands at $200 to $375.01 in private transactions this year…the volume-weighted average price per share for transactions from January through March 15 was $343.58, which would give Coinbase a public market valuation of about $67.6 billion.”
I’m going to do some bad back-of-the-napkin math here dividing those market caps by # of shares to approximate share price.
| Share price | Market cap |
|---|---|
| $200 | ~$23 billion |
| $300 | ~$34 billion |
| $400 | ~$45 billion |
| $588 | ~$67.6 billion (one target) |
| $869 | ~$100 billion (another target) |
It’s possible that Coinbase is overvalued. If it debuts as a company with a $100B market cap, I’m not banking on it to 10x and become a trillion dollar company like Amazon or Microsoft. Coinbase is innovative, but not 10x innovative in my eyes (yet).
Based on very rough estimates (I’m not a financial analyst!) I would look to acquire Coinbase for $588 or less per share. If Coinbase debuts at ~$300, I’d be more confident that this stock could double or triple over time to become a $100B company. Time will tell if there’s enough upside for investors.
Regardless of whether you choose to invest in Coinbase or not, its upcoming IPO is a huge deal. Bitcoin has been declared “dead” hundreds of times. Not too long ago, cryptocurrencies were seen as just some fringe, irrelevant technology. 12 years after Bitcoin’s creation, Coinbase’s IPO further legitimizes cryptocurrency and offers significant cognitive dissonance to crypto skeptics.
If you enjoyed reading this and haven’t hopped on the Coinbase train yet, use my friend link to sign up. We both get $10 in Bitcoin if you sign up with that link and buy/sell $100 worth of crypto.