A well-received Nasdaq debut from Coinbase last week opened what many hope to be Crypto’s cross into the mainstream. Nonetheless, the IPO has been controversial, including valuing the company on a completely watered-down basis. This method adds a higher number of stocks to the company’s valuation, essentially overvaluing the company by about $ 20 billion.
Perhaps the biggest controversy, however, lies in Coinbase’s ability to maintain and grow its profitability well into the future. Some analysts have warned against investing in $ COIN as high spreads and trading fees could bottom out in the face of increasing competition.
Brian Armstrong, Coinbase CEO, said he plans to expand the company’s product line over the next five to ten years to address those concerns.
Source: COINUSD on TradingView.com
Analysts are alerting Coinbase’s future profitability
In the run-up to the IPO last week, Coinbase released its numbers for the first quarter of 2021 and revealed impressive numbers. Highlights include $ 1.8 billion in revenue and doubling the monthly active user base to $ 6 million.
The biggest moneymaker is trading fees, which amounted to $ 1.1 billion and accounted for 86% of total sales last year. This corresponds to 0.57% of each transaction.
“In 2020 Coinbase collected about 0.57% of every transaction in fees, which corresponds to a trading volume of USD 1.1 billion with a trading volume of USD 193 billion. These trading fees accounted for 86% of sales in 2020. “
However, competition from Kraken, Gemini, Bitstamp and Binance will result in trading fees falling in a race to the bottom. Some analysts have indicated that based on the numbers for the first quarter of 2021, this is already moving.
“If we assume a similar breakdown of the total revenue reported by Coinbase of $ 1.8 billion in the first quarter of this year, trading fees would be about 1.5 on a $ 335 billion trade, or around 0.46% of each transaction Billions of dollars. “
Brian Armstrong, Coinbase CEO, said he expects 50% of the company’s revenue to come from non-trade sources over the next five to ten years. But is that a reasonable expectation?
The Amazon of Crypto
In conversation with Laura Shin, Gil Luria, the Research Director at D.A. Davidsonsaid the goal is to generate more revenue in custody and managed use. But he admitted that it wouldn’t happen overnight.
In terms of switching to 50% of sales from non-trade sources, Luria was confident that Coinbase could do it. He compared that situation to what Amazon has done since going public.
In 1997, Amazon was an online bookseller. Not only did it diversify into selling anything and everything, but the company also helped other people sell, switched to entertainment with Prime, and started a cloud business.
“Jeff Bezos may have imagined it, but we sure didn’t. We just knew that Amazon was way ahead of the pack. They had tremendous leadership and were so customer-centric, which was the absolute key to their success. And me see many parallels to Coinbase. “
By understanding the crypto game and being open to working with regulators, Luria believes Coinbase is in a good position to bring more products to market to replicate what Amazon has done.