Coinbase Global, Inc. is a financial technology company that provides end-to-end financial infrastructure and technology for the crypto economy. The company offers retail users the primary financial account for the crypto economy, provides a marketplace with liquidity for transacting in crypto assets, and utilises ecosystem partners’ technologies and services that enable it to build crypto-based applications and accept crypto assets as payment.
Investment Overview
Higher-than-peers retail fee margin could contract over time. Coinbase is the second largest crypto exchange by volume. Its scale and easy-to-use offerings have attracted close to 10m monthly transacting users on its platform. The company emphasises on compliance more than its peers, which earned it a good reputation with retail customers and also made it less susceptible to regulatory headwinds. Altogether, these factors enable the firm to charge higher-than-peers commissions from its retail customers, which accounts for a vast majority of its revenue. Nonetheless, we think the high fee margin could contract over time, especially after Bitcoin ETF emerging as a cheaper alternative to invest in Bitcoin.
TAM expansion and cost reduction underway. Management has been looking at product and geographical expansion initiatives to broaden its total addressable market (TAM), including entering EU, Singapore and offering derivatives in the US. The second round of layoffs of 20% of its staff, announced in Jan 2023, would also bring down operating costs by 25%. The markedly higher interest income from customers’ idle cash amid the high interest rate environment has also supported earnings.
Bitcoin spot ETF approval a strong boost to transaction revenue in near-term. Coinbase’s trading volume run-rate since Dec 2023 has almost tripled from 3Q23 level, supported by higher Bitcoin prices and improved crypto investing sentiment. This should lead to a jump in Coinbase’s transaction revenue in 4Q23 and 1Q24. Nonetheless, we think the growth curve could flatten soon as the hype around ETF approval fades gradually.
Risks
(1) Crypto asset price and volatility risk, (2) regulatory risk, (3) TAM expansion being slower than expected, and (4) margin compression due to heightened competition.
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