Coinbase ($COIN) Breakdown "1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa"

  
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“The true currency of life is time…and we have all got a limited stock!” - Robert Harris


To all the Time Investors,

What does it take to build a world with more economic freedom for every person and business regardless of their location. Today, we will breakdown, Coinbase ($COIN), a company building the infrastructure to propel a crypto revolution that is decentralizing the world of money and finance.

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📖What is Coinbase?

Coinbase is the largest cryptocurrency exchange in the US. The company is positioned to provide end-to-end financial infrastructure and technology supporting crypto assets.  The crypto ecosystem is shaped by three types of customers:

  • Retail: The everyday citizen can invest, store, spend, earn, and use crypto assets, such as Bitcoin, in a safe and secure space

  • Institutions: Financial institutions (corporations) can access crypto markets with safe trading and storage tools. The ecosystem ensures liquidity for transactions using crypto assets.

  • Ecosystem Partners: Merchants, developers, and asset issuers (governments) can build applications that use crypto protocols and participate in the crypto network.

Coinbase is positioned to power the evolving crypto economy. The invention of Bitcoin created a revolution of digital scarcity. This scarcity does not require authenticity or approval from central institutions. Scarcity is proven through the decentralized ecosystem. This has enabled the company to potentially be a leader in creating an open financial system.


📈Market Opportunity

Technology is sweeping human society, while the existing financial system continues to experience legacy limitations. The crypto economy is organically evolving due to a series of fundamental shifts:

  • The need for financial access, efficiency, and cost: Humans should have no intermediary barriers, inefficient procedures and protocols, or high costs to exchange in the financial system.

  • The need to cultivate value from the internet: The exchange of digital assets (NFTs) in the past has been difficult to ensure authenticity and scarcity. The crypto ecosystem ensures secure exchange and consensus-backed record-keeping (blockchain technology) to ensure resiliency and value. Additionally, the network is on 24 hours allowing for peer-peer financial transactions (DeFi applications).

  • The need for frictionless applications: The crypto economy is built on software networks on top of the internet. This ultimately ensures programmable smart contracts, which are self-reinforcing agreements between parties, and removes the need for intermediaries.

  • The need for a reliable store of value: Inefficient institutions have been notorious for wiping out wealth. The need for a digital asset class that can maintain its scarcity and preserves wealth is critical.

As a result, today the addressable crypto market is valued at $1.5 trillion which is about 10-13% of the value of all mined gold on the planet. Coinbase re-iterates that the market is still in the early stages. Coinbase will aim to target the 3.5B customers connected to the internet through smartphones around the world or translating into ~228 million monthly transacting users.


👨‍💻What are the Strategic Resources?

Coinbase has built the infrastructure to support its customer base and create a powerful flywheel for an open financial system.

Product Portfolio:

Coinbase has reported $316.1M in crypto assets as of 12/30/2020.

  • Bitcoin represents 63%, Ethereum 8%, all other crypto assets 29%. The market value for BTC at the time was ~$28K and no is around ~$51K.

  • With the integration of 15 blockchain protocols, the company can support 45+ assets for investment purposes and 90+ assets for storage.

Retail:

  1. Coinbase exchange - allows to buy, sell, and send 42 different types of crypto assets

  2. Wallet - store cryptocurrency

  3. Applications in the ecosystem to earn rewards and interest on crypto assets

  4. Coinbase pro - provides advance cryptocurrency trading of 90+ assets

Ecosystem:

  1. Prime exchange - allows trading for institutions

  2. Asset Hub - allows customers to list their digital asset

  3. Commerce applications - accept payments in crypto assets

  4. Custody - provides secure storage of 90+ crypto assets for institutions

Developing Resources:

Coinbase has filed 107 patents and currently has 21 granted patents for their intellectual properties. After analyzing the patent applications, the top five keywords appear:

  • Blockchain | protection | digital | transaction | stable

  • In 2019, Coinbase was granted a patent to essentially make sending Bitcoin as easy as e-mails. Email addresses are linked to wallet addresses and can be used to make payments instantly.

The company is driven by innovation and talent as it currently invests $271 million in technology and development as of 12/31/2020, which represents about 21% of revenue. The investment increased by ~86 million (47%) from last year driven by an increase in headcount supporting platform enhancement, software licenses, website hosting, and product development.

Customer Landscape + Partnerships:

Coinbase is breaking boundaries in the financial system and has created the following customer base:

  1. Retail: 43 million users as of 12/31/20 and ~2.8 million monthly transacting users (180% QoQ).

    • $32,1k trading volume per transacting user

  2. Institutions: 7,000 institution customers (67% YoY)

    • Coinbase facilitated MicroStrategy’s $425 million bitcoin earlier this year.

    • Coinbase also handled Tesla’s $1.5 billion purchase of bitcoin

  3. Ecosystem Partners: 115,000 partners composed of organizations that build blockchain protocols, create DeFi applications supporting the protocols, creators of new tokens, merchants, and organizations that monitor blockchain transactions (Government).

    • The company has a program called “Day 1 Launch” to support new crypto assets.

      • Compound is a key investment that stemmed from the program. Many using Compound earn interest on many crypto assets such as $700 million in USDC (digital USD in Coinbase).

    • Additional partners: Visa (release of debit card in European markets) and BlockFi

Resource Deployment + Growth Strategies + Acquisitions:

Business Model and Growth Strategies:

The company derives its revenues through three streams:

  • Transaction Fees – 86% of Revenue: The majority of revenue is generated from transaction fees related to trades (bought, sold, and withdrawn) of crypto assets on the platform. Since inception, the revenue generated from transactions is 96% from an average transaction fee of 0.50%.

  • Subscription and Services – 3% of Revenue: This is focused on custodial fees for services such as storing crypto assets, staking revenue from crypto assets in staking protocols, and revenue of crypto-asset earn campaigns.

  • Other Revenue – 11% of Revenue: This involved the sale of crypto assets to fulfill customer transactions. In some cases, customers need to meet the minimum trade size for execution in which Coinbase steps in for support.

  • 2020A: Revenue: $1.3B (137% YoY) driven by $192B (143% YoY) of trading volume

    • 62% of trading volume is driven by institutional and 38% by retail

  • 2020A: Gross Margin: ~80% (6.6% YoY)

  • 2020A: EBITDA: $322M (25% of Revenue)

  • 2020A: Operating Cash Flow: $3B ($2.7B driven by customer custodial funds which are restricted cash and cash equivalents held for customers and regulatory requirements). The net estimated free cash flow is $294M.

The company plans to continue accelerating growth through the following initiatives:

  1. Customer Expansion: Currently, Coinbase has spent 5% of revenue on customer acquisition for verified users. 90% of the users have come to use the product organically. The company will spend heavily on educating institutions and retail investors with the expansion of supporting teams and customer service. Additionally, 76% of the revenue was driven by the U.S. market, and expansion into emerging markets will open a greater pool of customers.

  2. Expansion of Crypto Assets: Expand the tokenization of new assets, and enhancing blockchain protocol features such as staking, and decentralized identity.

  3. Innovation: Plans to expand innovation infrastructure focusing on distribution, access and identity, and developer toolkits, and payments. The company also plans to utilize its venture arm to grow the ecosystem at large furthering its mission.

  4. Strategic Acquisitions: The company reported the acquisition of two key players:

    • Xapo ($68M): provides cryptocurrency wallet and custody services. Specifically, the company is known for having physical vaults in the Swiss mountains to store crypto assets offline.

    • Neutrino ($2.8M): provides blockchain analytics technology that highlights trends to identify new tokens in the space.  


💪Key Strategic Moats

  1. Scale: The company reported $90 billion in fiat and crypto assets stored through their services. This represents ~11% share relative to the value of the crypto market. With 115,000 partners, 43 million verified users, 7,000 institutional customers, and supports 90+ crypto assets, the company leads the pack in the space.

  2. Technology Platform: The company’s technological platform spans beyond just trading and selling of crypto assets. The one-stop-shop allows for customers to store their assets, borrow against their holdings, and participate in the decentralized networks that are built through the ecosystem. The company has ensured network effects through breadth and depth of products, trust, and diverse use of their products. Ultimately, the platform allows for “24/7/365 real-time cross-border payments”

  3. Brand: With the rise of Bitcoin since 2012, Coinbase has been the leading face supporting the infrastructure of the crypto economy. The company has ensured that trust is attached to its brand by dedicating 15% of its workforce to legal, compliance, and security. They want to ensure that their customers’ assets are secured, and they have ease of use to transact.

  4. Marketplace Ecosystem: Between retail users, institutions, and developers Coinbase built a foundation that ensures great synergies. This ultimately results in a deep pool of liquidity to transact the multitude of crypto assets in the ecosystem.

  5. Specialized Team: The company is founder-led with support from top-tier talent in the crypto space. 40% of the team is composed of engineers and about 10% of the team is composed of talents related to security and risk.

⚠️Key Critical Risks

  1. Competition: Coinbase states that it is operating in a fragmented and heavily regulated market. Certain competitors have an advantage since they do not have to adhere to the same standards.

    • From a retail user’s perspective, the key competition comes from Square, Robinhood, and PayPal who also allow their users to transact in certain crypto assets. A key difference here is that users in these other platforms do not actually own the crypto asset.

    • From an exchange perspective Binance, the world’s largest crypto exchange is a key competitor internationally. Coinbase claims they have “varying degrees of regulatory adherence.”

  2. Bitcoin and Ethereum Concentration: Total revenue from Coinbase is highly dependent on the crypto market and specifically the price of Bitcoin and Ethereum which represent 83% of the crypto assets. The decline in trading volume, price, or risk to market liquidity can create some drastic impact.

  3. Government Regulation: The government regulation in the crypto space is still undetermined. The company will need to adhere to evolving regulations to maintain appropriate licenses and financial offerings for customers.

  4. Security Risk to Crypto Platforms: In 2019, Binance was hacked resulting in $40M in losses. This could certainly harm the brand image of any exchange and with the increasing demand of Bitcoin, Coinbase stands as a prime target.


🧬Team DNA and Vision

Key Leaders: As of December 31, 2020, the company has 1,249 employees, of which over 40% are dedicated to engineering, product, or design roles.

  • Brian ArmstrongCo-Founder and CEO: Currently Brian is also the founder and CEO of ResearchHub Technologies, a scientific research platform. Prior, Brian was a software engineer at Airbnb, Inc and also a previous founder of Universitytutor.com

  • Surojit ChatterjeeChief Product Officer: Prior served as Vice President of Product Management for Google Shopping at Google LLC and Global Head of Product in Google

  • Emilie Choi – Chief Operating Officer: Prior to the role, Emilie served as VP of Business, Data, and Implementation in Coinbase. Prior she served as VP and Corporate Development for LinkedIn Corporation

  • Melissa Strait – Chief Compliance Officer: Prior, Melissa served as Global Head of Financial Crimes at Stripe and as a US Compliance Officer

Vision: Based on the Founder Letter, Coinbase is focused on creating economic freedom for their customers no matter their location. The future they are building will be decentralized and ultimately merge the digital and real-world economies.


🤯Key Insights for Time Investors:

  • Your location in the world unfortunately will define the opportunities you are presented. The current financial system is built with many obstacles to access financial services. However, with the invention of Bitcoin, a new movement emerged that could provide the core pillars to economic freedom to any individual. The current market to Bitcoin is around ~1.5 trillion representing about 10% of the Gold market. To propel this future, Coinbase emerged as one of the first trusted largest brands in America and currently the second-largest crypto exchange in the world.

  • The company also operates in a heavily regulated environment and will experience new regulations as the political climate wraps its thoughts around the co-existence of a crypto ecosystem in the current financial world. Coinbase dedicates 10% of its employees and has ensured appropriate leadership to meet security and compliance risks.

  • It is important to note that Coinbase’s success is tied to the overall growth of the crypto-economy and specifically the demand for Bitcoin and Ethereum. As Bitcoin and Ethereum scale, Coinbase will also benefit as it stands to be the one-stop-shop for a multitude of assets.

  • The company has experienced rapid growth (137% YoY) and more importantly, 90% of their customers to date have been acquired for free (organically).

  • The fact that Coinbase is founder-led with the mission of creating an open financial system brings assurance and clarity to the overall goal the company is trying to achieve. The company maintains an 11% share in the market and holds $90 billion assets in its platform with 43 million verified users and 2.8 million monthly transacting users.

  • It is important as Coinbase attempts to expand into international markets and their digital asset framework evolves beyond their core business model of generating transaction fees. What will Coinbase do with their $1B in cash to expand share? For long-term growth, the company is well-positioned to maintain market leadership.  

  • Investor Lineup + Equity Stake:

    • Top Tier VCs: Andreesen Horowitz (15.8%) and Union Square Ventures (7.5%)

    • Top Investors: Marc Andreesen (15.8%) | Frederick Ernest Ehrsam (9.5%)

    • Brian Armstrong (CEO): (21.3%)

    • As a group the executive leaders and directors: (58%)

    • In their most recent secondary share sale, Coinbase has sold shares ranging from ($200-$373) resulting in a potential $100B valuation


-Igli G. Laçi

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Disclaimer:  The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies