Coinbase: Distribution An Advantage As Tokenization Grows

Summary Coinbase has a leading crypto exchange, positioning it to benefit from crypto adoption and increased regulatory ￰0￱ company continues to innovate, and is expanding into areas like payments, institutional services, tokenization, and ￰1￱ Coinbase still has a procyclic business, its revenue base is more diversified than in the ￰2￱ company's margins should also trend higher as it ￰3￱ Coinbase's stock should perform reasonably well longer term, I think it is late in the current crypto bull market to be entering a ￰4￱ ( COIN ) operates a leading digital asset trading platform, positioning it to capitalize on growing adoption of cryptocurrencies and a more favorable regulatory ￰5￱ Coinbase's current valuation may appear high, the exchange business model tends to have compelling economics, as network effects create a large competitive advantage once liquidity is established.

Coinbase's distribution advantage is also likely to be important as product innovation extends the footprint of blockchains into areas like tokenized ￰6￱ should be prepared to weather near-term volatility though, as Coinbase's dependence on crypto trading volumes mean that its revenue could drop significantly in the event of a market ￰7￱ Coinbase's business is currently dominated by speculation on digital asset prices, although is slowly diversifying. Real-world uses cases for blockchain technology include: Store of value Real-time cross-border payments P2P financial applications Tokenization of assets The rise of stablecoins is helping to drive adoption in payment use cases, with cross-border applications an attractive candidate due to the high fees involved in legacy ￰8￱ believes that the majority of payments will eventually occur on stablecoin rails due to the fact that they are faster and less ￰9￱ GENIUS Act could provide a boost in this regard by creating regulatory clarity and potentially helping to protect ￰10￱ is also the CLARITY Act, which relates to non-stablecoin crypto ￰11￱ uncertainty is still high in more nascent parts of the market ￰12￱ particular, tokenization efforts could face pushback from regulators as adoption ￰13￱ World Federation of Exchanges is urging regulators (SEC, European Securities and Markets Authority, and IOSCO) to clampdown on tokenized ￰14￱ exchanges are obviously acting in their own interest, but there are reasons to be concerned about the merits of tokenized ￰15￱ ( HOOD ) has already introduced US stock and ETF tokens in the EU, although some private companies, like OpenAI, are distancing themselves from the ￰16￱ believes that every asset class will eventually reside on chain, enabling it to become one of the largest exchanges in the ￰17￱ Coinbase is already one of the largest exchange companies by market capitalization, there could still be significant upside as the company introduces a greater breadth of financial services and capitalizes on the rise of tokenization and prediction ￰18￱ Coinbase is a cryptocurrency exchange and fintech company that currently focuses on trading and stablecoin payments.

Coinbase's suite of services continues to expand though, helping to drive both growth and ￰19￱ to many peers, Coinbase emphasizes regulatory ￰20￱ this likely weighed on growth initially, it positions the company for success longer term as cryptocurrencies become more ￰21￱ its business has been dominated by retail customers, but institutions are becoming a more important part of the customer ￰22￱ 1: Expansion of Coinbase's Services () In support of its retail business, Coinbase offers the Base app, which was formerly known as Coinbase ￰23￱ Base app is primarily for trading but can also be used to access onchain apps and embeds social network functionality, which potentially strengthens the network effects of the ￰24￱ has a decentralized exchange integrated into the Base app, providing users with access to a broad range of ￰25￱ user experience is designed to be simple, with Coinbase covering network ￰26￱ trading is currently only available to users in the ￰27￱ coins are another area of product ￰28￱ are digital assets issued by creators which enable them to monetize content and engage with their fan base (provide access to private group chats, exclusive merchandise, etc.).

This could represent a move away from the ad-based model that has dominated the internet, and aligns with Coinbase's attempts to embed social media functionality in the Base ￰29￱ is also developing Base, a layer 2 Ethereum solution which began as an internal ￰30￱ are no specifics around design or governance at the moment ￰31￱ is also exploring the launch of a network token, which would be used to pay fees associated with transactions and help accelerate Base's ￰32￱ enables fast and low-cost transactions and a place for developers to be decentralized ￰33￱ leverages a range of decentralized protocols to provide the functionality necessary for ￰34￱ users that signs up is given a Base name (blockchain-based ID) that is based on the ENS ￰35￱ identity using the ENS (Ethereum Name Service) ￰36￱ is a decentralized naming protocol that utilizes smart contracts to translate addresses into human-readable ￰37￱ also utilizes decentralized messaging and social media ￰38￱ has a number of expansion initiatives, and payments is probably the most important of these in the ￰39￱ company has developed a vertically integrated payment stack (USDC, Base, consumer applications and wallets, payment APIs), which enables faster, cheaper and more global payment ￰40￱ announced its stablecoin payment API in the second quarter, enabling merchants and developers to adopt stablecoins using partners like Shopify ( SHOP ).

B2B payments is a focus area, particularly ￰41￱ has suggested cross-border payments is roughly a 40 trillion USD opportunity, with B2B constituting around 75% of ￰42￱ have already achieved some traction in this area (~100 billion USD volume annually). While many companies, including banks and payment service providers, want to adopt crypto, they don't want to build the associated infrastructure, and Coinbase offers these companies a range of services (private key storage, integration with different blockchains, payments, staking). Around 250 institutions are now using Coinbase infrastructure, including PNC, JPMorgan, BlackRock, Stripe and ￰43￱ also has institutional custody and prime financing businesses, which achieved all-time highs in ￰44￱ digital asset ETFs were introduced in 2024 by the likes of BlackRock, Fidelity and Grayscale, and have seen significant inflows ￰45￱ provides custody for over 80% of these ￰46￱ remains the heart of Coinbase's business at the moment though, and while volumes will naturally fluctuate over time, institutional adoption and derivatives are reasons to be bullish about this part of the ￰47￱ was 1 trillion USD of crypto derivatives traded on Coinbase's platform in the second quarter of ￰48￱ in this area is important, as around 75% of crypto trading volumes is in ￰49￱ majority of crypto derivative volumes occur outside of the US at the moment though, largely due to the historical regulatory ￰50￱ was the first US regulated exchange to launch a perpetual futures contract in the US, and recently acquired Deribit, the leading options platform for ￰51￱ is also introducing a Mag7 + crypto equity index futures product that combines exposure to equities and crypto ￰52￱ product is an index of 10 equally weighted components, including Coinbase's stock, that is cash settled and rebalanced ￰53￱ is also seeing solid adoption of DeFi lending and ￰54￱ 1 billion USD of Bitcoin is now pledged as collateral to borrow money on its ￰55￱ also recently introduced a USDC onchain lending product that yields as much as 10.8% .

Funds will be allocated across lending markets, although will remain accessible, dependent on ￰56￱ support of its efforts to expand its exchange across asset classes, Coinbase is pursuing ￰57￱ includes tokenized equities, which improve access and settlement times, while enabling perpetual futures, fractional shares and 24/7 ￰58￱ has suggested that it may integrate with traditional brokers initially in order to provide ￰59￱ also plans on introducing a prediction market service, a growth area that is likely to benefit from regulatory ￰60￱ Analysis While Coinbase's revenue hasn't returned to the peaks of 2021, the company's revenue is now far more diversified and ￰61￱ includes growing volumes related to USDC, staking, custody and prime ￰62￱ trading volumes and Base transaction volumes were also at all-time highs in the second ￰63￱ 2: Coinbase Revenue () Coinbase generated 1.4 billion USD revenue in Q2, roughly flat compared to the prior year comparable ￰64￱ asset volatility was down in the quarter, which presented a headwind, and the crypto market capitalization was relatively ￰65￱ trading revenue was down 41% YoY to 650 million USD, while institutional transaction revenue totaled 61 million USD, a 38% YoY decline.

Coinbase's total trading volume declined 40%, which was partly due to a decision to prioritize revenue over ￰66￱ this, the drop in Coinbase's volumes was in line with spot ￰67￱ and services revenue was 656 million USD in Q2, with growth in areas like custody, staking and ￰68￱ prices and protocol reward rates were headwinds in the quarter ￰69￱ 3: Coinbase Revenue Sources () Coinbase previously stated that its third quarter was off to a strong start, supported by higher asset prices and ￰70￱ company expects 665-745 million USD subscription and services revenue, up 8% sequentially at the ￰71￱ will also provide a tailwind, contributing around 30 million USD of revenue and 10 million USD OpEx in July.

Coinbase's adjusted EBITDA was 512 million USD in Q2, at roughly a 37% ￰72￱ expenses totaled 1.5 billion USD in the quarter, although a data theft incident was responsible for 307 million USD of this. Coinbase's institutional transaction expense was also hit by increased investments in incentives and rebates that are designed to increase Coinbase's derivatives market ￰73￱ was also a 1.5 billion USD unrealized gain on strategic investments in the quarter (primarily related to Circle's IPO) and a 362 million USD gain from fair value remeasurements of Coinbase's crypto ￰74￱ a result, Coinbase's net income totaled 1.4 billion ￰75￱ 4: Coinbase Margins () Coinbase recently priced a 2.6 billion USD convertible debt offering (0% convertible senior notes due in 2029 and 2032).

Buyers also have the option of purchasing up to an additional 400 million USD of the convertible ￰76￱ 2029 notes have a conversion rate of 2.2005 shares per 1,000 USD of principal, while the 2032 notes have a conversion rate of 2.5327 shares per 1,000 USD of ￰77￱ planned on deploying around 200 million USD of the net proceeds towards a capped call transaction. I tend to think the timing of the move is smart but it is probably a negative signal for ￰78￱ has a highly profitable business and substantial cash balance, meaning it has no real need for additional ￰79￱ suggests that the company is capitalizing on what it perceives to be an elevated share price and favorable funding environment to strengthen its balance sheet for any potential ￰80￱ While many people still question the merits of cryptocurrencies, they continue to become more mainstream and have recently benefitted from a number of favorable regulatory ￰81￱ is one of the leaders in the space, despite a decision to focus on regulatory compliance from the ￰82￱ leaves the company well positioned as crytocurrencies expand into new ￰83￱ wants to become a universal exchange, and its large user base is also an advantage in this ￰84￱ are only projecting around a 10% annual revenue growth rate over the next decade, which I believe is too ￰85￱ of this likely stems from the procyclical nature of Coinbase’s business and the fact that the crypto market is currently running ￰86￱ has diversified its business significantly in recent years though, which means that the impact of any downturn is likely to be less severe than in the ￰87￱ a result, I believe that Coinbase's stock will perform reasonably well longer term, although I think it is late in the current crypto bull market to be entering a ￰88￱ 5: Coinbase EV/S Ratio ()