Namaste Yogis. Welcome to the Blockchain & AI Forum, where your blockchain and artificial intelligence technology questions are answered! Here no question is too mundane. As a bonus, a proverb is also included. Today’s question was submitted by Victor from San Juan, and he wants to know my view of the crypto exchange company Coinbase.
Victor, you came to the right place. It just so happens, that I’m a Coinbase customer and own their stock hence I try to keep up on their performance. Let’s go through their August 7th, Securities and Exchange Commission (SEC) filing, to answer your question. We start by comparing a few important data points from December 31, 2023, to June 30, 2024.
At the end of 2023, Coinbase had $5.13B in cash; whereas on June 30th, 2024, it had $7.22B. Two billion dollar plus increase in six months is noteworthy. Coinbase provides crypto custody services, therefore let’s examine that metric. It turns out Coinbase now is the custodian of $262B in crypto assets whereas on December 31st, it had only $193B in customer accounts. A $70B increase is monumental. I suspect this increase is tied to the Bitcoin ETF approved by the SEC in January. Coinbase was selected by Blackrock and other investment managers as their Bitcoin ETF custodian. Holy vault Batman!
The amount of crypto held for investment by Coinbase climbed from $330M to $1.23B! Coinbase stockholders were delighted with their equity stake growing to $8.37B from $6.28B in only six months. Last, revenue more than doubled year over year to $1.38B but the net income was not particularly impressive, checking in at only $36M. Over 50% of Coinbase’s revenue is generated by fees placed on trading. Hence, that is a concern.
What about expenses? Short answer, expenses are up across the board. For example, transaction expenses, marketing, technology development, and general administrative all increased 10% plus. In an earlier article, I noted Coinbase pledge to spend millions on supporting pro-crypto politicians in this election cycle. Those expenses will shoot up during the third and fourth quarter as the general election approaches in November. Will there be a return on investment of those political contributions? Maybe, but it will take years provided the election goes the way Coinbase seeks. If anti-crypto candidates win, Coinbase could find itself with fewer friends and more opponents.
From a macro perspective there is good news for Coinbase’s business model. For instance, in the centralized crypto exchange world, Coinbase has no serious competitor. Most people prefer to participate in crypto via a centralize exchange and Coinbase reigns supreme for several reasons. First, Coinbase has an easy-to-use interface. Super simple to navigate, on-board, etc. Second, Coinbase is USA headquartered and registered with the SEC thus clients perceive there is a “cop on the beat”. Third, Coinbase takes extraordinary steps to ensure compliance with SEC rules which is exactly why Blackrock and other institutional investors selected Coinbase as their Bitcoin ETF custodian. Coinbase basically has the lion share of the centralized exchange and custodial market except for a small percentage of people who insist on peer-to-peer trades and being their own custodians. Could Coinbase lose market share in the future? Yes, a new centralized exchange might challenge. However, Coinbase is unlikely to lose significant clients due to the mass market going the way of peer-to-peer exchange and custodian free.
Time to go, but first a proverb from Vietnam, where they say: “talking to you is like pouring water over a taro leaf” (in one ear out the other).
Until next time,
Yogi Nelson
Blockchain & AI Forum 