Is Coinbase Really Worth $100B?

A Deep Dive on the Coinbase S-1

Published in

Coinmonks

11 min readFeb 27, 2021

Coinbase, a crypto exchange, just filed its S-1 to go public via direct listing. This comes on the back of recent months’ massive runup in cryptocurrencies, a SPAC frenzy, and an increasingly frothy market.

What’s caught many people’s attention is Coinbase’s supposed doubling in valuation over the past month. In late January, the company was valued at roughly $54 billion in a private secondary share offering. Now, less than a month later, it’s seeking a $100 billion public debut.

Some are claiming this is yet another case of an extended valuation in an overpriced market. Others are stating that Coinbase’s valuation is justified by its leadership status in the fast-growing crypto markets.

With the S-1, potential investors have been treated to a trove of new data. Below, I took a deep dive into the data so you don’t have to.

Some Important Numbers

Over the last few years, Coinbase has experienced rapid growth. Revenue grew 139% YoY in 2020 while net income turned positive, growing from a loss of $30M in 2019 to a profit of $322M in 2020. (For perspective, Airbnb and Snapchat are both >$100B companies that aren’t yet profitable).

Coinbase had 43M verified users (as of December 2020), up from 32M in 2019. Customer acquisition cost (CAC) was an astoundingly low $5.15. If we think about where Coinbase sits in the spectrum of financial institutions — from digitally-enabled, mobile services like Square to traditional banks like J.P. Morgan — it seems as though Coinbase is closer to the digital, mobile end. Such an agile, software-focused business model means that Coinbase’s profit will continue to grow exponentially as revenues scale (they likely had high fixed costs from setting up the exchange infrastructure but have low marginal costs per additional user).

Interestingly, Coinbase’s CAC increased in 2020, up from $4.02 in 2019. If we’re thinking of Coinbase as in a similar vertical to Square’s CashApp (digital wallets, ability to exchange money virtually, etc.) then we would actually expect CAC to eventually decrease over time as network effects/word of mouth drive organic acquisition.

Coinbase’s increased marketing & sales spend in 2020 was probably directed toward gaining market share in the crypto space and educating users about other products within the Coinbase ecosystem. Given the growing number of players entering the crypto space, it seems important to acquire customers first and fast to build strong network effects. To some extent, we’re already seeing that with Coinbase — over 90% of retail users have found them organically since the company was founded in 2012. That being said, I wouldn’t be surprised if Coinbase’s CAC drops again in future years as word of mouth, Coinbase’s strengthening brand, and broader adoption of cryptocurrency continue to accelerate organic growth.

Revenue Streams

Coinbase’s S-1 financials categorize revenue into three streams:

1. Transaction revenue (85.8%)

2. Subscription and services revenue (3.5%)

3. Other revenue (10.7%)

Transaction Revenue

Transaction revenue derives from users trading cryptocurrencies (you can see the entire fee structure here). Revenue for this segment roughly follows this formula:

Transaction Revenue = ($ amount per transaction) * (# of transactions) * (transaction fee)

Certain parts of this stream are more correlated to crypto cycles than others. The average transaction is closely tied to price volatility — the higher the price of crypto, the greater the absolute value of assets held on the platform and the more volume that occurs with each transaction (the average purchase price tends to go up).

The number of transactions is (somewhat) tied to monthly transacting users (MTUs). I say somewhat because certain MTUs may transact daily while others only once or twice per month. The S-1 notes that “MTUs have begun to appear less correlated to Crypto Asset Volatility.” It’s unclear what “less correlated” actually means — is it only 90% correlated now instead of 95%? One proxy I find interesting is Google search volume for “Coinbase” relative to “cryptocurrency.” Over the past five years, the two terms map almost exactly — with regard to both search volume and interest over time.

Search volume isn’t the same thing as actually signing up for (or using) a Coinbase account, but it does help reflect broader interest, popularity, and awareness of Coinbase among society. Noticeably, the run-up we’re seeing now is still only half of what we saw in 2017. To me, this could mean two things. First, it could suggest that the current crypto bull market has a long way to run; we may not reach the peak until search volumes reach (or surpass) 2017 levels. Or, second, these search trends could suggest that society is more generally aware of/knowledgeable about cryptocurrencies than in 2017. I’m more inclined toward the latter.

Interestingly, Coinbase’s transaction volume as a multiple of assets on platform decreased. In 2019 trading volume was 4.7x assets on platform, whereas in 2020 trading volume was only 2.1x assets on platform. This could signal a rise in the number of investors — both retail and institutional — that are adopting “diamond hands” (i.e. holding their investments in cryptocurrencies for the long run). If this is indeed the case, Coinbase’s subscription and service offerings will likely gain share as a percentage of revenue mix.

Subscription and Services Revenue

According to the S-1, subscription products and services include “Store, Stake, Save, Borrow, and Lend.” In 2020, subscription revenues grew 126% YoY. Coinbase stated that they’re actively trying to expand the subscription portion of their revenue, as subscription products help mitigate revenue volatility (less reliance on transaction volume reduces correlation to crypto cycles).

These products “generate revenue based on a percentage of the assets on our [Coinbase’s] platform participating in the product or service.” Thus, two big factors drive subscription revenues: number of users enrolled in these products and assets on platform.

Currently, only 21% of verified users (9M users) — enroll in (at least) one of these services. Notably, when a retail user begins using a non-investing service, average revenue for that user rises ~90%. It’s likely that Coinbase’s increased marketing & sales spend in 2020 was in part dedicated to expanding awareness of/enrollment in these services.

Assets on platform — the other component underlying subscription revenues — is more volatile. From December 2019 to December 2020, total assets increased from $17B to $90B! In both periods, 70% of assets were in Bitcoin ($11.9B in 2019 and $63B in 2020). During that same time period, the price of Bitcoin increased by ~340% (using prices on December 31st, 2019, and December 31st, 2020). The $11.9B in 2019 should have appreciated to $52.4B by year-end 2020, putting Bitcoin net inflows at $10.6B. In other words, the amount of new capital inflow– not just the increase in Bitcoin from price appreciation — nearly doubled from 2019 to 2020.

Similarly, Ethereum assets on platform grew from $1.53B (9%) in 2019 to $11.7B (13%) in 2020. Over that same horizon, Ethereum returned 480%, adding $7.3B worth of Ethereum to the platform in 2020 from price appreciation. As such, net inflows of Ethereum in 2020 were around $2.87B.

I think Coinbase downplays subscription revenues’ exposure to broader crypto market volatility. That the past year’s growth in assets stems more from Bitcoin and Ethereum price appreciation than from capital inflows means we could see significant reductions in assets if prices fall.

“Other” Revenue

According to Coinbase, “other revenue” comprises:

“The sale of crypto assets when we are the principal in the transaction.”

This segment seems to include any price appreciation related to (or sale of) cash or cash-equivalent assets on Coinbase’s balance sheet. Unsurprisingly, these holdings include cryptocurrency. At the end of 2020, Coinbase had $1.1B of cash/cash-equivalents, with 18% ($187.9M) in crypto. In 2019, Coinbase had roughly $550M worth of cash/cash equivalents, but it is unclear what percentage was in cryptocurrency. If we assume Coinbase had the same ratios of each cryptocurrency-to-total-cash/cash equivalents in 2019, they would have had sold around $134M worth of cryptos during 2020.

$134M is almost exactly how much Coinbase documented as revenue derived from “other” segments:

If Coinbase intends to maintain its crypto holdings at roughly 18% of cash equivalents going forward, then this segment is also exposed to volatility in the broader cryptocurrency markets.

Market Share

It’s also useful to put Coinbase’s growth in perspective relative to the rest of the cryptocurrency industry. The $90B in assets represents roughly 11% of total crypto market capitalization — up from Coinbase’s 8.3% share in 2019 and 4.5% in 2018.

Similarly, Coinbase is gaining share in overall trading volume. Over the past two years, Coinbase has gone from processing 16.5% of Bitcoin transactions to over 37%.

We’re also seeing consolidation among exchanges, suggestive that a combination of strong network effects and strategic acquisitions could help Coinbase continue to gain share. Whether Coinbase can grow — or sustain — its market share will be an area to watch.

So, Is Coinbase Worth 100B?

A $100B valuation puts Coinbase at a:

· P/S ratio of 78x

· P/E ratio of 309x

Sounds expensive. The $100B valuation is likely based on expectations (1) that cryptocurrency prices will continue to appreciate, especially as more institutions adopt it as a reserve, (2) that Coinbase can expand its product offerings to create more sustainable recurring revenue streams, and (3) that Coinbase will continue to gain market share.

So much of the difficulty and debate surrounding Coinbase’s valuation stems from the magnitude of the unknowns: will Bitcoin be institutionally adopted and, if so, what impact will that have on Bitcoin’s price? Will cryptocurrency ever actually become a transaction currency (e.g. fiat money) rather than a reserve currency (e.g. gold)? Where is there room for growth, and will Coinbase be the one to capitalize on those opportunities? How quickly might such changes take place? These are just a few of the many unknown factors that could impact Coinbase’s future.

That being said, I do think there are major growth opportunities ahead. My guess is that Coinbase dedicates additional effort in 2021 or 2022 to expanding their services in Africa. At the moment, they only service 13 African countries. Moreover, Coinbase only offers the ability to convert between fiat currencies and cryptocurrencies in these countries — far less than the product suite (deposit, buy, sell, pay, etc.) offered in many North American and European countries.

African countries that can access Coinbase services. Source: Coinbase

Notably, Nigeria — Africa’s most populous nation and a hub for crypto activity — is absent. Understandably, Nigeria’s absence may be because the Nigerian government has banned the trading of cryptocurrency — but isn’t that exactly what decentralized finance is supposed to help circumvent? Nonetheless, if cryptocurrencies continue to gain traction worldwide, Nigeria’s government may be pressured to ease its stance.

Additionally, Coinbase seems to be developing a bank-like suite of products, from mobile wallets to credit cards. If — or when — cryptocurrency does evolve into a more transactive currency, digital banks will be poised to take market share from traditional financial institutions. The 15 largest consumer banks in the US currently have a combined market cap of $1.76 trillion. A world in which Coinbase is both a bank and a (crypto) brokerage helps explain the potential justifications for the $100B valuation.

Some criticize Coinbase’s $100B valuation by comparing it to the overall crypto market cap (~$1.5 trillion) and stating that it is absurd to think that Coinbase is worth 7% of the crypto markets. I think this is a flawed perspective. Velocity of money (in this case, crypto) matters more than market cap — Coinbase’s revenue stems more on transaction volume than fees from idle assets, in which case it would make more sense to consider Coinbase’s valuation as a % of total transaction volume. But even then, it’s incredibly difficult to project how price and transaction volume will change in the next few years.

At the end of the day, whether Coinbase is (or will be) worth $100B depends on factors almost entirely outside of the company’s control. The current price ratios look expensive but, then again, Amazon’s valuation has looked expensive almost every step of the way. Early stages of innovation aren’t always embraced — the state of Massachusetts banned buying Apple stock in its IPO because they felt it was risky and over-valued. It’s hard to value disruptive innovation when we struggle to understand the magnitude and speed of that disruption.

So, I’ll leave you with this: when disruptive change occurs, it often happens gradually, then suddenly. Whether Coinbase is helping lead such a change remains to be seen.