Company Overview
Coinbase, the leading digital currency exchange, filed their S-1 last week. The company is going public through a direct listing (placeholder amount of $1,000,000,000) and Goldman Sachs is leading the offering. Coinbase will be listed on the Nasdaq under the ticker “COIN”.
The company is riding a surge in the cryptocurrency market and it's been reported they just sold shares in the secondary market at ~$100B valuation, which should set the range for when they start trading. The company will most likely begin trading sometime in March and will certainly be one of the most anticipated IPOs in recent memory given its focus on cryptocurrency.
The company’s mission is to “create an open financial system for the world” and that they are building the cryptoeconomy, which is a “more fair, accessible, efficient, and transparent financial system for the internet age that leverages crypto assets: digital assets built using blockchain technology.” Coinbase draws parallels between Google and how they democratized access to information through an easy-to-use search engine; Coinbase is democratizing access to the cryptoeconomy by offering a simple-to-use platform to invest and use crypto assets; the company is the onramp to crypto for millions of people around the world. CEO Brian Armstrong believes in a vision where cryptocurrencies have the potential to disrupt the global financial system and he states the following in his founder letter in the S-1: “The current financial system is rife with high fees, delays, unequal access, and barriers to innovation. In many countries, citizens don't have access to sound money, a functioning credit system, or even basic property rights. If the world economy ran on a common set of standards, that could not be manipulated by any company or country, the world would be a more fair and free place, and human progress would accelerate.”
Across the company’s history, they have facilitated $456B of lifetime trading volume and hold $90B of assets on their platform. Coinbase serves 3 main constituents 1) retail users 2) institutional investors and 3) ecosystem partners (more detail on this later in the product section). According to Coinmarketcap, Coinbase is the 3rd largest exchange globally and the largest in the United States. Coinbase’s financials and metrics are in a league of their own; there are many graphs and in-depth analysis of Coinbase’s financials and how they relate to the broader crypto ecosystem later in this post but a few stats -- the company currently has 43M retail users, 7K institutional investors, and 115K ecosystem partners across 100 countries on their platform. From a revenue perspective, they did $1.3B in 2020 and grew 139% year-over-year while generating 41% Adjusted EBITDA margins. Coinbase has $1.1B of cash (and if you include customer custodial funds it comes out to $4.9B). Assets on the platform have swelled from $17B ending 2019 to $90B+ ending 2020, up 432% year-over-year and trading volume has gone from $79.9B to $193.1B, up 142% in the same period. Coinbase takes roughly 0.57% take on all transactions on the platform. Interestingly, the company has moved to a remote company and lists no office location on the front of their S-1, although they do list a phone number with a San Francisco area code (they became a remote company in May 2020). They also list the genesis block associated with Satoshi Nakamoto at "1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa" on the S-1’s front cover, whose white paper in 2008 set bitcoin in motion. Both are firsts for S-1’s that I have seen. Coinbase has 1,249 FTEs (full-time employees) as of December 2020 and has raised $525M in equity financing according to Pitchbook since it was co-founded in 2012 by Brian Armstrong (more in the ownership section below).
While there are a significant amount of financial analyses and outputs later in this post, the following is Coinbase's quarterly revenue and year-over-year growth.
Total Revenue and YoY % Growth
Coinbase also included many charts in the S-1 around the broader crypto landscape which are helpful. The two below show the Bitcoin price on a log scale and the second shows the crypto market cap over time vs. the S&P 500.
Source: Company S-1
Source: Company S-1
Coinbase Product Offerings
Coinbase enables both individual investors and institutions to trade and store a wide range of cryptocurrency assets in an easily accessible web and mobile app. The company describes how they create network effects (or what is actually more just scale effects)-- retail users and institutions store assets and drive liquidity, enabling Coinbase to expand the crypto assets that they offer and launch new products and services that attract new customers to do the same. Coinbase’s scale and leadership position draws ecosystem partners to connect with their millions of customers around the world, further enhancing the value of the platform. The company is underpinned by robust back-end technology that enables them to launch and scale new products rapidly and to meet the needs of a single consumer to large institutional traders. Coinbase enables their customers to safely and easily invest, spend, send and receive, store, save, stake, borrow, lend, distribute, build, pay, and more generally access and transact with crypto assets
Retail: Coinbase offers support for the U.S. dollar, Euro, British pound, Canadian dollar, and Singapore dollar and enables consumers to invest in (buy) 45+ assets, spend through a Coinbase Card (Visa partnership), send and receive funds, use a savings account that allows users to earn yields from stablecoins like USDC and Dai, and stake (an alternative way to validate blockchain transactions), and borrow and lend on their crypto asset portfolios.
Institutions: Coinbase is building a “one-stop-shop” for institutions to participate in the cryptoeconomy. It includes advanced investing/trading features, the ability to send and receive crypto assets, secure storage through a custodian, the ability to stake (similar to retail), and borrowing and lending.
Coinbase's product portfolio over time (below).
Source: Company S-1
The company also shows an output of product capabilities by end user (below).
Source: Company S-1
Many people ask about the intrinsic value of or use cases for Bitcoin and other crypto assets. Coinbase lists a few applications in their S-1 that span financial and nonfinancial applications.
Store of value: Adoption of crypto assets with attributes such as a finite supply (like Bitcoin) or inherent parity with a fiat currency (like USD Coin) have emerged as stores of value around the world.
24/7/365 real-time cross-border payments: Crypto asset markets operate 24/7/365 and facilitate the instant transfer of value, eliminating the need for any intermediary, siloed payment networks or specialized infrastructure.
The democratization of financial markets: Blockchain protocols establish a universal source of truth, eliminating reconciliation workflows, allowing for near-instantaneous settlement, enabling capital to flow more freely, and simplifying transactions that require significant documentation.
Peer-to-peer financial applications (DeFi applications): Crypto-assets rely on software-based networks that can be used to facilitate traditional financial services like borrowing, lending, trading derivatives, and insurance through smart contracts.
Digital marketplaces for…anything: Crypto allows for the creation of new digital global marketplaces and business models that were previously not possible by substituting centralized intermediaries with open markets governed by programmable rules and incentives.
Coinbase's platform also supports many different assets and growing (below).
Source: Company S-1
Summary Metrics and GTM (Go-to-Market)
Coinbase’s goal is to become the primary financial account for retail to access crypto and to build a one-stop-shop for institutions to trade. Coinbase generates substantially all its net revenue from transaction fees (96% in 2020) and its revenue is highly dependent on the prices of crypto assets and the volume of transactions conducted on their platform. Transaction revenue is based on transaction fees that are either a flat fee or a percentage of the value of each transaction. For Coinbase’s retail brokerage product, they also charge a spread to ensure that they can settle purchases and sales at the prices they quote to customers. Coinbase also generates revenue from subscription products and services but it’s been insignificant to date. Moreover, in 2020 the company derived a majority of its net revenue from Bitcoin and Ethereum trading; these pairs drove over 56% of total trading volume on the platform. Coinbase is diversifying its transaction revenue away from Bitcoin; Bitcoin trading represented 60% of transaction revenue in 2019 and 44% of transaction revenue in 2020 as the company brings other assets onto the platform. In 2020 the company brought on an additional 20 crypto assets including multiple DeFi assets. Moreover, in 2020, no other asset than Bitcoin and Ethereum individually represented more than 10% of their trading volume or transaction revenue. Given the ease of use of the platform, the company charges a premium. Below is an output of the network effects or scale effects the company cites as it relates to their viral GTM.
Source: Company S-1
Coinbase spent less than 5% of revenue on sales and marketing last year and 90% of users are acquired organically. Institutional investors now make up half of assets on the platform so they are likely to continue to invest in products and services where they can generate revenue from institutional investors. The company does have customers in 100 countries but U.S. customers generated 76% of 2020 revenue while European customers generated 24% of 2020 revenue. Below are some other interesting company and industry stats pulled from the S-1.
Company Stats
Coinbase’s growth has come with minimal outbound sales and marketing effort – since inception over 90% of retail users had found them organically or through word-of-mouth.
Since inception through December 31, 2020, Coinbase has generated over $3.4B in total revenue.
Although subscription products and services do not currently contribute a significant portion of net revenue relative to Coinbase’s trading business, they experienced 126% annual growth in revenue from these products and services in 2020 over 2019.
Coinbase directly integrates with 15+ blockchain protocols, supports 90+ crypto assets for trading or custody, and offers a suite of subscription products and services.
Coinbase retail users use multiple products and services and across the four quarters ended December 31, 2020, on average, 21% of retail users who invested also engaged with at least one non-investing product per quarter. These include Distribute, Stake, Save, Spend, and Borrow & Lend products. They are also very sticky; when retail investors engaged with at least one non-investing product, Coinbase saw average net revenue per retail user increase by approximately 90%.
The overall market capitalization of crypto assets grew from <$500M to $782B between December 31, 2012, and December 31, 2020, representing a CAGR (compound annual growth rate) of over 150%. Over the same period, Coinbase retail users grew from ~13,000 to 43M, a 175% CAGR.
In 2020, as the price of Bitcoin increased from ~$7,000 to ~$29,000, Coinbase experienced a correspondingly high increase in trading volume, which grew from nearly $80B in 2019 to $193B in 2020, growth of 142% YoY.
And more recently, the company has experienced significant growth in the number of institutions on their platform, increasing from over 1,000 as of December 31, 2017, to 7,000 as of December 31, 2020.
Historically, Coinbase has seen a correlation between trading volume and both Bitcoin price and Crypto Asset Volatility. These correlations have generally been more pronounced with retail than institutional trading volume, and throughout 2020, Coinbase saw an increase in institutional trading activity.
Coinbase’s retail wallet application, which launched in mid-2018, had grown to over 2M users through the year ended December 31, 2020.
In 2020 Coinbase experienced ~30 outages, with an average outage duration of 64.6 minutes.
Coinbase takes security and compliance very seriously and as of December 31, 2020, over 15% of their full-time employees were dedicated to legal, compliance, finance, and security. 40% were dedicated to engineering, product, or design roles.
Industry Stats
Today, over 50 distinct blockchain protocols support more than 7,500 crypto assets that enable all forms of digital records and transactions, including contracts, documents, identity, rights, securities, titles, in-game digital goods, and many others, to be controlled programmatically.
In 2017, Bitcoin miner fees increased from ~$0.35 per transaction in January 2017 to over $50 per transaction in December 2017.
According to Coinbase, there have been four major crypto-asset price cycles since 2010. Each cycle has had a variable duration ranging from approximately 2-4 years and has increased the overall crypto market capitalization significantly from the prior cycle. In the three price cycles before the current one, which Coinbase believes we entered in late 2020, crypto prices have subsequently declined from each peak and settled at a trough higher than the prior peak.
Moreover, in the past, crypto markets have not appeared correlated with the broader U.S. equity markets. This trend held true until February 2020, when the U.S. stock market and crypto markets experienced a significant downturn due to the COVID-19 pandemic. Through December 31, 2020, these markets subsequently appeared more correlated as each market recovered.
As of December 31, 2020, the combined value of U.S. dollar stablecoins (crypto assets that track the value of the U.S. dollar) exceeded $25B, an increase of 375%+ from December 31, 2019.
As of December 31, 2020, there was already more than $15B of U.S. dollar equivalent value worldwide allocated towards DeFi applications and protocols.
Market Opportunity
Coinbase’s market opportunity in trading alone is massive. The company had 43M verified users and 2.8M monthly transacting users (MTUs, roughly 6.5% of total verified users) and the implied ARPU (average revenue per user) based on these numbers was roughly $800 last quarter. Coinbase states in their S-1 they hope to attract the world’s smartphone-wielding population of roughly 3.5B. Some simple math (output below) implies very large total addressable market: If Coinbase can address anywhere from 2.0B to 3.5B verified users and 6.5% of those users transact monthly, that gives them between 130M and 228M MTUs. At a range of ARPUs (which start significantly lower than current levels to be conservative), the implied market size ranges from $48B to $246B. The reality is that Coinbase’s revenue goes up when 1) the price of cryptocurrency goes up and/or 2) there is volatility, so the market potential will depend on the overall growth in the crypto ecosystem, which Coinbase is well-positioned to take advantage of. As they state in their S-1 “Coinbase grows as the cryptoeconomy grows.” Coinbase currently holds roughly 12% of the world's crypto assets today.
Note: Implied from company S-1 figures
Competition
Coinbase competes in a large and fragmented market that has varying levels of regulatory compliance. Coinbase states that some competitors do not adhere to their standards of regulations and can therefore attract more customers, and this is particularly true in international markets. On the retail side, they mostly compete with traditional financial technology and brokerage firms like Square, Robinhood, and PayPal, which have recently introduced crypto products and services. The company calls out Binance which they state has “varying degrees of regulatory adherence”. Kraken is another exchange competitor that is reported to be raising a large round but it's not listed as a competitor in the S-1. On the institutional side, they mostly compete with other crypto-focused companies or a few traditional financial incumbents with limited crypto products. Coinbase believes that they win due to their ecosystem, purpose-built infrastructure for crypto, significant investments in regulatory compliance and licensure, advanced cryptography and security expertise, and their emphasis on accessibility, trust, and ease of use.
Investors and Ownership
Coinbase has raised a significant amount of equity capital. Over the past few years though, the business is highly profitable and has no need of raise additional cash. According to Pitchbook, Coinbase has raised $524.7M of equity across seed → series E rounds from investors including IVP, Greylock, Andreessen Horowitz, Union Square Ventures, Ribbit Capital, DFJ Growth, Spark Capital*, Battery Ventures, Paradigm, GGV Capital, Wellington, Tiger, and others. 5%+ pre-offering institutional investor shareholders include Andreessen Horowitz (15.8%), Paradigm + Co-founder Fred Ehrsam (9.5%), Union Square Ventures (7.5%), and Ribbit Capital (6.4%). CEO and Co-founder, Brian Armstrong, owns a 21.3% stake (and most of the voting control). Armstrong also has a CEO Performance Award package over 10 years that could deliver him an additional 3.8% of class A common stock based on certain share price targets. The last reported equity round was a $300M series E led by Tiger at ~$8B post-money valuation in October of 2018 (Pitchbook). As mentioned earlier in the post, it’s been reported the company has sold shares in the secondary market at ~$100B before the upcoming direct listing. Interestingly, Union Square Ventures sold almost $140M worth of stock over the past couple of years in the secondary markets to unknown investors or to others on the cap table (and at prices below the last preferred series E preferred round of $36.19/share). While they might have been selling on the way up to de-risk, if Coinbase is worth $100B they will have missed out on billions of dollars of gain.
An output of the cap table ownership and per series prices is below. Coinbase reports ownership in its S-1 separately by share class (Class A and Class B shares - Class A common stock has one vote per share and Class B common stock has 20 votes per share). The chart below shows the calculated ownership percentages based on the current total basic shares outstanding of 186M (21M Class A + 165M Class B, not including options or RSUs), so it may not tie to the reported ownership figures (and it only includes investors the company reported in the S-1). The chart of per series share prices does not include the latest rumored secondary transaction at a $100B valuation.
Coinbase Ownership Percentages
Source: Company S-1
Source: Company S-1
Financials and Other Metrics Outputs
Coinbase discloses a substantial amount of financial and other metrics information in their S-1 and the following charts are a consolidated view of that information. Coinbase has to be one of the fastest-growing companies at their scale -- they did almost $1.3B in revenue last year and grew 139% YoY while generating adjusted EBITDA margins of 41% and saw almost a $400M increase in cash for the year (if you net out customer custodial funds). It’s also highly unusual for a consumer-focused fintech company of their scale to still acquire 90% of their users organically and spend so little on sales and marketing as a percentage of revenue. We’re also in a crypto bull market and while the company will see ups and downs, their current business model is incredibly profitable and their strong brand has continued to drive efficient new user acquisition. In Q4 of 2020, the company generated almost $600M of revenue and grew almost 500% YoY with ~50% adjusted EBITDA margins. The following charts dig deeper into the company’s metrics and ratios.
Historical GAAP P&L ($000's)
Source: Company S-1
Historical Net Revenue Build ($000's)
Coinbase breaks out their net revenue build as while institutions are growing in the platform, retail is still 90%+ of net revenue.
Source: Company S-1
Historical Key Metrics ($M)
Source: Company S-1
Quarterly Run-rate Revenue ($M)
Coinbase's revenue isn't recurring, but it's helpful to look at their annualized revenue run rate for a sense of scale, which was $2.3B last quarter.
Source: Company S-1
Quarterly Revenue Breakdown by Type
Transaction revenue is still ~80% of total revenue but other streams are growing faster.
Source: Company S-1
Retail vs. Institutional Volume
While institutions continue to make up most of Coinbase's transaction volume, they charge lower fees, hence Retail still drives the vast majority of revenue. It's not a surprise that institutions pay lower fees given their larger volumes.
Source: Company S-1
CY 2020 Net Revenue Breakdown by Type
The below chart breaks down Coinbase's net revenue by type. Retail is still over 90% of total revenue and 95% of transaction revenue. This mix has not changed materially over time.
Source: Company S-1
Implied Transaction Revenue Take Rate
If you divide Coinbase's quarterly transaction revenue against its reported trade volume, you imply Coinbase's take rate (fees).
Source: Company S-1
Transaction Revenue ($M) and Trading Volume ($B)
The company's transaction revenue is highly correlated with trading volume -- the following charts transaction revenue against total trading volume.
Source: Company S-1
Average Account Balance and ARPUs (Average Revenue by User)
Coinbase does disclose quite a few quarterly metrics from which you can derive other metrics and ratios. The company mentions that a small percentage of users drive a significant amount of revenue. MTUs (monthly transacting users) have a naturally much higher ARPU than total verified users. The average account held just over $2,000 of crypto assets as of last quarter.
Source: Company S-1
Implied Trading Volume and % YoY Growth
Trading volume per MTU was almost $32,000 last quarter.
Source: Company S-1
Monthly Transacting Users as a % of Total
Source: Company S-1
Coinbase Market Share
While Coinbase is in the top 3 global crypto exchanges, they are gaining market share. They currently hold almost 12% of the world's crypto assets. This metric is calculated by dividing Coinbase's assets on platform by total crypto market cap (as reported in Coinbase's S-1).
Source: Company S-1
Coinbase Reported Outputs
The below screenshots are taken directly from Coinbase's S-1.
Source: Company S-1
Source: Company S-1
Crypto Asset Volatility: Represents our internal measure of crypto volatility in the market relative to prior periods. The volatility of crypto assets is measured on an hourly basis (using 10 minute price intervals within each hour) for each crypto asset supported for trading on Coinbase, averaged over the applicable time period (quarterly), then weighted by each crypto asset’s share of total trading volume during the same time period across a select set of trading platforms, in addition to the Coinbase platform, that operate in similar markets including itBit, Bitfinex, Bitstamp, bitFlyer, Binance.US, Binance, Kraken, Gemini, Bittrex, and Poloniex.
Source: Company S-1
Source: Company S-1
Source: Company S-1
Source: Company S-1
Implied Gross Margin and Operating Expenses as a % of Revenue
Coinbase doesn't disclose a gross margin. The below chart takes a conservative view of gross margins by treating "transaction expenses" and "other operating expenses" as COGS.
Source: Company S-1
GAAP Operating Income / (Loss), Operating Margin and Adjusted EBITDA Margin
Coinbase unfortunately doesn't break out stock-based compensation by function, but they do disclose Adjusted EBITDA margin which I included below.
Source: Company S-1
Cash Flows ($M)
While the cash flow statement shows over $3B of cash flow generation from operating activities in 2020, $2.7B was for customer custodial funds (definition below). The output below nets out customer custodial funds from cash flow from operating activities (resulting in the "Adjusted" metric shown below) in an attempt to get a more accurate view of the operating cash flow profile of the company. On an adjusted basis, Coinbase generated $294M in operating cash flow in 2020. Note that in the previous P&L table shown above, the cash flow section is shown as reported by the company.
"Customer custodial funds represent restricted cash and cash equivalents maintained in segregated Company bank accounts that are held for the exclusive benefit of customers. Custodial funds due to customers represent cash deposits held by customers in their fiat wallets and unsettled deposits and withdrawals. The Company restricts the use of the assets underlying the customer custodial funds to meet regulatory requirements and classifies the assets as current based on their purpose and availability to fulfill its direct obligation under custodial funds due to customers."
Source: Company S-1
Quarterly P&L (000's)
Source: Company S-1
Valuation ($M)
Valuation for Coinbase is challenging to pinpoint. The easy part is that the company recently sold secondary at a reported $100B valuation. The table below tries to solve for that, but given the company has a strong correlation to cryptocurrency prices and volume, the stock could be seen as an index to the broader crypto market. This is both good and bad; assuming the crypto market continues to grow, Coinbase will do exceptionally well and as seen in the S-1, they are wildly profitable and growing revenue hundreds of percentage points a year while generating significant cash flow. If the crypto market flattens and/or assets decrease for a sustained period, Coinbase’s growth will slow and profits will fall dramatically. Fortunately, the company has over $1B in cash and cash equivalents (excluding customer custodial funds) and can weather any downturn in the crypto market. Given those reasons, pegging a multiple to Coinbase’s revenue is a reasonable way to assess valuation, but investor sentiment will probably be a larger driver of valuation at least in the short term. It’s unlike a SaaS company where this is a fairly narrow range of revenue multiples based on growth rates. Below is a table that shows potential valuations based on a range of growth rates over the next 12 months as well as a range of multiples. If you believe in continued revenue growth you can get to an implied $100B valuation based on their current margin structure and other, comparable multiples. Looking at other fintech comparables, AfterPay (ASX:APT) and Affirm (NasdaqGS:AFRM) both trade at 28x NTM (next-twelve-months) revenue as of 26-Feb-2021. I believe the most likely outcome will be investors will peg Coinbase’s valuation to the growth (or decline) of the overall crypto market vs. focusing on specific comparable multiples.
Note: Enterprise value ranges and growth rates are illustrative.
Coinbase’s IPO is a critical milestone for the crypto world. Crypto assets on the blockchain were only introduced to the world in 2008 and the market is still in its infancy. Coinbase became a market leader by focusing on making their product easy-to-use for consumers and by staying at the forefront of compliance and regulation in a fast-moving and "Wild West" market. We’re still in the early innings of the crypto market opportunity and Coinbase is the market-leading exchange. Their soon-to-be publicly traded stock will offer many a way to gain exposure to the crypto market they would not have had otherwise given how closely tied their revenue is with crypto market appreciation and trading volume.
The biggest risk to Coinbase is the future of the crypto market, but its fee structure is also a risk. The company takes on average over 50 bps (basis points) or 0.50-0.60% of every transaction on their platform, and they mention a significant amount of trading volume on their platform is derived from a “relatively small” group of customers both on the retail and institutional side. The nature of crypto assets is that they are easy to send and receive for anyone with an internet connection, and so if a competitor had a product as strong or better as Coinbase with lower fees, they could significantly impact Coinbase’s revenue. The company does mention fee pressure is likely to come in the future. Coinbase does have a moat around their business by being first to market, at the forefront of regulation, and having a strong brand name. It will take competitors a significant amount of time and investment to catch up not only to the product but also to the strong brand equity the company has built (Coinbase basically acquires users for free with a 90% organic customer acquisition rate). The company also calls out the risk around security -- if Coinbase were to be hacked and customer assets stolen, it could severely damage their reputation and hurt the business. Lastly and not surprisingly, Coinbase is opting for a direct listing with no lock-ups on shares, so just like the broader crypto market, the company's shares could see significant volatility when trading starts. Either way, it’s a watershed moment for the crypto market and Coinbase will likely be one of the most valuable fintech companies in the world when they start trading in the next few weeks.
*I previously worked at Spark Capital, which invested in Coinbase.
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Special thanks to my partner Anthony DeCamillo for the help on this post.