IPO Radar - Coinbase
Should you HODL?
Hey everyone, Dez here from All Things Venture. Today we’re sharing the first article in our new series called IPO Radar. IPO Radar articles are all about one thing - helping our community make investment decisions on startups that are at the brink of going public. I wanted to start IPO radar to give people quick, digestible, accurate information. When you have a 9 - 5, it’s not easy to dedicate the necessary time and effort you should to managing your money, so think of IPO Radar as a shortcut to doing just.
In our first IPO Radar article we are covering Coinbase so let’s get right to it.
Coinbase, AKA the big daddy of crypto, was founded by Brian Armstrong in 2012. Fun fact, Brian Armstrong worked at Airbnb before he founded Coinbase and he’s also bald. Like, really bald. We’re not sure why so many billionaires are bald, but given that he’s a soon to be billionaire we’re going to go ahead and tap him for 1st Team All Bald-Billionaires 2021. Anyways, so Coinbase was founded in 2012 with a mission to, “create an open financial system for the world.” What does that mean exactly? Well, like most corporate statements/missions, it’s a self-serving ambitious goal that frames a company as an entity designed with the sole purpose of furthering the human experience rather than just getting us to buy or pay for more stuff. On the balance, I don’t think Coinbase is working to create an open financial system for the world - I think they’re working to create a more open financial system for the world - a system that still includes Coinbase. Coinbase offers individual and institutional investors a range of products that allow them to trade, save, spend, and receive cryptocurrencies. (If you’re new to crypto - check out this primer). Coinbase makes money when an investor engages in one of their products. Now if you know anything about crypto, one of the central tenets of cryptocurrencies is that they’re decentralized, meaning there’s no single source that controls the network, the protocol, the resources, etc. So why would users who are looking to access a decentralized currency (i.e cryptocurrencies) go to a centralized source (i.e Coinbase) to gain access? This is an over simplification but think of Coinbase like a toll road. Coinbase’s toll road makes it easier, faster, and safer for you to access any cryptocurrencies you want but there’s a fee to do so. There’s other ways to access cryptocurrencies in the nature that they were intended to be accesses, but at the core of it Coinbase just makes things easier for the average consumer to buy crypto in the same way that Amazon makes it easier for the average consumer to buy groceries, body soap, or whatever item we’re now all too lazy to step foot in an actual store for.
By all intents and purposes, Coinbase is a company that is heading in the right direction. They’re swinging for the fences in their public debut in there’s good reason why:
The company has 43M retail users, 7K institutional investors, and 115K ecosystem partners across 100 countries
Coinbase has 2.8M transacting users
Coinbase generated $1.3B in revenue in 2020, a 139% YoY increase
Coinbase takes roughly 0.57% on all transactions on the platform
In the company’s history they’ve facilitated $465B of lifetime trading
Key Investment Attributes
Market Leadership - Coinbase is one of the top 3 exchanges by trading volume, and the dominant exchange among retail investors in the US. The best thing about that? They’re not burning cash on sales & marketing to grow. Coinbase spent 4.4% of their revenue on sales & marketing in 2020. By comparison, Uber spent 27.9% of their revenue on sales & marketing leading up to their IPO, and while it’s important to note that Uber and Coinbase operate in entirely different. They are both marketplace businesses with global ambitions.
Emerging Industry - The bitcoin whitepaper was published in 2008, and is viewed as the beginning of the cryptocurrency era. Per Coindesk on October 1st 2013, a single bitcoin was worth $123.65. As of March 15th, 2021 a single bitcoin is worth $56,300.33. That is a 455X increase in less than 15 years of the currency’s existence. It is clear that cryptocurrencies are an application of an emergent technology (blockchain), but the fact of that matter is that, no one knows for sure how cryptocurrencies (and blockchain) will impact the global economy going. forward. The parallel I like to use is that bitcoin is to blockchain, what the World Wide Web was to the internet, it is an accessible application of an emergent technology in history. The difference is that bitcoin is a technology application that is meant to be used as a store of value or payment, whereas the internet is a technology application that is meant to be used as a means of communication.
Global Infrastructure Opportunity - Globally, there are 4.66 billion active internet users worldwide, which makes up close to 60% of the global population. The fundamental value proposition for cryptocurrencies, which drives the value of a company like Coinbase, is that they are decentralized form of payment that can make sending various forms of money faster, easier, cheaper, and more secure (or anonymous if need be). The long term opportunity for Coinbase, in my opinion, is to become the primary global exchange for cryptocurrencies. Which means that, on a TAM basis - Coinbase has easily captured less than 1% of their target customer.
Key Investment Risks
Crypto Volatility - Coinbase generates 96% of their net revenue from transaction fees, which means the company is dependent on two things: 1) The value of cryptocurrencies being high and 2) The volume of trading in cryptocurrencies also being high. It’s no secret that cryptocurrencies are volatile. From Dec 2017 to Dec 2018, bitcoin lost nearly 80% of it’s market value after reaching a peak of ~$20,000 in late 2017. Similarly, from Jan 2020 to March 2020, bitcoin lost nearly 50% of it’s value due to the effects of the pandemic. To put this into context, Coinbase could go from making 0.57% off a $1000 transaction to making 0.57% off of a $200 transaction.
Revenue Concentration - In addition to the revenue concentration from transaction fees, Coinbase attributes 56% of total trading volume on the platform to just two cryptocurrencies - Bitcoin & Ethereum.
Government Regulation - If the U.S. government oversteps and is too heavy handed in crypto regulation, cryptocurrency investors will undoubtedly get spooked and de-risk their investments. The main focus of the U.S. government is to combat the, “malign actors [that] are increasingly using [cryptocurrencies] to facilitate international terrorist financing, weapons proliferation, sanctions evasion and transnational money laundering, as well as to buy and sell controlled substances, stolen and fraudulent identification documents and access devices, counterfeit goods, malware and other computer hacking tools, firearms, and toxic chemicals.
If you are comfortable with the price volatility and believe in the viability of cryptocurrencies as digital gold or an alternative to fiat currencies, I think it makes sense to add Coinbase to your portfolio.
Note: I think this goes without saying but I am not an Investment Advisor, and all views are my own. Also big thank you to my good friend Tyler Triscari for helping me work through early drafts of this article!