How Much Money Does Coinbase Make?

Among the best business models in the world is the money management one. While fees have come down substantially in recent decades, you can certainly still find examples of financial advisors charging north of 1% on assets under management while another 1% is charged through commissions, 10b-1 fees, and mutual fund costs.

Sum those up and 2% of invested capital is lost each year to these hefty fees. So what, that’s no big deal people think because if the market makes 8-10%, they’re ahead.

But what happens when the market falls? Those same fees amount to 2% of the capital invested while 100% of the risk is saddled by the client. And then there’s the real problem with the economics that most fail to think about until it’s too late. Those pesky 2% fees extrapolated over 40 years wipes out 80% of the originally invested principal.

Now if you think that’s a good business model, we might have found an even better one, and it’s one you can invest in publicly.

Coinbase Has Cracked The Code

Now if money management sounds like a good business, it does have a drawback, which is time. The money manager has to wait a whole year to capture those economics. It’s why very few money managers actually scale their businesses.

But what if you could capture 1.49% of the principal immediately? That’s how Coinbase operates. And yet it gets better because Coinbase is a platform that services traders. And what do traders like to do if not transact, often.

So, imagine an eager crypto speculator deposits $100,000 into Coinbase and buys that amount of bitcoin, for example. Coinbase keeps $1,490 right off the bat. Now the speculator gets nervous and wants to sell, another 1.49% of whatever is leftover is taken by Coinbase as the toll for providing the trading platform. Before you know it 3% is in Coinbase’s coffers.

But how often does an average Coinbase client transact? As of 2023, Coinbase had approximately 9.5 million monthly active users, defined as users who make at least one transaction on the platform during a 28-day period​, or 12 transactions per year.

If each one of those transactions led to near 1.5% charge, almost 18% of principal invested is captured by Coinbase within 12 months. Now can you see the economics?

What’s The Catch?

For one, not all transactions incur that 1.49% fee and not all traders are active. Here is a breakdown of transaction fees depending on size.

• $0.99 for transactions up to $10
• $1.49 for transactions between $10 and $25
• $1.99 for transactions between $25 and $50
• $2.99 for transactions between $50 and $200

For larger transactions, the 1.49% fee is charged. Yet for credit card purchases, the fee can be as high as 3.99%.

There is also the risk that cryptocurrencies fall in value and therefore Coinbase is highly tethered to the value of the underlying assets.

But it’s by no means a poor model, and Coinbase has figured out many ways to capture value. For example, beyond transaction fees, Coinbase also applies a spread on the purchase and sale of cryptocurrencies. The spread is the difference between the buy and sell price, which usually ranges from 0.5% to 2%.

And still there are more fees:

• Conversion Fees: When converting one cryptocurrency to another, Coinbase charges a spread of about 2%.
• Deposit and Withdrawal Fees: Depositing funds into a Coinbase account can be free if done via ACH transfer, but other methods like wire transfers or PayPal might incur fees.
• Staking Fees: Coinbase reportedly charges a 25% commission on rewards earned from staking certain cryptocurrencies.

As you can see, Coinbase has numerous ways to make money, and it does, and so it’s no surprise that revenues are up 108% last quarter and 115% the prior quarter on a year-over-year basis. Better still, net income is forecast to grow at a 77% CAGR over the next 5 years, making the current 32.5x P/E very cheap.

How Much Does Coinbase Actually Capture?

For an active client, here is a sample calculation of how much Coinbase can actually capture of originally invested principal over the course of a 12 month period.

1. Initial Buy Transaction:
   • Transaction Fee: 1.49%
   • Spread Fee: Average 1%
2. Subsequent Transactions (11 more transactions):
   • Transaction Fee per Transaction: 1.49%
   • Spread Fee per Transaction: Average 1%
   • Total Fees per Transaction: 2.49%

Assuming the average client makes 12 transactions per year:

1. Initial Buy:
   • Principal Fee: 1.49%
   • Spread Fee: 1%
   • Total Initial Fee: 2.49%
2. Subsequent Transactions (11):
   • Total Transaction Fees: 1.49% * 11 = 16.39%
   • Total Spread Fees: 1% * 11 = 11%
   • Total Subsequent Fees: 27.39%
3. Annual Total:
   • Initial Buy Fee: 2.49%
   • Subsequent Transactions Fees: 27.39%
   • Total Annual Fees: 2.49% + 27.39% = 29.88%

Now imagine investing $100,00 and discovering $29,880 was taken with fees at the end of the year. The asset, or cryptocurrency, really needs to rise to overcome that fee anchor.

Of course, this estimate cannot be applied broadly across the entire client base, otherwise revenues would be substantially higher, but it does highlight that highly active users on Coinbase risk the platform capturing a bulk of the economics. For investors, however, the more volatility there is in crypto markets, and the more users transact, the better is for Coinbase.

And with a P/E of 32 now if net income really does rise at the rate forecast of 77%, it’s essentially trading at just 2x 2029 earnings. So, it’s no surprise that analysts have a consensus price target of $251 per share.

Certainly, there are risks to the investment thesis with the demise of cryptocurrency ranking near the top. If bitcoin and ether, and other popular cryptos fall sharply in value then Coinbase will capture a substantially smaller percentage of AUM and in turn will see revenues plummet as they did in 2022. So too are competitive pressures likely to threaten fee schedules being as high as they are currently. 

Finally, a discounted cash flow forecast paints a more pessimistic view with a $149 per share price point. And that’s not entirely a surprise given that free cash flows came in at $484 million last quarter but have been negative for numerous quarters in the company’s operating history.

The choppiness of those free cash flows makes forecasting challenging but if Coinbase can ride the crypto wave higher through increased crypto prices, more clients, and maintain its fees, the future is bright.

So to the original question, how much money does Coinbase make? Coinbase makes as much as 2.49% per transaction, comprised of a 1.49% commission and 1% fee spread in addition to administrative fees to deposit and withdraw funds.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.