When the internet launched in 1989, its creators had a singular purpose: to make information more easily accessible on a global scale. Originally, the internet was used exclusively by scientists in universities and research institutions. Eventually, it rolled out to the rest of the world, effectively offering anyone with a connection unprecedented access to knowledge. In other words, the internet democratized learning.
The mysterious Satoshi Nakamoto, author of the 2008 white paper that introduced Bitcoin, believed that cryptocurrency could democratize the financial system. By moving away from centralized banking and towards a decentralized crypto-economy, the world population would experience greater economic freedom.
That concept resonated with Brian Armstrong, who took action to increase access to Bitcoin by founding a new type of company, Coinbase, in 2012. Through Coinbase, users can buy, sell, and store multiple types of cryptocurrency, including popular options like Bitcoin and Ethereum.
The company began offering its shares through a direct listing on the Nasdaq as of April 14, 2021, and investors were immediately enthusiastic. It has been a roller coaster ride, with the stock price shooting up as high as $429.54 and dropping as low as $208.00 before settling down a bit. Over the past three months, Coinbase has traded in a tighter range – roughly $225 per share to $260 per share.
What’s in store for Coinbase – and for its shareholders? Many analysts predict substantial growth. This is the bull case for Coinbase, as outlined by the Coinbase leadership team during its second-quarter 2021 earnings call held on August 10, 2021.
Cryptocurrency Trends Drive Coinbase Growth
As with many new technologies, cryptocurrency wasn’t immediately popular. However, it is rapidly approaching mainstream adoption as its user base expands. Today, cryptocurrency has moved beyond its early role as an investment vehicle or a method of keeping questionable purchases off the books.
For example, Coinbase has 1.7 million users involved in staking – the process of validating transactions – which earns them a yield on assets. That figure is notable because there were essentially no Coinbase users participating in staking a year ago.
In addition, Coinbase users are borrowing and lending on a peer-to-peer basis, as well as making purchases with their Coinbase cards – debit cards with the Visa logo.
Industry analysts believe this activity signals the growth of a true cryptoeconomy – and as the cryptoeconomy grows, Coinbase is positioned as an industry leader. That’s good news for Coinbase shareholders.
Coinbase Reports Strong Quarterly Results
Second-quarter 2021 results showed Coinbase has succeeded in delivering growth across nearly all key metrics. One of the most critical, Monthly Transacting Users (MTUs), increased quarter-over-quarter from 6.1 million to 8.8 million.
More importantly, a growing number of users have expanded their relationships with Coinbase through the use of additional products. In the first quarter of 2021, 25 percent of users had multiple Coinbase products. That figure rose to 27 percent in the second quarter.
Individual Coinbase users aren’t the only consumers of Coinbase products and services. Coinbase noted increased adoption on the institutional side as well. Specifically, Coinbase clients now include 10 percent of the top 100 hedge funds as measured by assets under management (AUM). That is particularly impressive, as the figure was near zero just 12 months ago.
From a revenue perspective, Coinbase delivered solid results. Users generated a total trading volume of $462 billion, which created net revenue of $2 billion for the company.
EBITDA came in at $1.1 billion. Subscription and services revenue also went up to $103 million for the quarter, which represents approximately 5 percent of Coinbase’s total revenue.
Obstacles to Coinbase’s Growth
Cryptocurrency remains a relatively new store of value, which means it has its share of skeptics and detractors. Unfortunately, some of those detractors are responsible for regulating cryptocurrency for entire nations.
Coinbase leadership acknowledged the possibility that lawmakers could create obstacles for cryptocurrency in general and Coinbase in particular. The company is taking a proactive approach to managing this risk.
Management indicated that the company supports smart cryptocurrency regulation that encourages innovation in this area. They are carefully monitoring developments in the regulatory environment as lawmakers examine various components of the cryptoeconomy. Some elements currently under scrutiny include risk mitigation of crypto assets, stablecoins, tax reporting, and securities registration.
In the letter to shareholders, Coinbase leaders pointed out that much of the regulatory risk may come from a lack of clarity and misunderstanding of the cryptoeconomy among lawmakers. For example, discussions held among members of the US Congress during the development of a recent infrastructure bill illustrated the issues that may result from the creation of laws by those less familiar with cryptocurrency and everything that goes with it.
The technology is complex, so Coinbase has elected to work with lawmakers as partner and advisor in an effort to ensure that they have the insight and information necessary to create smart regulations to manage the cryptoeconomy.
The Bull Case for Coinbase: 1 Billion Users
Cryptocurrency is inherently volatile, and that has an impact on Coinbase’s revenue. As a result, management explained that they choose not to attempt to base predictions of future revenue on quarterly results.
Nonetheless, Coinbase top brass was willing to offer some thoughts on the company’s future, starting with a reinforcement of the company’s goal of reaching one billion users – a number that will drive increased cryptocurrency activity and revenue growth for Coinbase.
Cryptocurrency is gaining traction, and as it does, Coinbase’s prospects improve considerably. Coinbase has committed to investing in the infrastructure required to match industry growth. Armstrong and his team are aware that in order to expand on current market share, the platform must be capable of meeting users’ expectations for customer service and rapid onboarding regardless of volatility.
Coinbase will also focus on enhancing its products, services, and partnerships to keep up with the introduction of new assets, new use cases (e.g., decentralized finance or DeFi), non-fungible tokens (NFTs), decentralized autonomous organizations (DAOs), and other developments in the industry. Each of these areas is likely to see growth, and Coinbase intends to provide users with a safe way to explore further.
To that end, Coinbase’s short-term goals include bringing more assets to the platform, bringing those assets in faster, shipping more products in the international market, and integrating with third-party interfaces and self-custody so that Coinbase users can access any decentralized app.
While the outline of Coinbase’s strategy for meeting consumers’ needs doesn’t give investors and analysts financials to work with, it does demonstrate Coinbase’s deep understanding of the industry and its thorough preparation for meeting challenges as it grows.
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