A Long-Term Look At Coinbase (NASDAQ:COIN)

This article is a thesis for why Coinbase (NASDAQ:COIN) is a long-term bet on the growth of crypto, including in its less speculative forms, despite the largely negative sentiment towards the stock in 2022.

Few other moments had such a strong flavor of a market peak as Coinbase’s IPO, a much-fanfared market listing of the U.S. cryptoexchange valued at $86B at a time when greed and crypto still rhymed amid seemingly never-ending price rises of thousand celebrated ponzi schemes.

As on its way up, Coinbase is now closely watched on its way down, and it doesn’t look good. Cryptoexchanges are more restricted in terms of what they can do in the U.S., as compared to the rest of world (including the EU) anyway (i.e., broadly speaking no derivatives, no leverage), leaving them more reliant on pure trading fees propelled by asset appreciation and things like NFTs.

And Coinbase has treaded carefully. We have talked about their dispute with SEC, from which they ultimately backed off. This week, we saw new legal challenges emerge, some which are of more serious nature. What is and isn’t a security is a perennial topic in crypto. It seems that, unlike their jurisdiction shopping competitors, Coinbase has to be very careful about its business. And for the most part, they are.

Coinbase has stuck to their simple business of earning trading fees. One look at Coinbase’s 2021 annual report reveals just how much of its business is trading fees from retail (p. 141). This does require, however, prices going up.

So, as you know if you’ve invested any penny, 2022 feels a bit different. Quantitative tightening and recession fears sent financial markets and crypto deep, deep down. By and large, people have lost what they’ve made in the last 12-18 months.

It is a perfect storm for Coinbase with its mostly plain vanilla product suite. People are transferring their decimated crypto assets off exchanges, and competitors are introducing commission-free trading.

All eyes on Coinbase. With its share price down 76% from the November peak, people are looking for signs of some final debacle taking place. Any bad news is closely watched.

Like this: “Coinbase to halt US affiliate program citing tough crypto market.” On the face of it, shutting down customer discounts distributed by partners seems bad. But put on it an alternative perspective – that of the end of crypto tourism – and Coinbase might just be making the right decisions.

Crypto, a transformative technology, quite naturally causes waves of excitement that end in tears, only to later repeat. In Dominoes Falling, we talked about this age-old phenomenon that during the crypto excitement phase, tourist projects emerge that attempt to replicate business models from the real world in crypto.

This is especially true in finance, where platforms like Celsius (CELH) played a bank, offering clients 20% on their deposits. This worked fine, as long as markets went up, but when they turned red, things fell apart, revealing their agnosticism towards risk management and what seems like a near-complete lack of math and excel in their business model, really.

They didn’t necessarily have bad intentions, either. Just entrepreneurs doing their thing – opening startups that try to make money off the wave of crypto excitement by building centralized easy-to-use products that may use some elements of, but are very not, crypto.

Why do the crypto tourists emerge? Because our excitement for crypto does not equate to a real-time usage (which requires learning and risking the first time use of relatively complex alien technology – the plethora of wallets, protocols and decentralized platforms), but rather short-term greed. Everyone wanted to buy a piece of growing crypto bubble, so wrapping it up in an easy product seems like a good startup idea?

Celsius did not offer Coinbase discounts, but it serves well to define what crypto tourism is. Of course, saying that all Coinbase affiliate partners were crypto tourists would be wrong, there were many content creators and crypto educators that may have used the program. Generally speaking, however, yes, they lived off that greed, channeling people to Coinbase makes a short-term buy.

For one thing, the IPO has given Coinbase a long runway. The company has a strong cash buffer to withstand the downturn, and it is (infamously through lay-offs) cutting costs. At the same time, they are active, talking to their customers, giving rewards for feedback, trying new things and working to improve their products.

Analysts (Goldman Sachs, Morningstar, etc.) view Coinbase very unfavorably right now, taking the view that it is a no-moat business in an increasingly commission-free industry, but their horizon is rarely >1 year. Or as per Morningstar (which puts fair value at $110-131 vs. current $56!):

While Coinbase’s shares are trading well below our fair value estimate, we emphasize the heightened risk and uncertainty facing the company, which is likely entering a period of unprofitability with no clear timeline for when it will re-emerge.

Coinbase is a long-term bet on crypto. I like to think of them as a gateway to crypto for masses with an Apple-like product quality. If you’ve travelled through a few cryptoexchanges, you will know that Coinbase’s various websites, apps and trading dashboards are better built, less tacky. An esoteric point that makes a big difference when you are thinking where to send your money.

They have a strong product portfolio from retail (wallet, trading, NFT) to institutional products and commerce solutions (crypto integrations that can add value to an e-business, including payment receiving and staking), as well as a qualified custody suite.

Their Ventures arm is now sitting on a large diversified portfolio of projects, all the way from lending (Compound acquired and integrated in their products) to security/forensics (CertiK). This puts the company in a good position to benefit from valuation upside on those projects that prove systematically important in future, as well as integrate new additions to their product suite.

Regardless of the short-term market collapse, crypto is an innovation; it is irreversible, transforming the centuries-old intermediated analog system. Coinbase is a good gateway to the growing non-speculative more functional crypto universe, where one thing may very likely remain true – most people will not want to take care of their private keys.