As of April 14th Coinbase (COIN) is now a publicly traded company. I decided to buy a few shares on day one and here is why. My average share price is $381 as I bought in as soon as shares were available.
Coinbase is an American based company founded in 2012 and now the world’s largest cryptocurrency exchange in the world. It opened at a valuation of near $100 billion and is the first direct listing ever on Nasdaq.
The company was founded in 2012 by Brian Armstrong and Fred Ehrsam. Armstrong is the company’s CEO and a software engineer, who had the idea for the platform while working at Airbnb (ABNB), reflecting on the struggles of doing international money transfers. He encountered a famous white paper by Satoshi Nakamoto, the mysterious creator of Bitcoin and started the business against all other advice.
I have been fascinated by crypto for years – For me, as a futurist and tech enthusiast it is like a natural step forward in payments and processing, though I have never dared invest into it until recently. The cryptocurrency market has, over its relatively short lifespan, proved extremely volatile and utterly risky. But as more and more institutional investors like renowned banks like JPMorgan (JPM), payment services like PayPal (PYPL) and large companies like Tesla (TSLA) and Square (SQ) have all started to dabble into it, I have deemed it financially unreasonable not to expose myself to it just a little.
That is why I set a goal for myself earlier this year to put around 1% of my net worth into crypto related assets. I joined Coinbase in mid January and bought my first Bitcoin & Ethereum. Not only did Coinbase manage to make the experience easy and seamless for me – They also managed to make me spend a lot of time on their platform learning about new and rising cryptocurrencies by offering me free incentives. Through Coinbase Earn and their referral bonus I received a not insignificant amount of money. I converted all the odd/lesser coins I received from the Earn program into Bitcoin and Ethereum quick and easy at no extra cost, directly on the platform. All these free bonuses and incentives that Coinbase have in place make up around 30% of my total crypto assets.
Now, why Coinbase? There are many crypto exchanges out there: Binance, Kraken and even platforms like Etoro and RobinHood that offers users the possibility of buying crypto as well as stocks. The answer is fairly simple: Branding and mindshare. It is the first cryptocurrency exchange I heard of, before looking more into the topic and It remains the first result I get on Google. In the cryptocurrency community, opinions on the platform as a whole differ widely, but I do think they do this better than the rest. And this leads me to my reasons for investing in the company and why I plan on holding long term.
Adding Coinbase to my stock portfolio does serve as a major part of my diversification plan of having 1% of my net worth invested in crypto related assets. With the purchase of the stock I am nearing this goal, sitting at 0.7% – leaving a little room of future buying opportunities. As mentioned I own two types of cryptocurrency on the platform itself: Bitcoin & Ethereum along side a stake in the company itself.
There are many things I like about the company. Lets first start with what I was taking a bit about before: Mindshare. In 2021 outlook published in early April on investor.coinbase, the company mentioned that it is radically increasing its marketing spend. Going forward around 12-15% of net revenue will be dedicated t0 marketing and sales. Today the company has around 56 million verified users and 7000 intuitional investors – making up over $220 billion in assets on the platform. That is up from 43 million verified users at the end of 2020, so if the company is to keep up this massive growth in users and remain first choice, spending massive on marketing going forward is absolutely justified.
Looking further into the numbers, we see signs of a pretty insane growth story within the company: Particularly for its revenue and profits. In its Q1 2021 earnings or ‘current report’ the company reported something rather incredible. They reported a net revenue of $1.14 billion for the full year 2020 in comparison to $483 million in 2019. That means they more than doubled in a single year alone. Not only that – their net income was $322 million in 2020 – An absolutely insane amount of profit for a company in such early stages and for a tech company growing so fast. But that is not even the craziest part… Looking at this we would expect their quarterly revenue for Q1 2021 maybe be along the lines of $350 million, being a one fourth of the year.- That factors in some growth for the company and aligns well with what we saw in 2020.
But no… Coinbase are not just doubling their revenue for the first quarter of this year. We are not talking $500 million or even $700 million. Coinbase is expected to make $1.8 billion dollars of revenue in Q1. That is as unbelieve of a number as I have ever come across before regarding growth of a company. I understand we are riding a wave of ATHs in the cryptocurrency market and that the events of 2020 may have brought with it less trust in the dollar and other unique circumstances – But regardless, this is impressive.
Coinbase makes a lot of its profits from fees related to people buying and selling cryptocurrency assets on its platform. I see users complain about the fees being too high and at the same time many analysts are predicting that competition will bring a sort of ‘race to the bottom’ scenario to the crypto market – much like we have seen with platforms like RobinHood in the stock market. And while I agree with the sentiment that these transactional fees likely will lower in the future, I do not agree with it being a major issue looking at future revenue potential overall. The reason being that Coinbase today offers other products and services today. Around 21% of their active users take part of these services and once a customer does so, Coinbase makes nearly double the amount of revenue of that customer than if they were just paying transactional fees. I think as transactional fees lower in the future, Coinbase will grow their services and products category to balance the revenue.
Another thing I see many Coinbase users talk about being a catalyst for something catastrophic is their customer support. I dont really see any analysts raising this issue but I thought it would good to share my perspective on anyway. Visiting review- or social media sites regarding Coinbase it is easy to see that they are struggling with response times and a general low satisfaction rate.
Obviously that is immensely frustrating for the users affected and somewhat tragic for those claiming to have lost funds in some account they cannot access. However struggling with this particular problem of customer support is an extremely typical trait for a growing tech company. The amount of daily signups for a platform like Coinbase is in the thousands. That makes the task of hiring enough new and qualified people to support these users a near impossible task. I have seen it time and time again in companies in this stage and I have no doubt that while it certainly is an issue now (also reputation wise) it will not stay one. Once the company reaches a scale and pace where it is able to keep up in this department, the experience will dramatically improve for everyone. Long term this is not an issue I am worried about.
The last negative catalyst I want try to and tackle in this writeup is what effect an inevitable Bitcoin crash might have on the company. As with all assets, Cryptocurrency is not only going up. Coinbase went public in a time many may deem ‘the golden age’ of Bitcoin and in fact Bitcoin and Ethereum both reached new ATHs in the days up to the Coinbase listing.
There is no going around it: The valuation of the company is high. But it is also an extremely hard company to describe a value to given its uniqueness. It is the first Cryptocurrency exchange to go public and is growing rapidly. In fact, just on the first day the valuation put the company at well above $100 billion and as low as $68 billion all in a matter of hours. So while I too struggle to figure out what might be a fair value for this company I do not fear a crypto crash as much as many other seems to. Coinbase will still make signicant revenue on fees if the price of Bitcoin goes dramatically down. Even if a panic should ensue and many people will sell of – Coinbase makes money from every exit. I would expect trading volume to die down along with the hype we are seeing now but over the long term I have no doubt that Crypto will be a more popular asset than today, regardless of price.
In short: I do not think any of these potential negatives will turn out any significant obstacle to the stock’s performance long term. I am really excited about entering a company that exposes me further to the crypto market but that I do not think will follow the price of Bitcoin one to one like many crypto mining companies do. Coinbase is also seemingly under great leadership from Brian Armstrong.
In fact I am so excited about the company that I started a subreddit on Reddit called /r/coinbaseshareholders to discuss the stock. I hope to see the place grow into a healthy and high quality community for people to discuss and learn about the stock. The larger /r/coinbase subreddit that exists already is under moderation by company representatives – which is great in broad terms but not something I am looking for when trying to openly discuss the ups and downs of a company.
Disclaimer: I am not a financial advisor, the opinions expressed in this article are entirely my own – always invest at your own risk.
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