Coinbase

Coinbase's Base L2 network is quietly becoming one of the most active chains in the entire ecosystem, processing billions in transactions and generating fee revenue that barely shows up in analyst models yet. If they can capture even a fraction of the onchain economy they're building infrastructure for, the subscription and services segment starts to look massively underpriced. The market is still treating this like a pure crypto exchange play when it's evolving into something much bigger.

Coinbase Wallet's move to support more EVM-compatible chains and even Solana puts them in an interesting position relative to MetaMask, which has dominated non-custodial wallet market share for years. Whether Coinbase can convert its massive custodial user base into active self-custody wallet users is a product challenge as much as a technical one — most retail users still don't want to manage their own keys.

The SEC dropping its case against Coinbase is a genuinely significant development that changes the operating environment, but I'd caution people from reading it as a green light for the whole business model permanently. Regulatory posture can shift with administrations and Coinbase still has open questions around which assets qualify as securities. Worth watching what happens with the staking-as-a-service question specifically.

Coinbase's operating expenses are still extremely high relative to the revenue base — they burned through massive cash during the 2022 bear market and while they've cut headcount, the cost structure around compliance, legal, and regulatory affairs is basically a permanent tax on margins that competitors in less regulated jurisdictions don't carry. Binance operates in a completely different cost environment and will always be able to undercut on fees.

USDC revenue sharing with Circle is one of the most undervalued line items on Coinbase's income statement. As interest rates stay elevated, every dollar of USDC in circulation generates yield that gets split between the two companies, and Coinbase has massive distribution advantages to grow USDC supply on Base and through Coinbase Wallet. This is essentially a Fed funds rate-linked annuity that most people aren't modeling correctly.

Transaction revenue is still over 60% of Coinbase's top line and that number swings violently with crypto sentiment cycles. Q1 2023 vs Q1 2024 shows you exactly how dependent they are on retail FOMO driving trading volumes. Until the subscription and services revenue becomes a genuine majority of the business, I don't see how you underwrite a stable multiple here.

Coinbase received approval from the NFA to offer crypto futures trading to US retail customers, making it one of the first major platforms to do so through a regulated domestic venue. This directly competes with CME Group's crypto derivatives business and opens up a product line that's been dominated by offshore platforms like Deribit. The futures product rollout has been a long time coming given how many regulatory hurdles they had to clear.

Does anyone have a good breakdown of how Coinbase Prime is actually growing relative to the retail exchange business? I know they custody assets for a number of the Bitcoin ETFs including BlackRock's IBIT, but I haven't seen granular institutional segment disclosure in their recent filings.