My Thoughts on Coinbase

 

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Ceo of Coinbase with Nancy Polosi

With the increasing consensus of major institutions and the general public on digital currency and blockchain, Digital currency and blockchain will play an increasingly important role in the future world. Whether it’s the value of savings, anti-inflation, or a more efficient social operation infrastructure. It simultaneously challenges the dominance of the U.S. dollar and the gold standard. The importance of the role of digital currency in the future will be defined by newly emerging business models. The current point in time is like the Internet age in 2000, unable to predict the future of the Internet, but sees the value of it. So keep an eye on its development, know yourself and the enemy, don't miss the progress of the world.

In institutions that lead the rapid development of digital currency and blockchain, the existence of Coinbase cannot be ignored. As the world's first listed digital currency exchange, Coinbase occupies 11% of the world's digital currency trading market share. Just like stock trading, there are many brokers providing services, every family can take up one acre and three cents of their own land and make a lot of money, I used to think that the same is true for digital exchanges. However, as I learn more about Coinbase, I found that Coinbase is special, It will never stop here. This particularity is mainly constructed by three points:

1. The mission of the company

2. Focus on long-term culture

3. Its unique business model

The mission of the company,

Like many start-ups from Silicon Valley, Coinbase embraces a want to change the world's goal. As its official website says, Coinbase's mission is to make the world more economically free, It believes that an open financial system can achieve this goal. So Coinbase is helping the world build "crypto economy", a more equal, convenient, efficient and transparent digital financial system.

In order to make the world's digital financial system mature, Coinbase believes that the government's understanding of digital currency and the establishment of a reasonable regulatory system are an indispensable part of this development process. So we can see that Coinbase is different from other digital currency exchanges, It has actively embraced and supported supervision since its inception and promoted industry compliance. Coinbase's choice to list on the stock exchange is a very unusual choice in itself. It can issue platform digital currency on its own platform to raise funds. However, it chose to be a listed company by the SEC and the government..

On the way to achieve the company's mission, because Coinbase has high requirements for the trustworthiness of its system, the company's strong investment in safety performance has helped the company have its own unique competitive advantage. Compared to its competitors, Coinbase's security system has been successfully blocking hackers out. Extremely high security and compliance have attracted many institutions to choose Coinbase for the purchase and management of digital assets. As of the first quarter of 2021, 54.7% of the assets on the Coinbase platform come from more than 8,000 institutional clients(Like Tesla),Total value of 122.1 billion U.S. dollars.

*Data from Coinbase 2021Q1 financial report

Focus on long-term culture

In the prospectus, Coinbase founder Brian Armstrong wrote:

"We built a culture that doesn't take shortcuts or try to make a quick buck."

"You can expect volatility in our financials, given the price cycles of the cryptocurrency industry. This doesn't faze us, because we've always taken a long-term stance on crypto adoption. We may earn a profit when revenue are high, and we may lose money when revenues are low, but our goal is to roughly operate the company at break even, smoothed out over time, for the time being. We are looking for long-term investors who believe in our mission and will hold through price cycles."

Coinbase values ​​the future of the digital financial system. Pay attention to long-term development prospects, rather than short-term profit. This is confirmed by the company's consistent cautious style. Don't rashly introduce new digital currencies into the platform, does not provide digital currency derivatives, etc. 

Unique business model

From the business model of large digital currency exchanges such as Coinbase and Binance, this is a new species. This business model has the possibility of subverting traditional industries, It's like a bank(Money storage, Periodic interest, Mortgage loan), Brokerage(Financial derivatives, Transaction maintenance), Investment bank(Large exchange between different currencies), Exchange(New currency listing IEO), infrastructure(cloud computing) and so on.

This commercial aggregate may be far from the ideal crypto economy of Coinbase(Digital financial system). Coinbase's mission and its long-term culture will help Coinbase lead the development of the entire financial system as a leader. As the current promoter of industry compliance, Regulators will use Coinbase's business model as a reference, Coinbase's services and products will most likely become industry benchmarks. In addition, Coinbase Cloud will provide third-party applications with its own digital currency infrastructure and technology as the basis for digital currency projects, this kind of cloud resource sharing and link feedback will become a very important part of the development of the entire industry. The closed loop of information feedback that users and application providers have on the Coinbase platform will also form a powerful flywheel effect in the future. Word of mouth accumulated by Coinbase, customers and resources will greatly increase the probability of becoming an oligarch in the digital financial platform industry.

With major institutions, Banks and countries build their own digital currency systems on Coinbase cloud and Binance cloud, the digitization of the world system will be faster and faster, the trend is irresistible.

If you want to invest in future social changes, but you don’t want to choose one or several types of digital currencies as assets, Investing in Coinbase to reduce the risk of a single digital currency's volatility, at the same time benefit from the entire digital currency, a  community infrastructure platform for the development and expansion of the digital financial system and blockchain is a better choice. It is also a choice of great significance to the future development of society

On a valuation perspective, the company made a revenue of 1.8bil usd for 1Q2021, the company is confident in maintaining or even growing their top line in 2Q2021. So assuming their revenue stays consistent throughout 2021 their p/s will be around 7x. If we do a trailing top line for 2021 their 3 year revenue CAGR will be 76%. The company is also highly capitalized with over 1.44bil usd of net cash. 

In terms of PE assuming it can continue to make 771mil net profit every quarter. Their PE will be around 16x for 2021. Of course bottom line will be volatile, very dependent on their expenses, So I would rather focus on their topline instead. Its FCF is also very strong relative to its price. Price to trailing FCF is around 14.7x.

Lastly, I don't see Coinbase as only an exchange, even though the bulk of its revenue is still from transactions. I see them as a crypto enabler and a growing blockchain infrastructure ecosystem. Using their dominance in the US, they can transition functional coins to wallet usage and commerce utility. Their recent acquisition of Bison Trails tells us what their long term future holds. See how it goes.

Full disclosure, I have vested interest in this stock and I currently have a 2.7% weightage and down 9%

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