A Certified OG

Coinbase was founded on June 20th, 2012. That same day, the price of BTC hit $6.65. It would be another year and a half before the Ethereum whitepaper was published. At the time, much of “crypto” still lived on Mt. Gox. Coinbase was that early. It’s a certified OG.

Over the years, Coinbase’s OG bona fides have meant different things. In the beginning, Coinbase was a disrupter. A brash startup operating at the bounds of legality. But things are different now. Today, Coinbase is a well-run, highly regulated, and very traditional corporation. Part of this is by design: it’s a public company! But mostly, it’s due to deliberate operational conservatism.

Started from the bottom now we’re here

Until this year, Coinbase was the Apple of crypto. It had the best UX and the most trusted brand – for which it charged a premium. In true Cupertino fashion, Coinbase was happy to be the second or third-mover and let competitors enjoy the highs and suffer the lows associated with life at the bleeding edge.

However, the fall of FTX and the industry-wide carnage that ensured exposed flaws in this strategy. While Coinbase’s conservative strategy may be game theory optimal for itself, it’s proven to be anything but for the broader space.

“You cannot escape the responsibility of tomorrow by evading it today.” – Abraham Lincoln

But lucky for us, change is afoot. Coinbase is cool again. It’s back in the arena trying stuff. Some will work, some won’t. But it’s learning. The only problem is that Wall Street has gotten comfortable with – even taken a liking to – Coinbase 1.0 and has yet to pick up on the vibe shift. The Street still values Coinbase like a stodgy old exchange and custodian, a rather myopic view in our opinion. We see much more.

To be fair, Wall Street is not entirely wrong to value COIN this way. In Q2 2023, Coinbase’s non-transaction revenue – interest income, staking, subscriptions, etc – totaled a whopping 54% of total revenue. Mr. Armstrong has Lord Powell to thank for this.

The nice thing about non-transaction revenue is it’s less cyclical and more resilient during bear markets than trading volumes and transaction-based revenues.

The stable, recurring cash flows Coinbase’s interest income provides is like a siren call for Wall Street. And it’s led to Coinbase being valued more like a TradFi bank than a diversified crypto juggernaut.But we believe there’s more to Coinbase than Wall Street recognizes. One of the biggest differences between our expectations and the Street’s forecasts is very few seem to believe crypto markets will recover over the next 2-3 years, let alone rally to new all-time highs. As we discussed last month, our base case clearly differs from this view.

Our favorable outlook on COIN – at its most fundamental level – is driven by our belief that crypto markets will recover, and Coinbase will reap the benefits during the next bull run. If this future indeed comes to pass, Coinbase will be at the center of it all – primed to benefit from crypto’s asymmetric upside.

Since its direct listing, COIN’s price has struggled alongside the broader crypto market. A key driver of this underperformance has been Coinbase’s business model, which remains tightly correlated to crypto prices.COIN has been subject to non-crypto market headwinds too, such as the poor performance of other IPO stocks.

That said, COIN has staged an impressive comeback YTD, outperforming the broader equity market and even BTC by a sizable margin.

Based on its historically strong correlation with crypto asset prices alone, we expect COIN to outperform much of the broader equity market when the bull market returns. But we believe there’s more to COIN’s story than just a broader market recovery.

While it might be fair to value Coinbase like a boring boomer stock today, markets are forward-looking, and we believe investors will soon view Coinbase through a dramatically different lens.

This report will focus on three new revenue drivers we believe Wall Street is sleeping on. Some have more potential to make an immediate impact on Coinbase’s revenue, while others are longer-term bets that position Coinbase at the center of one of the secular trends that is crypto.

These include:

• Going Global – the launch of Coinbase International, an international perps and derivatives exchange

• Staying Local – the core Coinbase exchange business and domestic markets

• Moving Onchain – Base Chain, and its potential direct and indirect impacts on Coinbase’s fundamentals

The upshot is we believe Wall Street is overlooking an increase in top-line revenues anywhere from 15%-20% all the way up to 150% in the most optimistic scenario. In order to capture this market opportunity, Coinbase must first execute. But we’re confident in its ability to do so — mostly thanks to its unique positioning as the premier crypto on-ramp for many of its users. For the billions of people who have yet to touch crypto, many will do so using Coinbase’s rails.

Coinbase Goes Global

In May 2023, Coinbase announced the launch of Coinbase International Exchange, an exchange focused on perpetual futures and derivatives products tailored towards institutional clients outside of the US.This move has massive potential in our view, especially considering the dominance of perpetual trading in the crypto sector, which accounts for over 75% of crypto trading volume

Coinbase International Trading Statistics

Here’s the interesting part – Coinbase International isn’t facilitating that much volume…yet. With no user interface and trades happening solely via API, it’s like Coinbase is playing hard to get and not chasing the immediate cash-in. Instead, they’re quietly laying the groundwork, ready to pounce when the time is right.

When we compare the $139M in 24H trading volume (and $74M occurring on the BTC-PERP vehicle) for a brand new exchange with no front end to the $350M 24H trading volume of Coinbase’s BTC-USD spot market, we can see why Coinbase is moving into this new vertical.

If you’re just an everyday trader hoping to onboard, hang tight. The exchange is geared toward institutions for now, but by year-end, Coinbase International is planning to roll out the red carpet for retail users.

Coinbase International FAQ

Just days after the international exchange’s debut, CEO Brian Armstrong was spotted in the UAE. This was most likely not a random vacation. While much of the West has adopted a skeptical crypto stance, the Middle East is embracing its potential and vying to be one of the future capitals of the industry.

But the road ahead is no cakewalk for Coinbase. While it might be friendlier with regulators than, say, Binance, they still aren’t exactly the best of friends. Between the recent SEC lawsuits and Wells notice, Coinbase knows they’re walking a tightrope. So, it’s no wonder they’re scouting nations with friendlier crypto vibes for their international HQ.

Aside from regulatory refuge, Coinbase International also offers some much-needed geographic diversification. Nearly 90% of Coinbase’s revenue over the last 12 months has come from the US – the rest of the world is but a footnote.Relative to its earlier days, the pace at which Coinbase is moving is lightning-fast. So, what’s fueling the accelerated pace of innovation and expansion? Why is an exchange that has previously demonstrated a more minimalist approach suddenly tapping into every possible vertical? Because more opportunities have presented themselves for Coinbase to fill the void.

We believe Coinbase sees the looming opportunities in the global crypto futures and derivatives CEX market and is positioning itself to capitalize on a market that’s been hollowed out over the last 12-18 months. The company’s heavy dependence on the US market only strengthens its resolve

A Brief Walk Down the Memory Lane

During the 2017 cycle, BitMEX and Binance were the largest players in the CEX futures market. BitMEX quickly became a household name within the crypto industry with the advent of the perpetual futures contract, which has since become the industry-favored vehicle for crypto speculation.

BitMEX enjoyed success for many years before ultimately collidi