Watching valuation shocks to Coinbase is a painful one, and NOTHING looks good.
Coinbase is in a regulatory mire, embattled with lackluster revenue growth, a model based on the pricing performance of crypto and crypto relevancy. None Of that reads the same as the ‘free and infinite possibility‘ type of growth story we’ve seen with tech companies of 2015 to now.
Disclaimer: This is not a post to defend their valuation or try to determine where fair value currently sits. After doing a few scenario tests, it does appear their valuation has room to plummet further. And those valuations are rooted in my conservative assumptions.
That said, crypto itself can randomly regain volume and excitement once more, but this has proven to be an unstable underpinning for $COIN’s growth proposition. This is why the focus of coinbase has dead reckoned towards palatable regulatory framework and stable source of recurring revenue.
So, that’s the good news. Coinbase is not the typical tech company in how perceived itself. They’re a realist. They know their story is a quiet one and their innovation is not publicly visible. Since their IPO, they’ve had several missed opportunities to capture the excitement the rest of the tech leaders have taken advantage of. Their relevancy is also slightly fading with crypto volumes persisting downward. I applaud them for recognizing all of that.
Here‘a where I think bad can be good:
fewer distractions from resting on a revenue model destined to wax and wane like the lunar cycle, with far less predictability. This forces their executive leadership to stay focused on a course that makes them meaningfully needed and to create moats that align with efficiency and regulatory conformity. This is a large part of the reason why they contest elements of the Clarity Act - which doesn’t give them the full expression of where they find their stablecoins to be most useful.
Let‘s skip ahead and talk about the things they are doing right:
They are outfitted with the right people with correct tone for making their case to regulatory bodies. They don’t speak like innovators. They’re speaking like bankers. Lawmakers like that. It’s dry, boring and (somewhat) comprehensible.
They’re also making the right arguments to the current regime:
”We support dollar dominance globally by offering a platform denominated in the USD stablecoin and subsequent staking rewards” and “We are an American-born company on the leading edge of blockchain‘s global adoption”. That’s also language that remains party neutral, a durable good, if you will.
As for their revenue mission, they’re the infrastructure for institutional involvement in crypto. Their next evolution is already happening as they strive to be the base for efficient rules-based exchange. This can encompass so many things…contracts, ownership stakes, pay arrangements, record keeping, KYC; all of which have highly universal applications.
This isn’t a huge revenue bump felt immediately but an accumulation that will make their revenue stickier and more predictable with time.
A few other revenue streams worth noting that are within reach:
compliance and authorization as a service, prime brokerage services, merchant/stablecoin infrastructure and processing, treasury services, tokenized private investments (funds, LP models, DPPs), international exchange developments that programmatically adopt the host-nations regulatory framework.
None of these areas are a stretch, but I also want to leave a disclaimer that none of them would massively drive revenue growth in a single year. I would liken coinbase to the JP Morgan Chase of exchanges. Slow to pivot but fundamentally sound in directive.
Their primary mission is to be the exchange first. Everything that comes after is a value add and a potential business unit developed over time either organically or by acquisition. So, that’s my proclamation here. Great things are very possible, but the company is a bet on your own patience.
What makes the story of Coinbase unique is their generally positive perception from institutions, enterprises and government. There’s really not a lot of ground they need to cover reputation-wise; just stay the course.
And an overlooked positive is that because they are in the business of money itself, they can capture inflation spikes on their top line. Greater money velocity and supply can be more directly fed into their revenue model without the burden of recognizing cost constraints beforehand. This is very different from your COGS-heavy profit margins.
My point for writing this post is to inform investors that Coinbase is one hell of a force. This doesn’t mean by 2030 we should expect a valuations to exceed $1T or higher, but there’s a roadway and it’s built on stone rather than a mirage across sands.
Value the business accordingly.