Coinbase: More Than a Trading Platform

Intro

The cryptocurrency market is a complex and rapidly changing environment that can be difficult for amateur and experienced investors to navigate. With a wide range of trends and projects emerging daily, it can be overwhelming to keep up with everything happening.

Amateur investors may hesitate to get involved due to the
market’s inherent volatility, while experienced investors may struggle to stay ahead of all the trends and developments. So, what’s the best way for investors to diversify their portfolios, considering it is practically impossible for an individual to outperform the market consistently?

Indices.

Indices allow investors to track the performance of a group of assets, such as a basket of securities, without investing directly in each asset.
They are a convenient and efficient way to own multiple assets and diversify risk without constantly monitoring market developments and managing individual asset
volatility.

Indices can be used to build a diversified portfolio in the stock market, such as the Dow Jones, S&P 500, and Nasdaq Composite, which cover the overall U.S. stock market.

This same concept can be applied to the cryptocurrency market using a crypto index that includes a selection of popular assets, such as Bitcoin, Ethereum, Solana, Cardano, and Polkadot.

So what index should someone buy for the crypto market? While hundreds of stock market indices can be used to measure the overall market’s performance or specific sectors, the cryptocurrency market’s indexing options are more limited and not as well-established. This is because the cryptocurrency market is relatively new and less developed than the stock market, and there is still a lot of uncertainty and volatility in the prices of this asset class.

However, in April 2021, the first “Crypto index” was listed on the stock market. We’re talking about $COIN (Coinbase). Now, you might be wondering, how is Coinbase an index of the crypto market? The $COIN as an index fund analogy is built on the idea that Coinbase accrues value through increased trading volume, on-chain activity, daily active users, and generally anything that indicates growth in the crypto industry.

Over the years, Brian Armstrong, CEO and founder of Coinbase, has led the company toward building several products and services related to any crypto-related activity. Therefore, if the cryptocurrency market grows, Coinbase will grow and vice versa. Let’s dive more in-depth into this assumption and see how far the Coinbase ecosystem is branched out.

USDC

Coinbase, with Circle, is a major shareholder in Centre, the USDC provider. They earned $146 million via their participation in the USDC ecosystem in the last
quarter of 2022. Stablecoins are the biggest DeFi sector by TVL, and whatever market condition the crypto space is going through, stablecoin providers will generate billions of revenues. Consequently, Coinbase is well positioned on this front for the years to come as USDC is the second biggest stablecoin and the most regulated one.

Staking Service

In 2022, Coinbase made $793 million on their subscription & services. Staking is a big part of this. Coinbase staking service is the second biggest after Lido Finance by Total Value Locked ($2.12b). Furthermore, Coinbase has recently acquired shares in Rocket Pool, the third staking service in the crypto space by Total Value Locked ($1.81b).

Thus, the company is well positioned for the upcoming years in the staking sector, which is the second DeFi sector by TVL, and it’s projected to grow more and more. To fuel the fire, imagine the staking revenue as ETH continues to appreciate in USD over the following years.

Trading Volumes

Looking at the volumes between the 2018 and 2022 bear markets, we can see how Coinbase has grown heavily, increasing its trading volumes by eight times. In 2018 they did 105B In 2022 they did 830B The last year was one of the worst, if not the worst, years for the industry, yet Coinbase generated 2.4b in revenue.

Additionally, with the collapse of FTX, Coinbase is now the second biggest CEX (Centralized Exchange) by traded volume. They’re well-positioned to attract the next wave of users entering the crypto market.

Layer 2

On February 23, 2023, Coinbase announced the testnet deployment of Base, a Layer 2 rollup incubated by Coinbase. In the depths of the bear market, Coinbase has 8.3M monthly transacting users (Dec’ 22). On the other hand, the three biggest Layer 2 in the DeFi space report these numbers:
● Optimism: Fees ($4.5m) Revenue ($909.0k) Daily Active Users (68.9k)
● Arbitrum: Fees ($7.2m) Revenue ($1.1m) Daily Active Users (204.0k)
● Polygon: Fees ($3.0m) Revenue ($2.1m) Daily Active Users (378.9k)

Average Fees: $4.92m
Average Revenue: $1.36m
Average Daily Active Users: 217.3k

Coinbase would have to convert 2.62% of its 8.3M bear market users to reach these three competitors’ average daily active users. This means there is a concrete chance that Base will become one of the main, if not the biggest, Layer 2 in the DeFi space. This means another revenue stream for the company and above all, a dominant role similar to what Binance has done with the BNB Chain, which currently generates $217m in annualized fees in a bear market.

But there’s another aspect to consider. Coinbase is not just a CEX; it’s an institutional entity in the crypto space. As reported in the Q4 2022 shareholder letter,
roughly 25% of the world’s top 100 largest hedge funds have chosen to onboard with Coinbase. Now, Coinbase can start to onboard every entity, such as hedge funds, pension funds, governments, companies, merchants, and others, to build upon Base, bringing more fees to the chain and strengthening the company’s position in the industry.

Conclusion

Coinbase has a well-established ecosystem that touches every part of the crypto and DeFi industries and keeps working to bring new products and services. It’s safe to say that as the industry grows, the company will too and therefore, any user, from the less experienced to the most, can hold the $COIN stock along with BTC and ETH without worrying anymore about catching every single trend that pops out and risking to lose time and money.