Too Long Didn’t Read for Coinbase Stock Analysis:
- The competitive advantage of Coinbase is it has a “license” to operate as a crypto hub from the Federal government. This kind of competitive edge is the sustainable one.
- Due to that advantage, it is easier for Coinbase to gain trust from the institutional fund that needs to invest in crypto.
- The trend of the institutional fund joins crypto investment beginning in August 2021 with a total of $17 billion money poured into crypto assets.
- As a result, Coinbase earnings in Full Year 2021 exploded more than ten times from the previous period.
- The biggest risk is the core business is tied to the popularity of cryptocurrency. A digital asset with no official or legal backup.
Business Model and Competitor in Coinbase Stock Analysis
Advantages from The Regulators Making It Trustworthy and Dependable
The business model itself is simple. Coinbase allows the user to buy or sell cryptocurrency with EURO or USD through its platform. And due to the popularity of cryptocurrency today, it is unsurprising that we see many competitors rise up.
For example, we have Binance and Kraken. They may have better UI, more intuitive, and simpler. Even maybe they have lower transaction costs. But for the institutional, it is always Coinbase. Since it is regulated and official.
For instance, One River Asset Management – a hedge fund with more than $2 Billion in Asset Under Management – choose Coinbase as a full-service partner and custodian for its digital asset. Coinbase will get this big fish.
Kraken and Binance will try to attract the retailer or individual investors. A group with less money and capital. They will pursue different market shares from Coinbase.
The other advantage as official gives Coinbase the privilege to act like a stock exchange for the crypto asset. So it will be like NASDAQ for the digital assets. Once a new coin wants to be listed on the “stock exchange”, Coinbase is there.
This privilege could be classified as an intangible asset advantage.
How Long The Advantage Could be Retained?
The importance of network effect in Coinbase Stock Analysis
Though at the moment we don’t recognize any competitor that could steal Coinbase’s market share, it doesn’t mean that the economic moat will never get challenged. Getting official status from the government is difficult but not impossible. We believe in the foreseeable future, any entity like Coinbase could get Federal approval.
But it will not ruin Coinbase’s business, because of the following:
- The Switching Cost. Once certain hedge funds become Coinbase clients they will unlikely to migrate to another platform since it is required to fill another form, contacts, or bank information. It is similar with change your bank account, It is painful.
- The network. For the middleman, the network is one of the most important elements in building a competitive edge since it opens a new door for a new market and at the same time strengthens the existing platform. Take a Visa – Coinbase partnership for an example. A Visa user could use a credit card to buy crypto assets with his/her Coinbase account. This is good for both Visa and Coinbase. The connected network will serve as an integrated platform that is difficult to be replicated.
Network in Numbers:
- Coinbase engaged with more than 210,000 ecosystem partners
- Visa – Coinbase partnership reached $2.5bn in transactions in Q1 2022.
- Coinbase partners with Mastercard to facilitate credit cardholders to purchase in the NFT marketplace.
- Adidas joins crypto economy with Coinbase
- Competitive advantage and competitor analysis should be our first priority in analysis. Since it is instrumental in preserving profitability in the long run.
If you are interested in how network effect could build advantage, please visit https://investingdeck.com/business-model-of-visa-the-magic-card/
Financial Highlight: Meteoric Trend
Financial Analysis Is Part of Coinbase Stock Analysis
Now we are going to finance and the accounting thing.
In 2019, Coinbase was in negative earnings territory. The crypto platform recorded 533 million in revenue, but the expense exceed it by 579 million. Translating into a 30 million loss.
In 2020, the revenue steeped to 1.2 billion – more than double the 2019 figure. Offsetting all expenses and bringing the earnings into positive territory, 322 million.
In 2021, thanks to a change in the paradigm of institutional investors like BlackRock about crypto. The revenue boom to a 7.8 billion level, dragging the earnings to 3.6 billion.
As we have expected, if we take a look at Coinbase transactions, we know that the skyrocketing earnings are driven by the institutional move. As the figure below present:
In the upcoming year, we can’t find a reason why this trend couldn’t continue.
Tied into Hype
Problem When Reality Strike
Everything sounds good. The future is promising, customer retention is solid, and the competitive advantage looks impenetrable. Right.
But there is one thing.
The revenue of Coinbase really depends on the volume of crypto transactions. It means if the hype about this digital asset decays, the party could be over soon.
Since Coinbase is tied to the volume of crypto transactions, the analysis of its stock and prospect should rely on the analysis of the popularity of crypto assets. The question should be as follows:
- How long does the hype of “x-coin, y-coin, or any-coin” last in the absence of official backup?
- When will the masses accept crypto? When will crypto taste the level of its fiat counterpart? Or, will it?
Everyone talks that Blockchain technology is the future of financial transactions. One thing they miss is the blockchain itself is the platform, the technology, while the Bitcoin and other cryptocurrencies are the tools. The tools could have vanished when mass realized they never replace the fiat.
Coinbase is tied with the cryptocurrency, not the blockchain. Other financial behemoths like banks – and payment monsters like Visa are still there and exploit the new technology.
This is why we don’t think that investing in Coinbase is a good idea – even with its impenetrable moat, and skyrocketing financial performance. Maybe we will miss another superb opportunity – the fat pitch – the big capital gain, but we don’t take it. It is too risky.