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Coinbase (NASDAQ: COIN) was founded in June 2012 with the sole purpose of facilitating the buying and selling of Bitcoin. But over the next 12 years, the digital asset brokerage and exchange operator has expanded into a broader business by offering more services.
After a disappointing 2022, shares have been on an absolute tear, soaring 697% in the past two years. As of this writing on Dec. 19, the company's market cap sits at $70 billion.
But can Coinbase continue its upward trajectory, increase 14-fold in value, and become the first trillion-dollar cryptocurrency stock by 2040?
Betting on the entire crypto industry
Thanks to its first-mover advantage, powerful network effects, and expanding financial ecosystem, Bitcoin deservedly gets a lot of the attention among investors. Smaller blockchain projects, like Ethereum, XRP, and Solana, are also potentially on the radars of those looking to put money to work in this industry.
Here's where Coinbase provides a unique opportunity. I view the business as essentially being a bet on the growth of the entire cryptocurrency market because of the different ways it's exposed to the industry.
Most people are familiar with the brokerage and exchange segment that lets individuals and institutions buy and sell hundreds of different cryptocurrencies. This activity represented 51% of net revenue in Q3 (ended Sept. 30), down from a much higher 88% share in the same period three years ago.
In recent years, the leadership team has focused more on diversifying the business model to depend less on volatile trading volume and lean more into predictable subscriptions and services. This segment includes things like stablecoin revenue, staking rewards, and custody solutions. The hope is that as cryptocurrencies evolve from a tool mainly used for financial speculation to something that has day-to-day utility for people, Coinbase can rely less on volatile trading revenue.
Coinbase also makes direct investments into new companies or technologies in the crypto space. As of Sept. 30, these strategic investments were valued at $359 million. While up-and-coming crypto start-ups could possibly be viewed as a threat to Coinbase's competitive position, the fact that this company has equity ownership in many of these businesses gives it financial upside should they succeed.
Crypto over the long term
Coinbase's ascent over the past decade is admirable. But its ultimate success rests not only on the cryptocurrency industry thriving over the long term, but on the company's ability to capture this opportunity.