Coinbase’s mid- and long-term prospects: Can it be restored to its former glory?

Coinbase's mid- and long-term prospects: Can it be restored to its former glory?

In 2021, Coinbase generated $8 billion in revenue, $3.6 billion in net income, and $14 in EPS, but right now, no one knows if Coinbase will be able to return to its former glory. This article will focus on analyzing Coinbase’s mid- to long-term prospects in order to give people a better understanding of this “listed crypto exchange.”

In April 2021, prior to the Coinbase listing, CEO Brian Armstrong presented the following PPT to investors:

Coinbase's mid- and long-term prospects: Can it be restored to its former glory?

As you can see, Coinbase positioned itself as a Web 3 platform focused on “achieving economic freedom,” but if we look at Coinbase’s financials at the time, Coinbase was actually supposed to be a lucrative crypto retail brokerage firm that 88% of 2021 net revenue will come from retail transaction fees, 5% from institutional transaction revenue, and the remaining 7% from “subscription and services revenue” (as shown in the chart below).

Coinbase's mid- and long-term prospects: Can it be restored to its former glory?

Breaking down 2021 performance further, Coinbase facilitated $1.7 trillion in transaction volume in 2021, with 68% institutional and 32% retail. While institutional volume is more than double the retail volume, Coinbase’s retail revenue has increased 18x. Why? Simple: retail deals are more profitable than institutional deals. Coinbase’s 2021 mixed yield for retail trades reached 1.21%, while institutional trades’ mixed yield was only 0.03%, a difference of about 4,000 times (as shown in the chart below).

Coinbase's mid- and long-term prospects: Can it be restored to its former glory?

When thinking about Coinbase’s mid- to long-term prospects, we must ask two questions:

  1. Is Coinbase’s retail trading revenue stream sustainable?
  2. Can Coinbase’s other revenue streams grow to a larger scale?

However, there is evidence that the final answer to both of the above questions is likely to be “no”, let’s continue the analysis –

Coinbase retail trade revenue unsustainable

The main problem for Coinbase over the next three to five years is that the retail customer base cannot support the company’s fundamentals until some other revenue stream explodes. For the primary retail user base, Coinbase cryptocurrency brokerage charges a minimum fee of 1.49%, and for small dollar transactions, the effective rate is even higher than 10%; on the other hand, the maximum commission rate of Coinbase Pro is only 0.60%, 50% lower than Coinbase’s overall commission rate – from this perspective, retail users may feel “cheated”, after all, people will not be so “ignorant” forever.

More importantly, Coinbase still needs to face three other challenges:

  • Challenges from centralized exchanges: Coinbase has two biggest competitors, Binance and FTX. The former offers over 600 cryptocurrencies, and its subsidiary Binance US offers “over 100” cryptocurrencies; FTX offers over 300 cryptocurrencies, and The company FTX US offers “more than 20 cryptocurrencies.” In contrast, Coinbase has certain disadvantages. According to the shareholder letter in the first quarter of 2022, Coinbase currently supports 212 asset custody and 166 asset trading, perhaps its advantages are limited to the US market;
  • Challenges from traditional financial institutions: Once the regulatory status of cryptocurrencies is clarified in the next few years, traditional financial giants such as Goldman Sachs and JPMorgan Chase will undoubtedly enter this field, and the competitive pressure on Coinbase is bound to increase further;
  • Challenges from Decentralized Exchanges: Decentralized exchange Uniswap has over 1000 tokens available on its platform with only 0.3% transaction fees. DEXs have been grabbing market share from crypto exchanges, and this trend is likely to continue (as shown in the chart below).

Coinbase's mid- and long-term prospects: Can it be restored to its former glory?

Not only that, but data on crypto spot trading volume suggests that Coinbase’s market share has also been declining in 2022 (as shown in the chart below).

Coinbase's mid- and long-term prospects: Can it be restored to its former glory?

In fact, competition among cryptocurrency exchanges may continue to intensify, and eventually, transaction fees are likely to return to zero. For example, Binance US has announced the launch of commission-free bitcoin spot trading services in June this year, and more exchanges will surely follow suit in the future. to get in and get a piece of Coinbase’s lucrative retail trading business.

Coinbase’s revenue stream sources are highly uneven

The source of Coinbase’s income stream is more serious, and it is almost impossible to replace its core retail trading business income with other income.

In 2021, 7% of Coinbase’s revenue will come from so-called “subscription and service revenue”, divided into five separate segments: blockchain reward revenue, custody fee revenue, interest revenue, commission-earning activity revenue, and other revenue, as follows As shown in the figure:

Coinbase's mid- and long-term prospects: Can it be restored to its former glory?

Next, let’s estimate the future prospects of these revenue stream sources under the most optimistic assumptions –

  • Blockchain reward revenue: This revenue stream is the staking rewards Coinbase earns from running validators (mostly Ethereum). Assuming that by the next cycle, Ethereum can reach the $1 trillion cap and generate a 5% pledge yield with a pledge rate of 30%, equivalent to an addressable market value of $15 billion pledged per year, if Coinbase can maintain the current 14 % of the network’s market share, then equivalent to about $2 billion in block reward revenue.
  • Custody fee income: Coinbase charges its customers a fee for custody of crypto assets. In 2021, Coinbase custods $234 billion worth of crypto assets and earns $136 million in custodial fee income, which translates to a custodial rate of about 0.06%. Assuming a total crypto market cap of $10 trillion in the next cycle, while Coinbase maintains its current market share of custody assets, its custody revenue would grow 6.25x to $850 million.
  • Interest Income: Coinbase will receive a share of the interest income earned by hosting customers’ fiat funds through the platform. Assuming that this income project grows with the growth of custody fee income, it can earn approximately $400 million in income.
  • Income from commission-earning events: For customers who participate in educational content on specific blockchain protocols, Coinbase takes a commission from the cryptocurrency they earn, and expects to earn about $100 million in the next cycle.
  • Other subscription and service revenue: This revenue is mainly from the crypto infrastructure platform Coinbase Cloud. Assuming this revenue stream can grow 10 times in the next cycle, Coinbase is expected to earn $690 million in revenue.

Taken together, you can see that even under the most optimistic scenario, Coinbase could earn about $4 billion in total subscription and service revenue, far less than the $6.5 billion in retail transaction revenue that Coinbase will earn in 2021, and we haven’t factored in what Coinbase needs Facing increasingly brutal market competition from Binance and FTX.

Coinbase's mid- and long-term prospects: Can it be restored to its former glory?

Other issues with Coinbase

Coinbase currently has three other thorny problems:

  • The staff is too bloated. Currently, Coinbase has more than 6,000 full-time employees, second only to Binance, which has more than 8,000 employees (but Coinbase’s spot trading volume is only about 10% of Binance’s), and much higher than FTX, which has about 600 employees.
  • No derivatives business. At this stage, FTX is working hard to promote the US Commodity Futures Trading Commission to clarify the regulatory measures of the encrypted derivatives business. As long as clear supervision is given, Coinbase should enter this field, but it is bound to lag behind Binance and FTX, which dominate the current market.
  • The heavily invested NFT market is a complete failure. According to Dune Analytics data, since its launch on April 20, Coinbase NFT’s trading volume as of early July was only $2.9 million, while the NFT market OpenSea’s trading volume over the same period has exceeded $5.9 billion, and LooksRare’s trading volume has exceeded $2.3 billion.


Overall, it’s almost certain that Coinbase’s core retail trading business is very profitable but unsustainable, and this revenue stream will likely taper off to zero in the long run. On the other hand, Coinbase’s subscription and services business is unlikely to replace retail trading revenue anytime soon. To make matters worse, Coinbase’s attempts to expand beyond retail trading have not worked well, most notably with its NFT marketplace.

A sober analysis of Coinbase’s business shows that the company faces a highly uncertain and unfavorable fundamental path over the next three to five years, making it unlikely that it will succeed again anytime soon, and possibly never.

Of course, hopefully these analyses are all wrong, and hopefully Coinbase will get back on its feet in the future to open up new revenue streams and be successful in the crypto market. Frankly, as Coinbase CEO Brian Armstrong is a visionary who has been actively advancing the crypto industry and believes that the higher purpose of crypto is to create a better system. We should support the success of people like Brian Armstrong, but at the same time, we should not be blind to the problems Coinbase faces.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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