It's an open secret that Coinbase is going public next week. The public listing of the crypto exchange is a big step toward mainstream crypto adoption. As expected, the decision of the second largest cryptocurrency exchange has drawn a lot of attention to one of today's most divisive investment topics. Ahead of this much-anticipated event, here are 7 factors to consider before buying Coinbase shares.
1.Huge revenue base
Coinbase makes money mainly through transaction fees and its subscriptions and services business. In 2020, transactions generated 86% of total revenue, while subscriptions and services accounted for 4%.
Revenue of the crypto exchange platform Coinbase increased nine-fold from last year. The company generated $1.8 billion from $190.6 million on an annualized basis. Net income also grew to between $730 million and $800 million from $31.9 million a year ago.
2.High valuation
Coinbase is the latest tech company to hit the market with a massive valuation. The company has been valued at $68 billion, a number that swells to about $100 billion when factoring in a fully diluted share count.
There have been reports that recent private market transactions have valued the company at more than $100 billion, so it's fair to say that this won't be a cheap stock.
3.The volume of subscribers increasing
In the first quarter, monthly transaction users (MTUs) on Coinbase increased by 6.1 million bringing the total number to 56 million verified users. The company believes that it could hit 7 million MTUs if bitcoin keeps rising or at worst 4 million MTUs if prices drop.
4. Immense growth potential
Coinbase has huge headroom to grow. The company sees "anyone with a smartphone" as a potential customer, giving it an addressable market of 3.5 billion people. The crypto exchange can also add new crypto assets onto its platform. It can also roll out new services such as a way for developers to integrate payments into their applications, boosting crypto transaction volume.
5. Closely tracks the performance of major cryptos
This is where most investors are worried. Coinbase's performance is closely linked to the exponential growth in cryptocurrencies.
The exponential returns of Bitcoin and Ethereum, plus the cult followership of meme digital coins such as Dogecoin has attracted a lot of users to the platform.
However, when the dust settles and the frenzy is dispelled by falling prices, people may not be actively using their accounts to trade, which implies less revenue for the company.
Since the bulk of Coinbase's revenue is still transactional in nature, a slowdown in demand for Bitcoin -- or other cryptocurrencies -- could hugely impact its financial performance.
Even the company acknowledged price volatility as a risk factor to its business in its S-1 filing
6.The list of options for crypto exposure is increasing
There is a growing list of options for exposure to the digital asset. This could draw potential customers away from the exchange platform.
Some investors may prefer investing in crypto stocks such as HIVE and GBTC. Also, there is the possibility of the launching of a bitcoin ETF this year following the successful listing of 3 Bitcoin ETFs in Canada.
Thirdly, there are growing options in how to trade crypto, for example, the CME just launched bitcoin mini-futures. Binance also offers futures and options trading in cryptos.
This may make Coinbase less appealing to investors who have a huge risk appetite and want diversity in their crypto portfolio as the crypto exchange does not offer such.
7.Crypto industry is still emerging
While Coinbase has huge opportunities, the road ahead isn't all clear. This is an unbeaten path in an emerging industry.
The growth of the crypto economy will depend on all sorts of factors, ranging from adoption and regulation to technology.
Changes in technology, competitive threats, and regulatory risks could all derail its long-term growth outlook. As such, Coinbase's investors may find themselves on a roller-coaster ride.
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