195 - The Bull Case for $COIN | Michael Rinko & Jay
Nov 6, 2023
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Michael Rinko, a research analyst at Delphi Digital, joins independent researcher Jay to delve into Coinbase's intriguing business model. They discuss the company's evolution from reliance on trading fees to diversifying revenue streams like staking and USDC. The pair highlight Coinbase's strategic offshore expansion to navigate regulatory challenges, and its role as a custodian for Bitcoin ETFs. With $COIN's value plummeting, they explore the implications of market dynamics, institutional lending, and innovative approaches shaping Coinbase's future.
Coinbase has successfully diversified its revenue streams away from just trading fees, generating income from various sources including interest income from USDC holdings and staking revenue from Ethereum.
Coinbase's focus on diversifying its revenue streams positions it well for future growth, appealing to a wide range of users with its trusted brand, regulatory compliance, and secure custody services.
Coinbase aims to capture a share of the substantial offshore derivatives market by offering a compliant and secure platform for perps trading, leveraging its reputation and expanding internationally.
Coinbase's custodianship business is a significant revenue driver, and their Base Chain built on the Ethereum L2 OP stack serves as a hedge and potential catalyst for decentralized growth.
Deep dives
Coinbase's Diversified Revenue Streams
Coinbase has successfully diversified its revenue streams away from just trading fees. They now generate income from various sources, including interest income from USDC holdings and staking revenue from Ethereum. The interest income comes from minting USDC and investing the corresponding fiat in short-term treasuries. Coinbase charges users a fee for providing access to staking services, which has seen significant growth. The potential for offshore derivatives trading is another avenue for revenue expansion for Coinbase. This market is substantial, with interest in offshore perp exchanges growing. Coinbase aims to capture a share of this market alongside other major players like Binance. With its reputation for compliance and secure custody, Coinbase appeals to both retail and institutional traders. As it expands internationally, Coinbase's revenue streams diversify further, providing opportunities for sustained growth.
USDC Interest Income and Staking Revenue
Coinbase generates interest income by minting USDC and investing the corresponding fiat in short-term treasuries. This service allows users to earn yield on their USDC holdings while Coinbase benefits from the spread between the interest earned and the interest paid out. Staking revenue is another significant source of income for Coinbase. They charge a fee to users for providing access to Ethereum staking opportunities. The revenue from staking has been steadily increasing, driven by Coinbase's reputation, ease of use, and security. As the staking market continues to grow, Coinbase has the potential to capture a larger market share, particularly among retail and less crypto-native users.
Entering the Offshore Derivatives Market
Coinbase is looking to expand its presence in the offshore derivatives market, specifically in the perps (perpetuals) trading space. This segment of the market has seen significant growth, with a larger volume traded compared to spot markets. While competitors like Binance currently dominate this market, Coinbase aims to establish itself as a player in offshore perp exchanges, offering a compliant and secure platform to both retail and institutional traders. The potential for revenue generation in this market is substantial, with estimates projecting a significant increase if Coinbase is successful in capturing market share from major players like Binance. Coinbase's expansion into this market is part of its efforts to diversify revenue streams and reduce dependency on the US market.
Future Growth Opportunities
Coinbase's focus on diversifying its revenue streams positions it well for future growth. As Coinbase expands internationally and capitalizes on opportunities like USDC interest income and offshore derivatives trading, it has the potential to further increase its revenue and market share. With its trusted brand, regulatory compliance, and secure custody services, Coinbase appeals to a wide range of users, including both individual retail traders and large institutional investors. By leveraging its strong reputation and expanding into new markets, Coinbase is poised to sustain its growth trajectory and solidify its position as a major player in the cryptocurrency industry.
Control and Regulation in the Crypto Space
Coinbase aims to have control over the crypto industry and ensure that it operates within the boundaries of regulations. It wants to prevent unregulated actors from dominating the market and ensure that major companies like Coinbase follow the rules.
Opportunities in Offshore Perps Exchange
Coinbase sees a great opportunity in offshore perpetual exchanges (perps). With the collapse of competitors like BitMEX and FTX facing regulatory pressure, Coinbase aims to capture the market share by offering a regulated and trusted platform for trading perps.
Custodianship and Base Chain
Coinbase's custodianship business is a significant revenue driver. Additionally, their Base Chain, built on the Ethereum L2 OP stack, serves as a hedge against the potential impact of decentralization on their centralized business model. It can also attract developers to build on the platform and potentially lead to the launch of a decentralized base token.
Operational Efficiency and Financial Outlook
Coinbase has been focused on improving operational efficiency, reducing net losses, and delivering new products despite the layoffs and challenges in the market. The financial outlook for Coinbase is positive, and it has the potential for growth in various areas, including offshore perps, institutional lending, and the expansion of base.
This is our first time ever covering a TradFi stock! However, Coinbase is a different beast…
Coinbase is a behemoth of a company, growing since May of 2012. CEO Brian Armstrong has been on Bankless a number of times.
Today, we’re bringing on two analysts–independent researcher Jay (0xJaypeg) and Delphi Digital analyst Michael Rinko.
Today’s episode will not be a history lesson on Coinbase, if you’re looking for that, we’ll highly recommend checking out Coinbase’s documentary: COIN: A FOUNDER'S STORY
Today’s episode is all about $COIN the asset. Down from its ATH of $342/share in Nov. 2021 to $85 today—and with a current market cap of $17.8B— are you bullish $COIN? Why or why not?
0:00 Intro 4:30 The Business of Coinbase 8:40 Diversifying the Business 14:30 Analyzing Equities 17:20 Coinbase USDC 23:30 Yields and Interest Revenue 31:45 The Staking Business 37:00 The Take Rate 43:45 Growth of Staked ETH 48:20 Coinbase International 56:45 Derivatives Revenue and Regulation 1:06:00 Coinbase Bank and Custody 1:17:00 BASE 1:31:00 Ranking Coinbase’s Opportunities 1:35:00 Coinbase Assets 1:38:20 The Company Itself 1:48:00 Predicting $COIN 1:54:50 The Bear Case
