All About That (Coin)Base – Bitcoin Market Journal

All About That (Coin)Base – Bitcoin Market Journal

If you believe in Coinbase, this could be a great time to buy COIN stock. Because on August 9, Coinbase will officially launch their Layer-2 solution Base.

This is significant.

Before I explain why, let me confess that I bought COIN at the IPO price, at about $405. (As I write this, it’s trading at about $90.) I failed to heed my own warning that “IPO” stands for “It’s Probably Overpriced.”

Still, I remain a huge believer in Coinbase, because I am a huge believer in crypto, and I believe that Coinbase is perhaps the single best-positioned company in the world to capture the potential growth of crypto.

However, investing in Coinbase comes with some big risks. Here’s my investing thesis on COIN; I would love to hear your thoughts as well.

Coinbase has World-Class Products

Coinbase has a history of creating crypto products that are actually easy to use.

Most crypto applications look like they were designed by engineers locked in a sensory deprivation tank. You need a Ph.D. in economics to understand them. (*Cough cough Curve*)

Coinbase was founded on the idea that people needed an easy way to buy bitcoin. So they built an app that is simple and elegant: to me, it’s the easiest crypto on-ramp in the world. Anyone can use it.

I don’t understand why more crypto companies don’t place a priority on usability. Coinbase gets it. Crypto is always a little clunky, but for the most part, their products just work.

I’m a huge fan of tech products that just work. (It’s why I’m also an investor in Zoom.) Companies that make a seamless user experience generally have deep expertise along the entire tech stack, which means they can generally execute well on new products.

For example, Coinbase’s liquid staking derivative cbETH was launched just last year, and even given this late start, it’s already the #2 Ethereum LSD, behind Lido:

liquid staking
cbETH is the light green band above Lido. (Source: Token Terminal)

Again, anyone with a Coinbase account can easily opt in to these new Coinbase products, which is a huge competitive advantage. Good products lead to easier adoption of new products.

Which leads us to Base.

Coinbase is Launching Base

Base is a new Ethereum Layer-2, to improve Ethereum’s speed and scalability. Importantly, other developers can build apps on top of Base – and leverage Coinbase’s userbase to kickstart their own users.

(As an analogy, think of Apple launching the iPhone platform, then opening an app store on top of it. Anyone with an iPhone is a potential user.)

At Bitcoin Market Journal, user traction is our most important metric for valuing crypto investments, so this built-in user traction is a huge competitive advantage for Base over other L2s.

Importantly, Coinbase will also take a cut of transaction revenue for all the applications built on Base.

Historically, Coinbase’s revenue has come largely from trading fees. This revenue model is great when crypto is hot, but terrible when it’s not. Coinbase has been working diligently to build new revenue streams, like custody and staking.

Base is another step in that direction. While Base revenues will certainly surge during crypto booms, they are not directly related to trading fees, providing further diversification.

Coinbase’s Financials are Improving

In addition to diversifying revenue, Coinbase has aggressively cut costs over the last year, including laying off about 30% of its staff.

This means that Coinbase is still losing money (which is common in technology growth stocks), but not nearly as much. In the second quarter of 2022, the company lost $1 billion, but narrowed that loss to $97 million in the most recent quarter.

Coinbase has got $5 billion cash on hand, and currently holds $124 billion in customer crypto assets, up from $75 billion just six months ago.

In my view, the company is doing the right things to weather the crypto winter: diversifying revenue streams, keeping costs down, and investing for the future.

However, there are still major risks.

Coinbase Comes With Risks

The biggest risk, of course, is the SEC’s lawsuit against Coinbase. While this will likely take several years to play out, an SEC victory would deal a mighty blow to Coinbase—as well as the entire crypto industry, and potentially the global financial system (think FTX times ten).

The best-case scenario for Coinbase is that Congress passes new legislation to better define crypto assets—ideally, in a way that benefits the company. This appears to be the company’s strategy: lobby to get better crypto laws passed, before the SEC suit gets settled.

This is a risky strategy, as U.S. lawmakers are not known for their speediness.

However, it does appear likely that some legislation will get passed in the next year or two. It’s also likely that such legislation would benefit Coinbase overall, as the leading U.S. crypto exchange. (If Coinbase can’t comply, what hope does anyone else have?)

But perhaps the most important investing factor is the Coinbase story.

Coinbase Has a Sticky Story

As you may remember from my summary of the classic investing book A Random Walk Down Wall Street, the legendary Burton Malkiel recommends:

1) Invest in companies with prospects of high growth for five or more years. Investing in Coinbase is a big bet on crypto. If you believe it’s here to stay, then Coinbase is positioned for outstanding growth.

2) Never pay more for a stock than its “firm foundation of value,” i.e., what it’s worth. I thought COIN was a deal at $405, and I think it’s a better deal at $90. The market is spooked by the SEC suit, and that means bargain-basement prices.

3) Look for growth stories that sound like “castles in the air.” Malkiel suggests stocks that capture the fancy and dreams of the crowd (particularly institutional investors). In other words, stocks with a sticky story.

To me, Coinbase has that story: it is the leading crypto on-ramp, and also a legitimate public company. Importantly, it’s headquartered in the United States, unlike its bigger rival Binance (which is located who-knows-where).

In summary, if crypto continues to grow, then Coinbase is ideally positioned. To invest in COIN, you have to believe that crypto will continue to grow.

Invest for the Long Term

I don’t expect that COIN stock will pop on August 9, because I don’t think most traditional investors have any idea what an L2 solution is (indeed, most investors seem clueless about Coinbase’s growth prospects at all, judging from its price history).

But I believe that the launch of Base is likely to be a significant milestone in the company’s history. It bridges traditional markets with crypto markets – and Coinbase itself is that bridge.

For that reason, I’m continuing to hold my COIN. Are you?

 

 

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