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Coinbase achieved profitability for the first time in 2020, with a net profit of 320 million U.S. dollars. In terms of profitability indicators, Coinbase’s ROE and ROA both surpassed major traditional exchanges.
Written by: OKEx Research Institute
On February 25, 2020, Coinbase officially submitted a listing application to the SEC, planning to list its Class A common stock directly on the Nasdaq Global Select Market. Starting from the development background of the blockchain industry and the encrypted digital market, this article deeply analyzes Coinbase’s business scope, revenue composition, target group, operating performance and profitability and other factors. Finally, this article gives Coinbase a future outlook on the risks and opportunities that cryptocurrency exchanges will face.
From the perspective of industry development, in recent years, various countries have successively introduced blockchain support policies, and the epidemic has also promoted blockchain R&D investment in various industries; the scale of the cryptocurrency market has developed rapidly, which is reflected in the market value increase in the last year. 293.1%, the market value of Bitcoin alone has surpassed well-known companies such as Tesla, Tencent, Alibaba, and Facebook. Institutions are vying to increase their holdings of cryptocurrencies to promote a bull market in the cryptocurrency market.
From the perspective of company operations, Coinbase’s business scope is diversified, focusing on providing online trading platforms, with additional subscriptions and services and other businesses, effectively reducing the volatility of revenue. Coinbase achieved profitability for the first time in 2020, with a net profit of 320 million U.S. dollars. In terms of profitability indicators, Coinbase’s ROE and ROA both surpassed major traditional exchanges. According to DuPont’s analysis, the asset turnover rate is the main contributor to the growth of ROE, the equity multiplier is at the bottom of the industry, and other indicators are basically the same as those of the three traditional exchanges. From the perspective of capital structure and debt solvency, Coinbase has strong growth capabilities. The net profit attributable to the parent at the end of 2020 has increased by 1247.35% year-on-year; the debt-to-asset ratio has been increasing year by year, indicating that it has confidence in business operations and is able to bear the interest and risks of borrowing .
From the perspective of future development, Coinbase is subject to increasingly stringent legal and regulatory requirements on a global scale. For this reason, Coinbase has to increase investment in compliance to meet legal and regulatory requirements. On the other hand, with the rapid development of the encryption economy, Coinbase has a huge opportunity to further expand its business footprint and operating income, and continue to maintain its leading position in the encryption industry.
Stock exchanges listed on digital currency exchanges: the beginning or the end of the crypto industry?
On February 25, 2020, Coinbase officially submitted a listing application to the SEC, planning to directly list its Class A common stock on the Nasdaq Global Select Market (stock code “COIN”). Coinbase is a cryptocurrency exchange headquartered in the United States with users in more than 100 countries, with approximately 43 million certified users, 7,000 institutions, and 115,000 ecosystem partners. Its business scope covers investment, consumption, savings, Earn and use cryptocurrency. If Coinbase is successfully listed, it will become a milestone in the crypto industry.
Figure 1: Historical evolution of Coinbase, source: Coinbase prospectus, organized by OKEx Research Institute
Between 2012 and 2020, the overall market value of crypto assets has grown from less than US$500 million to US$782.0 billion, with a compound annual growth rate (CAGR) of more than 150%. During the same period, Coinbase’s retail users increased from approximately 13,000 to 43 million, and the number of institutions increased from more than 1,000 in 2017 to 7,000 in 2020. As of the end of December 2020, the total transaction volume of customers on the Coinbase platform exceeded US$456 billion, and more than US$90 billion worth of assets were stored on the company’s platform. At present, Coinbase has grown into a leading provider of financial infrastructure and technology in the crypto economy.
Coinbase at the forefront: the blockchain industry and the digital currency market are growing rapidly
Countries have successively introduced blockchain support policies, and the epidemic promotes blockchain R&D investment
In 2020, the global uncertainty and distrust brought by the new crown epidemic will promote the R&D investment in blockchain technology. According to the China Patent Protection Association’s “Global Authorized Patent Report in the Blockchain Field in 2020”, from the perspective of not distinguishing between virtual currency, public chain and consortium chain, as of May 2020, the block chain field has a global share 3924 authorized patents. Among them, the United States accounted for 39%, South Korea accounted for 21%, and China accounted for 19%.
Figure 2: The number of blockchain patents worldwide, data source: “2020 Global Authorized Patent Report in the Blockchain Field”, compiled by Ouyi OKEx Research Institute
At present, the development of blockchain technology has also attracted the attention of governments of various countries. Governments of various countries are rushing to issue a number of documents and policies to promote the development of blockchain technology and strengthen the governance of blockchain technology. With the application of blockchain technology, it will bring subversive changes to traditional social production relations and promote the development of global politics, economy and society. According to the survey data of the China Academy of Information and Communications Technology, from 2019 to 2020, 24 countries around the world issued special policies or laws and regulations specifically for the development of the blockchain industry and industry supervision. The European Union, China, Australia, India, Mexico and other countries are actively developing the blockchain industry and have formulated an overall development strategy for the industry. For example, in September 2019, Germany released its “National Blockchain Development Strategy”; in November 2019, the European Commission announced a new investment plan for European artificial intelligence and blockchain-focused startups; February 2020 , Australia released the “National Blockchain Development Roadmap”; in March 2020, Korea Science and ICT announced the launch of the “Blockchain Technology Verification Support Plan 2020”.
Table 1: 2019-2020 Blockchain Industry Support Policies of Major Countries/International Organizations in the World, Source: China Academy of Information and Communications Technology, Ouyi OKEx Research Institute
The scale of the global cryptocurrency market is growing rapidly, and the momentum remains strong
Cryptocurrency is a transaction medium that uses cryptographic principles to ensure transaction security and control the creation of transaction units. It is responsible for multiple functions such as medium of exchange, value storage, and energy supply for applications. It is the most active in the global encryption market. Part. Nowadays, the public has widely recognized that blockchain technology is the three major outlets for changing the future. Under the background of this era, encrypted currencies relying on blockchain technology are undoubtedly the eye of the storm.
The global encrypted digital currency market has grown from 10.4 billion U.S. dollars in 2013 to 764.7 billion U.S. dollars in 2020, with a compound annual growth rate exceeding 3.2%. In 2020 alone, the market value has increased by nearly 570 billion U.S. dollars, an increase of 293.1%, not only that In 2021, the crypto market is still gaining momentum. As of March 3, 2021, after only two months and three days in 2021, the size of the crypto market has expanded by another 94.5%.
Figure 3: The total market value and growth rate of the global crypto market, source: Coinmarketcap, OKEx Research Institute
Bitcoin’s market value exceeds one trillion, sit firmly in Diaoyutai
In the global crypto market, Bitcoin (BTC), as the creator of the world, undoubtedly sits firmly on the top spot. Since Bitcoin was created by Satoshi Nakamoto, the market share has remained high. Since 2021, the market share of Bitcoin has basically remained above 60%, and the historically lowest market share has also been 33%. After that, Ethereum (ETH ), but the market share of Ethereum is only hovering around 10%. At present, it is far from being able to compete with Bitcoin. This is especially true for other altcoins. They compete with each other for the remaining “cake” of Bitcoin. There is no market share yet. More than 3%.
At the same time, Bitcoin has sprung up suddenly in the recent overall downturn in the market economy. The market value rose rapidly in a short period of time, and even broke through the trillion U.S. dollar mark on February 19, 2021.
Figure 4: Bitcoin market trend chart, source: OKEx Research Institute
Judging from the current market value of global listed companies, the only companies that have broken through the trillions of market value are Apple, Microsoft, Amazon, and Google. Among them, Apple has the highest market value, which has reached two trillion US dollars. If Bitcoin is added to it, its market value has already surpassed well-known companies such as Tencent, Tesla, Alibaba, and Facebook. What’s even more shocking is the speed at which Bitcoin has become a member of the “trillion club”: it took 42 years for Apple to reach a market value of one trillion dollars, 24 years for Amazon, 21 years for Google, and 21 years for Bitcoin. It only took 12 years.
Figure 5: Market value growth in the past ten years (100 billion US dollars), source: OKEx Research Institute
Bitcoin’s return rate is far ahead of the world’s major major asset classes, reaching as high as 301.46% in 2020. From the perspective of market yields, in the past year, the S&P 500 index’s yield was 16.26% during the same period, and the market’s sought-after gold was only 25%. It can be said that Bitcoin’s performance in 2020 has far exceeded All other major assets.
Figure 6: Return rate of major asset classes in 2020 (%), source: OKEx Research Institute
The new crown epidemic is the ignition point, and institutions are rushing to help
In 2020, the world has experienced black swan events such as the “pandemic” and “negative oil prices” that have not been seen in a century. In response to the economic recession brought about by the epidemic, countries have adopted quarterly loose monetary policies. In an economic environment of high inflation and low growth, in order to avoid the loss of nominal principal and the need to pursue higher returns, investors’ demand for hoarding cash has naturally evolved into a demand for cryptocurrencies such as gold and bitcoin, which drives A bull market in the crypto market with Bitcoin as its head.
According to Bitcoin Treasuries data, as of the end of 2020, 15 listed companies around the world have purchased and held more than 100,000 Bitcoins, 12 of which are located in the United States or Canada. In February 2021, Elon Musk, the father of Tesla, the richest man in the world, made a bet of US$1.5 billion in the Bitcoin market. American broker WedBush predicts that nearly 5% of listed companies will follow suit in the next 12-18 months. Sla’s investment diversification strategy has joined the Bitcoin investment wave.
Alternative Financial Market Exchange: How strong is Coinbase?
Diversified business scope, effectively reducing income volatility
As we all know, there are two ways to obtain bitcoins. The first is to use complex and powerful computers to mine bitcoins by solving complex mathematical problems, or to buy bitcoins on exchanges. The cost of the former is ridiculously high and requires a lot of technical knowledge, while the latter only needs to open an account on the above-mentioned exchanges, among which Coinbase is the leader of such exchanges.
Coinbase’s main business is to provide an online trading platform that allows buyers and sellers to meet and invest, spend, send and receive, store, preserve, mortgage, lend and lend, distribute, build, pay and more widely at the right price. Use encrypted assets for access and transactions. Its income composition includes the following parts: transaction income, subscription and service income and other business income.
Transaction income includes net income from transaction fees incurred on the platform. The company charges a fee of about 0.50% for the purchase and sale of cryptocurrencies, but this rate will vary according to market conditions. From mid-2019 to the end of 2020, transaction service revenue rose from USD 235.35 million to USD 109.617 million, an increase of 366%. Transaction service income is the most important component of operating income, accounting for approximately 86%.
Subscriptions and service income include storage (Store), staking (Stake), distribution (Distribute) and construction (Build). These incomes are calculated using the interest method, and interest income depends on the balance of the statutory funds in custody and the current interest rate environment. Subscription and service income accounted for approximately 4% of total operating income. From 2019 to 2020, this revenue will increase by about 355%.
Other business income includes income from the sale of encrypted assets. The company regularly uses its own encrypted assets to complete customer transactions. Before some small orders are sold to customers, the company keeps and controls the encrypted assets in these orders, and records revenue at the point in time when the sale is processed. The company records the total value of sales as revenue, and records the cost of crypto assets in other operating expenses. Other income includes interest income exclusively earned through cash and cash equivalents. This type of income accounts for approximately 11% of total income and has increased by 329% in the past year.
Table 2: Subscription and service income, source: Coinbase prospectus, OKEx Research Institute
Figure 7: Coinbase’s revenue composition and growth rate, source: Coinbase prospectus, OKEx Research Institute
In addition, Coinbase’s institutional clients include hedge funds, major trading companies, small and large financial institutions, family businesses, and companies that have recently sought to allocate a portion of their investment portfolio to crypto assets. As of December 31, 2020, there were 7,000 institutional clients on the company’s platform. For example, the innovative investment management company One River Asset Management.
In terms of ecological partners, Coinbase is looking for companies that can build their own products and services or distribute these products and services through the Coinbase platform. For example: developers who build new blockchain protocols and applications that utilize blockchain protocols; creators of new tokens on these protocols; see commercial value when accepting these tokens as a new payment method for their business Merchant partners; organizations and financial institutions that use Coinbase Analytics technology to monitor various use cases (such as compliance) of blockchain transactions. In addition, the company’s partners in the DeFi agreement include Compound.
Figure 8: Coinbase target user group and corresponding business, source: Coinbase prospectus, OKEx Research Institute
“Arsenic” or “Honey”, Coinbase takes advantage of the trend
Since the outbreak of the new crown epidemic, the global economic situation has become more and more sluggish. People have shifted their focus to the cryptocurrency industry, and cryptocurrencies are rushing to appear first, driving the business development of virtual asset trading platforms. Coinbase’s operating income has skyrocketed from 1.82 billion yuan in the second half of 2019 to 5.666 billion yuan in the second half of 2020, with a compound annual growth rate of 76.44%. The scale of Coinbase’s operating income is currently not comparable to that of traditional exchange giants, but the gap is shrinking rapidly. In the second half of 2020, it will only differ from the Hong Kong Stock Exchange by 2.168 billion yuan. At the same time, COINBASE has huge growth potential: in 2020, the revenue levels of other stock exchanges (Hong Kong Stock Exchange, London Stock Exchange, Intercontinental Exchange, etc.) have declined, but Coinbase has survived, and revenue has increased in half a year to the beginning of the year. 2.12 times.
In terms of net profit, with the success of encrypted digital currencies, the trading volume of major crypto market exchanges has risen rapidly. Coinbase achieved profitability for the first time in 2020, and rapidly increased by 262.48% from 45 million yuan in the first half of the year to 1.65 at the end of the year. 100 million yuan, the Hong Kong Stock Exchange and the Intercontinental Exchange only increased by 2.57% and -35.86% in the first half of 2020.
Figure 9: Revenue growth rate is as high as 76.44% (100 million yuan), Source: Wind, OKEx Research Institute
Figure 10: Net profit increased by 362.48% in the first half of 2020. Source: Wind, OKEx Research Institute
From the perspective of return on equity (ROE) and return on total assets (ROA), the Coinbase exchange has surpassed major traditional exchanges in both ROE and ROA in the second half of 2020. ROA is even the Hong Kong Stock Exchange and Intercontinental Exchange respectively. This is mainly due to the occurrence of major events such as the epidemic in 2020 and the “black swan”. Major traditional exchanges have suffered heavy losses. Exchanges such as Coinbase in the encrypted digital currency market have instead taken advantage of Dongfeng. In the eyes of investors, “Fragrant Pastry”.
Figure 11: ROE takes the lead for the first time in 20 years, source: Wind, OKEx Research Institute
Figure 12: 20-year ROA far exceeds the other three major exchanges, data source: Wind, OKEx Research Institute
According to DuPont analysis and further decomposition, except for the asset turnover rate and equity multiplier, other indicators are basically the same as those of the three traditional exchanges. The asset turnover rate is the main contributor to the growth of ROE. The asset turnover rate of Coinbase in 20 years is 0.31, while the Hong Kong Stock Exchange and the Intercontinental Exchange are divided into only 0.06 and 0.05, and the London Stock Exchange is even 0. As a virtual digital currency trading platform, Coinbase is compared with the other three traditional exchanges. The unique technical characteristics and application scenarios of the virtual market make Coinbase’s trading procedures simpler, faster in production and operation, and can be obtained with less resources. Greater income.
Coinbase’s equity multiplier is at the bottom of the industry, only 3.19, and the lowest equity multiplier among the three traditional exchanges also has 6, which is 1.88 times that of Coinbase. The capital invested by Coinbase shareholders accounts for a relatively large proportion of assets, indicating that the borrowed funds are very small and the financial risk is not large. This may be related to Coinbase’s just entering the market.
Table 3: DuPont analysis of the four major exchanges in 2020, data source: Wind, OKEx Research Institute
From the perspective of capital structure and solvency, the asset-liability ratios of the three traditional exchanges are all above 80%, and the asset-liability ratio of the London Stock Exchange has even reached above 99% in recent years. According to Coinbase’s annual report and prospectus, although Coinbase’s asset-liability ratio has also shown an upward trend year by year, from 55.61% at the end of 2019 to 73.94% at the end of 2020, there is still a big gap with the three traditional exchanges. However, the current development trend of Coinbase is relatively healthy, and the rising asset-liability ratio shows that Coinbase is confident in business operations and is able to bear the interest costs and risks of borrowing from banks.
In addition, Coinbase has strong growth capabilities and huge development potential. The net profit attributable to the parent in the first half of 2020 and the end of the year will increase by 710.87% and 1247.35% respectively. The other three traditional exchanges are relatively mature and have little room for growth. The net profit attributable to the parent of the established London Stock Exchange has increased by -13.13% and -8.13% year-on-year.
Figure 13: The debt-to-asset ratio is on the rise, source: Wind, OKEx Research Institute
Figure 14: The growth rate of net profit of the parent company far exceeds that of the other Big Three, source: Wind, OKEx Research Institute
Coinbase’s key business indicators perform well
In addition to financial performance, the company also uses business indicators such as verified users, monthly transaction users (MTU), assets on the platform, transaction volume, and non-GAAP financial indicators to evaluate the business, measure performance, determine trends that affect the company’s business, and make decisions. Strategic Decision. Verified users represent users who have shown interest in the platform. As of December 31, 2018, for all quarters ended December 31, 2019 and 2020, the number of verified users increased from the previous quarter. Among them, the retail e-wallet application, which was launched in mid-2018, has grown by more than 2 million users as of December 31, 2020.
MTU represents the company’s active and passive retail user transaction base and reflects revenue opportunities on the platform. MTU promotes the growth of retail transaction volume and includes transaction-based products for retail users that interact with it, such as investment, spending, sending and receiving, investment and distribution. MTU has historically been associated with the price of Bitcoin and the volatility of encrypted assets.
Figure 15: Verified users (millions), source: Coinbase prospectus, OKEx Research Institute
Figure 16: Monthly trading users and crypto asset fluctuations, source: Coinbase prospectus, OKEx Research Institute
The assets on the platform are a measure of the total value scale held by the platform, reflecting the trustworthy nature and profit opportunities of the platform. This indicator is affected by market factors. For example, as the price of crypto assets (mainly Bitcoin and Ethereum prices) fell from their 2017 highs, platform assets declined in 2018. Between December 31, 2017 and December 31, 2018, the prices of Bitcoin and Ethereum dropped by approximately 74% and 82%, respectively, and the total market value of encrypted assets dropped by 80%. During the same period, assets on the platform decreased by 73%. Despite short-term fluctuations, due to the increase in the price, quantity and type of cryptocurrencies, as of December 31, 2018, the assets on the platform have increased from USD 7 billion to 17 billion in a long period of time in 2019 and 2020, respectively. US dollars to 90 billion US dollars.
Transaction volume represents the product of the number of asset transactions and the transaction price when the transaction is executed. Since transaction activities directly affect transaction revenue, the measurement standard reflects the liquidity of the company’s order book, transaction status, and the potential growth of the cryptocurrency economy. Compared with institutional trading volume, retail trading volume is more affected by the volatility of Bitcoin prices and encrypted assets, and institutional trading volume fluctuates less over a period of time. With the increase in institutional transactions, the number and types of encrypted assets supported by the platform have been expanded, and the utility of encrypted assets has also expanded. It is expected that the correlation between bitcoin prices, the volatility of encrypted assets and transaction volume will decrease.
Figure 17: Platform assets and cryptocurrency market value, source: Coinbase prospectus, OKEx Research Institute
Figure 18: Trading volume and volatility of encrypted assets, source: Coinbase prospectus, OKEx Research Institute
Non-GAAP financial measures refer to adjusted EBITDA, that is, adjusted EBITDA is defined as net income (loss), adjusted to exclude interest expenses, income tax (income) reserves, depreciation and amortization, stock-based compensation expenses, goodwill Impairment, acquisition of intangible assets and encrypted assets, restructuring costs, minus recurring acquisition-related compensation costs, unrealized foreign exchange gains and losses, fair value adjustments of derivatives, and non-recurring legal reserves and related costs. The adjusted EBITDA for the year ended December 31, 2020 increased compared to the year ended December 31, 2019, mainly due to the increase in trading income.
At present, Coinbase has obvious advantages in terms of brand influence, user trust, compliance and product experience. The company has established a powerful back-end technology platform to support the real-time and uninterrupted needs of the global crypto asset market. By cooperating with global regulators to formulate policies, the company has invested heavily in regulatory compliance and pioneered industry-leading security practices to protect encrypted assets. The company attracts retail users, institutions, and ecosystem partners to the platform, creating a powerful flywheel: retail users and institutions store assets and improve liquidity, allowing the company to expand and provide and launch new and innovative crypto assets, So as to attract more new customers to join. The company’s size and leadership has attracted ecosystem partners to connect with our millions of customers around the world, thereby further increasing the value of the platform.
Born in danger, breaking through the cocoon and becoming a butterfly: the risks and opportunities of cryptocurrency exchanges
From country to business, exchanges face complex risks
As a result of its global business, Coinbase is subject to various laws and regulations formulated by the US federal, state, local and foreign governments and regulatory agencies. Globally, Coinbase is subject to increasingly stringent legal and regulatory requirements. These requirements involve the detection and prevention of terrorist financing, anti-money laundering, fraud and other illegal activities, competition regulations, economic and trade sanctions, privacy, and cybersecurity. Information security and data protection. These laws, regulations and rules (and their interpretations) are constantly changing and increasing in number.
Table 4: Regulatory agencies within the US federal government, source: OKEx Research Institute
Table 5: The supervision of some state governments in the field of blockchain in the United States. Source: China Academy of Science and Technology Development Strategy, Ouyi OKEx Research Institute
Money laundering and terrorist financing are common crises faced by all cryptocurrency exchanges. Coinbase is subject to various anti-money laundering and anti-terrorist financing laws, including BSA in the United States and similar foreign laws and regulations. Coinbase has implemented a compliance program designed to prevent the platform from being used for money laundering, terrorist financing, and other illegal activities in the country or with individuals or entities (including designated lists issued by OFAC and equivalent foreign authorities). activity. The compliance plan includes policies, procedures, reporting agreements and internal controls, designed to meet legal and regulatory requirements, and to assist in the management of risks related to money laundering and terrorist financing. Anti-money laundering regulations are constantly evolving and vary from jurisdiction to jurisdiction. The company will continue to monitor compliance with anti-money laundering and anti-terrorist financing regulations and industry standards, and implement policies, procedures and control measures in accordance with the latest legal requirements.
Abundant cash flow, product innovation, the exchange has a bright future
The market operated by Coinbase has one of the deepest liquidity pools and network effects, with a large amount of liquidity to exchange a wide range of encrypted assets. The good combination of retail and institutional activities provides the company with deep liquidity, highlighting the synergy and network effects between customers on the platform. Liquidity brings liquidity, and this advantage will deepen as we continue to expand the range of supported crypto assets and attract new customers to the company’s platform.
Coinbase has grown with the development of the crypto economy. Powerful momentum drives the online exchange of almost all aspects of economic activity. More importantly, Coinbase has a huge opportunity to increase the number of customers: including increasing user adoption and participation in products, expanding and accelerating the coverage of retail users, expanding institutional coverage and support, developing a good ecosystem relationship, and increasing payment methods And international expansion; increase the depth and breadth of encrypted assets on the platform: including expanding support for digital currencies and encrypted assets, supporting exchanges’ blockchain protocol functions and marking new assets; and launching new innovative products to actively promote business Development means building any existing and more financial and non-financial products that have yet to be created for the crypto economy.
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 PricewaterhouseCoopers, PwC’s Global Blockchain Survey 2018,
 “2020 Global Blockchain Development Trend Report” https://www.weiyangx.com/377569.html
 China Academy of Information and Communications Technology, Blockchain White Paper 2020, 2020.12