Coinbase: Is COIN’s future strongly correlated with Bitcoin’s performance?

Saif Naqvi
Source: Pexels

Coinbase has come a long way since its inception 11 years ago. The initial team, comprising of an Airbnb engineer, a former Goldman Sachs trader, and a computer programmer has now evolved into a multi-Billion dollar firm that is home to over 1,200 employees.

Naturally, the firms’ success can be attributed to the burgeoning demand for cryptocurrencies, which has skyrocketed in the recent past. However, the exchange’s future outlook was not solely dependent on the price of digital assets.

Source: TradingView

Coinbase x Bitcoin?

A quick comparison of COIN’s (Coinbase’s NASDAQ ticker) and Bitcoin’s chart showed eerily similar performance. A bull run was evident between late July-early November while a downtrend took over between November-January.

It is evident that demand for cryptocurrencies does generate more revenue for Coinbase. This was because most of Coinbase’s revenue is generated through transactional fees associated with its crypto offerings. Higher prices help create institutional demand, which further correlates to increased trading on exchanges such as Coinbase. However, investing in Coinbase’s COIN is not the same as buying Bitcoin. Their valuations depend on totally different externals and metrics.

For instance, results from Coinbase’s third quarter showed a 626% year-on-year increase in trading volumes and a 294% year-on-year surge in retail transactions. During the same period, Bitcoin registered its highest percentage growth of 130%.

Despite an increase in base statistics, it’s worth noting that Coinbase’s Q3 performance fell short of Wall Street expectations. Q3 EPS was reported at $1.62, against analyst expectations of $1.75. The following day, shares of Coinbase tanked by 7% against Bitcoin’s 3% dip.

Coinbase’s Independency

All in all, Coinbase’s growth is dependent on Bitcoin but its valuation as a company is based on different forces. As a publicly-traded firm, Coinbase has to maintain significant cash reserves, multiply its subscriptions and stay up-to-date with new product offerings. All these factors contribute to its “true performance”, which lies in attractive earnings per share.

Research firm SeekingAlpha made a similar observation in their Coinbase review. The statement read,

“In 2021, however, Coinbase’s huge revenue increase of 482.7% is much higher than BTC price increase of 63.8%. It is, in fact, more in line with the transaction volume growth of 676.5%.

It further added,

“The huge jump in its transaction volume meanwhile, we believe was due to the company’s IPO. Going forward, while we still expect its revenue to be dependent on BTC price, we see transaction volume playing a much more crucial role, given it has now reached a significant size”.

Concluding Words

Coinbase is a well-established name and is far beyond an initial learning and growing stage. Hence, its growth depends on how well it creates a niche amongst the competition rather than just Bitcoin’s price.

Now, Coinbase stated that it’s currently working on an NFT marketplace where users would be able to create, collect, and showcase their NFT’s. At the same time, Coinbase Pro is also being developed, which would include staking and earning from a single balance. It would be interesting to see how these developments have shaped up when Q4 results are released on 24 February.