Coinbase S-1 Teardown

Brad Otto
8 min readMar 11, 2021

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For many investors, Coinbase provided a secure and easy way to buy Bitcoin, Ethereum, and other cryptocurrencies for the first time. The company has always been at the forefront of bringing crypto into the mainstream. However, Coinbase is anything but an ordinary company. After generating eye-popping 2020 financial results, the company is now eschewing the typical IPO process by opting instead for a direct listing, potentially at a valuation that exceeds $100 billion.

Product Overview

Founded in 2012, Coinbase boasts one of the most well-known brands in the crypto space today. The company’s early success started with ease of use. Before Coinbase and other crypto exchanges existed, an individual wanting to own Bitcoin had to go through the technically-intensive process of Bitcoin mining. Coinbase offered individuals another way to acquire Bitcoin — to buy it from others through a simple mobile app or web-based interface.

With an end-to-end financial infrastructure platform, the company now serves both retail and institutional investors. This platform strategy can be summarized as follows.

Coinbase refers to this process as their “flywheel” — a self-reinforcing loop in which the platform gets better with each new user and each additional asset, in turn attracting more users and assets.

Today Coinbase offers a portfolio of products and services to retail users, institutions, and ecosystem partners. Unlike other crypto-based startups, Coinbase has an easy to understand business model. The clarity and simplicity of Coinbase’s model is one of its appeals as a publicly-listed stock: it provides investors with a safe way to bet on the rise of crypto as a secular trend without having to worry about speculating on the price of Bitcoin or Ethereum. When cryptocurrencies rise, Coinbase wins. When cryptocurrencies fall, Coinbase wins. A deconstruction of their economic model shows this clearly, as noted below.

Business Model

Coinbase derives 96% of its revenue from transaction fees, which are earned each time the company matches a buyer and seller to execute a trade on its platform. In 2020, based on the reported $1.1 billion of transaction revenue and the $193 billion of transaction volume, the company’s “take rate” is that they earn approximately 0.57% of each transaction on its platform. As crypto adoption grows, so does transaction volume, hence the reason Coinbase has seen such outstanding revenue growth (139% year over year, as noted below).

In the future, an important part of Coinbase’s business model will be using their initial success with customer acquisition to drive trading to expand adoption of its non-investing products. In 2020, 21% of retail users engaged with both investing and non-investing products. These users generated 90% more revenue per user than those who only invested — illustrating the Flywheel strategy in motion. Non-investing products include the Distribute, Stake, Save, Spend, and Borrow & Lend products, many of which are subscription-based and therefore offer an attractive diversification of revenue streams. Coinbase’s subscription revenue was $45.0 million in 2020, up 126% year-over-year.

Financial Performance

It would be an understatement to say 2020 was a good year for Coinbase. Highlights include:

  • Revenue of $1.3 billion (139% growth over 2019)
  • Net income of $322 million (25% margin)
  • Adjusted EBITDA of $527 million (41% margin) — adjusted for stock-based compensation, among other items, which I’ll refer to as EBITDA going forward.

The Company’s Q4 2020 results are particularly impressive: $585 million of revenue and $288 million of EBITDA — thus a run rate of $2.3 billion in revenue and $1.2 billion in EBITDA. Notably, the Q4 2020 EBITDA margin of 49% is one of the highest EBITDA margins you will ever see in any public company. As a point of comparison, Facebook’s 2020 EBITDA margins were 46%, Microsoft’s were 47%, while Google’s were 30%. Heady territory!

Here’s the full P&L for those who want to dig deeper.

Unit Economics

The S-1 gives us enough information to do a back-of-the-envelope analysis of Coinbase’s unit economics.

In 2020, Coinbase generated $1.1 billion in transaction revenue on an average of 38.3 million verified users, which works out to $28.6 of transaction revenue per user.

  • Transaction margins (transaction revenue — transaction expense) are 88%
  • $28.6 * 88% = $25.1 of transaction margin per user

The company’s sales and marketing expenses were $56.8 million, and it added 11.0 million verified users in 2020. Let’s make a simplifying assumption that all $56.8 million went to acquire these new users. In that case, Coinbase spent $5.16 to acquire each user.

One key piece of information we’re missing is churn rate. Let’s assume that the average customer stays on board for just 1 year (representing an 8.33% monthly churn rate). In this example our LTV/CAC ratio would be 4.9x ($25.1 tx margin * 1 year / $5.16). That’s very good for a company at this scale and growing this fast, and compares favorably to the classic benchmark for attractive LTV/CAC ratio of 3.0x.

Working backwards, Coinbase could have an average customer lifetime of as low as 7.5 months (~13.5% monthly churn) and still have an attractive LTV/CAC ratio of 3.0x. All this is to say, despite not knowing the actual churn rate, these unit economics look great.

Key Business Metrics

Here are a few snapshots of key business metrics from the S-1.

Trading Volume and Crypto Asset Volatility

Institutional trading volume surpassed retail trading volume in Q2 2019, and has stayed higher ever since.

Verified Users

Verified users continue to grow at a steady clip.

Monthly Transacting Users (MTUs) and Crypto Asset Volatility

Monthly transacting users are closely correlated with crypto asset volatility.

Assets on Platform and Crypto Market Capitalization

Crypto market capitalization more than doubled in 2020, and Coinbase’s assets followed suit.

Share of Crypto Market Capitalization

Coinbase continues steady growth of market share.

Market Landscape

There are numerous competitors in the world of cryptocurrency exchanges. According to CoinMarketCap, the five largest exchanges by daily volume are:

  1. Binance — $22.6 billion
  2. Huobi — $7.1 billion
  3. Coinbase — $3.1 billion
  4. Kraken — $1.7 billion
  5. Bitfinex — $1.4 billion

Security

One of the most important considerations in choosing a crypto product is security. Particularly after high profile Bitcoin heists like MT Gox and Coincheck. Coinbase remains one of the most trusted names in the crypto space with no record of a major hack to date.

The company achieves this security by using a combination of offline “cold” storage and online “hot” storage. 98% of customers’ assets are stored in offline “cold” storage, which is generally far more secure from potential hacks. The remaining assets in online “hot” storage, used to meet the company’s daily liquidity needs, are in secure servers and are insured should Coinbase suffer a breach. Cash balances in Coinbase accounts are held in FDIC-insured custodial accounts.

Valuation

Coinbase’s last financing was a $300 million Series E round in October 2018, which valued the company at $8 billion on a post-money basis. As of January 2021, the company was being valued as high as $100 billion in secondary sales via Nasdaq Private Markets, where it’s selling shares on a weekly basis to determine a reference price for the upcoming direct listing2.

This $100 billion valuation means the company is trading at 42.7x run rate revenue and 86.9x run rate EBITDA. Public comparables in the financial exchanges sector trade at 11.3x revenue and 20.5x EBITDA, as seen below.

Are investors crazy to value Coinbase at $100 billion? Maybe. To value the company at $100 billion an investor would have to believe Coinbase will continue to grow revenue at 100%+ year-over-year at current EBITDA margins. Doing that for the next two years would generate $9.4B of revenue and $4.6B of EBITDA in 2022. Thus, at a $100B valuation Coinbase is trading at 10.7x 2022 revenue and 21.7x 2022 EBITDA, which is right in line with the comparable group.

The Bottom Line

Whether Coinbase is worth $100 billion is largely dependent on whether you believe the company will continue its incredible growth trajectory (139% year-over-year!). However, this is also a bet on the crypto asset sector as a whole — as there’s a correlation between Bitcoin price/volatility and transaction volume on the platform.

As a crypto enthusiast, I’m excited by the prospect of Coinbase shares being publicly listed. It’s a big win for the entire ecosystem, not to mention the founders, employees, and VCs. Finally, it’s an exciting opportunity for retail and institutional investors to participate in the crypto economy without holding the volatile underlying assets like Bitcoin and Ethereum. Is it safe to say Coinbase’s IPO makes crypto mainstream?

S-1 Easter Eggs

There’s no doubt Coinbase is an extraordinary company. However, fellow S-1 nerds will also appreciate Coinbase’s unique S-1 document.

It is customary for any company filing an S-1 to list a headquarters address. Coinbase chose not to. Is it possible that it’s the first company to do so?

For my Bitcoin enthusiasts out there, most of you will have read the Nakamoto whitepaper, which essentially led to the creation of Bitcoin. A copy of the S-1 registration statement was earmarked for Satoshi Nakamoto, the mysterious creator of Bitcoin, and sent to his/her/their(?) blockchain address.

Finally, for those out there who don’t spend sufficient time on Reddit trading in finance memes, Coinbase took the liberty of defining a key term within the crypto community.

A special thank you to Jeff Bussgang for helping out with this post.

Disclosure: I am not a financial advisor, and this post is not meant to be investment advice. I am not an investor in Coinbase.

Sources

  1. Coinbase S-1
  2. Coinbase Valued Above $100 Billion
  3. CoinMarketCap Exchange Rankings
  4. S&P Capital IQ

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