Coinbase's Potential As The Leading Crypto Exchange In 2024

Summary Coinbase's business diversification and international expansion effort are going as planned as the company has recently acquired several operational licenses in the EU. The company is advocating for new SEC rules regarding digital assets and this could set the precedent for how US regulators classify digital tokens. Coinbase's potential dominance in 2024 is supported by its position as a custodian for several spot BTC ETFs and its commitment to regulatory compliance. Coinbase ( COIN ) had an impressive run last year, boasting a gain of around ~420% and hitting a 52-week high of approximately $179 about a week ago. While this surge can be partly attributed to the positive momentum in the broader cryptocurrency market, it's essential to note that Coinbase has been making strides on its own, independent of Bitcoin's or the crypto market's momentum influence. Coinbase's business diversification, which involves morphing the crypto exchange into a full-fledged financial platform, and its international expansion efforts are some of the strides Coinbase made in 2023. Crypto centralized exchanges (CEX) are one of the most affected segments during bear markets as sentiment becomes negative, leading to lower transaction volume which in turn means lower fees and lower sales for CEX. Coinbase is one of the crypto exchange platforms that has emerged stronger since 2022's crypto contagions and debacles and the subsequent months-long bear market. Coinbase Diversification and Expansion Efforts Coinbase is living up to its strategic expansion slogan: " Go broad, Go Deep ." In the past two years, the firm has secured an e-money license and a virtual asset service provider (VASP) in Ireland , a crypto custody license in Germany , a crypto asset service provider (CASP) license in Italy , and more recently a successful registration with the Bank of Spain , and a VASP approval in France about a week ago. Coinbase's existing strong European foothold presents an easy opportunity to leverage the Markets in Crypto Assets (MiCA) regulation , which will be implemented in 2024 and will bring about a uniform regulation of crypto asset platform operations across Europe. While embroiled in legal disputes with US regulators over insufficient crypto regulatory clarity and the SEC's classification of certain crypto tokens as securities, Coinbase continues to expand globally, especially in the EU. Coinbase is currently in an ongoing battle with the US SEC over the SEC's crypto rules enforcement. Coinbase is playing a leading role and is advocating for new SEC rules regarding digital assets. January 17, 2024, is a crucial date to watch as the Coinbase vs SEC oral argument is slated for that date, and I believe it will have a positive impact on the crypto space if the case goes in Coinbase's favor, and could set the precedent for how US regulators classify digital tokens. In 2023, Coinbase's offshore expansion also reached Asia and South America. Since entering the Asian market in 2015 by launching operations in Singapore, Asia's crypto hub, Coinbase strengthened its Asian footprint in 2023 through strategic partnerships with banks and gaining a full operational license in October 2023. The banking partnerships allow customers in Singapore quick and easy fiat transfers between their Coinbase accounts and local bank accounts. To this effect, Coinbase received In-Principle Approval from the Monetary Authority of Singapore under the Payment Services Act to provide regulated Digital Payment Token services in Singapore. Looking ahead, Coinbase stands to gain from the much-anticipated spot Bitcoin ETF approval as it is the chosen custodian for ten of the current spot Bitcoin ETF applications, including Grayscale's, ARK 21Shares', and BlackRock's spot BTC ETFs. As the custodian for most spot BTC ETFs, Coinbase may have an increased influence on market dynamics, potentially becoming a key player in shaping industry standards and practices related to cryptocurrency custody. Coinbase's push for regulatory clarity and compliance, its strategic expansion across continents, and its position as a major custodian for several spot BTC ETFs show Coinbase's potential as the leading crypto exchange platform in 2024. Financials Recap and Outlook Coinbase's transaction revenue for Q3 was ~$289 million, which was a 12% decrease quarter-over-quarter. The decrease in transaction revenue was attributed to a decline in crypto asset volatility, which reached levels not seen since 2016. More volatility typically means more trading activity which translates to more transaction revenue for crypto exchanges. Total trading volume in Q3 decreased by 17% or $16 billion QoQ and was just $76 billion. The total crypto spot trading market declined by 24% in Q3. CEX Monthly Volume (The Block) CEX volume picked up in the last quarter of 2023, increasing by an average of 40% MoM between October and December. With the anticipation of a spot BTC ETF approval and speculation of price increases in Bitcoin and other crypto assets post-Bitcoin halving, there would likely be high short-term price volatility in crypto assets and a surge in spot trading volume, which translates to higher transaction revenue for Coinbase and other major CEX. A spot BTC ETF approval opens up another revenue stream for Coinbase - custodial fee revenue. This comes from fees from custodial services provided to Coinbase's institutional clients for being custodians of their crypto assets. Overall, I believe, Coinbase's top line should see notable improvements this year. As Coinbase establishes operations in new countries and continues to embrace regulatory compliance in these regions, this can attract local institutional clients in those regions, potentially increasing subscription and services revenue from custodial services and other offerings tailored for institutions. BASE TVL in USD (DefiLlama) BASE, Arbitrium, Optimism TVL Share (DefiLlama) Coinbase's BASE blockchain hasn't performed poorly since its launch. Though BASE still has some catching up to do in terms of TVL and revenue when compared to rival Layer-2 chains like Arbitrium ( ARB-USD ) and Optimism ( OP-USD ), TVL has increased steadily. BASE's TVL reached a high of ~$455 million on December 28, 2023. Risks As a crypto-related stock, COIN is tied to the volatility associated with crypto, and the stock price is typically influenced by factors like crypto trade volume and sentiment. Coinbase's core business operation is also not totally immune to crypto security threats like hacking. While there is optimism that a spot BTC ETF will be approved soon, there has been no official announcement in this regard and it remains wide speculation. If the SEC postpones or declines a spot ETF approval, the potential revenue stream from custodial fees, mentioned earlier in this article, will not materialize as envisioned. Takeaway Data by YCharts COIN currently trades at about 56% from its 2021 all-time high. Numerous compelling factors support a bullish outlook on COIN for 2024. The speculated post-halving crypto market price gains, the much-anticipated spot Bitcoin ETF approval which will bring a potential new revenue stream for Coinbase, and the company's offshore expansion and increase in its user base collectively strengthen the case for Coinbase's potential dominance in 2024. Coinbase's commitment to regulatory clarity and proactive approach to regulatory compliance in the jurisdictions in which it operates positions it as a strong contender for institutional investors and enhances its appeal as a potential top choice for institutional investment. COIN Valuation Grades and Metrics (Seeking Alpha) As we look ahead to a potentially strong year for the crypto industry in 2024, crypto-related stocks like COIN could diverge from traditional valuation metrics and experience volatility. I wish you a happy bullish new year!