Some people are getting filthy rich in cryptocurrencies, but few are making as much as the services that sell them. Tech blog Recode recently reported that the online cryptocurrency exchange Coinbase generated more than $1 billion of revenue in 2017, driven by a fourth-quarter surge in bitcoin's price that brought an onslaught of new users, elevated trading volume, and transaction fees.
If $1 billion in revenue doesn't sound like much, consider that Coinbase's revenue is derived only from fees. In other words, if you pay a $15 fee to buy $1,000 of bitcoin via Coinbase, only the $15 fee would flow into Coinbase's revenue line, not the full transaction value of $1,015. That's what makes this $1 billion revenue figure so remarkable: It's just from fees, nothing more.
Coinbase vs. traditional stock brokerages
When you compare what Coinbase made by processing cryptocurrency trades to what online discount brokers earn processing stock trades, it becomes evident that bitcoin exchanges have the better business model, at least for now.
Consider that TD Ameritrade (NASDAQ:AMTD) hauled in $440 million in commissions and transaction fees in the most recent quarter, putting transaction-related fees on an annual run rate of about $1.76 billion. That was an especially good quarter for TD Ameritrade, considering it includes the full contribution of its recent Scottrade acquisition. Even still, the online stock broker is on track to generate less than twice as much in transaction revenue on trades in real financial markets than Coinbase generated just from cryptocurrencies like bitcoin.
Likewise, Interactive Brokers (NYSEMKT:IBKR) reported only $647 million in revenue from commissions on stock, options, futures, and currency trades in markets all over the world in the most recent year. In 2017, Coinbase generated more trading-related revenue just from cryptocurrencies than Interactive Brokers earned from trades on virtually every financial market around the world.
Estimating Coinbase's revenue per user
Coinbase's growth accelerated in the back half of 2017, so many of its users were only trading for a portion of the year. My back-of-the-envelope math suggests that Coinbase had about 8.5 million to 9 million weighted-average users over the course of the year, implying average annual revenue per user of roughly $111 to $118, based on my analysis of data collected and shared by Alistar Milne.
Of course, user numbers are likely to be inflated by inactive accounts. Given that opening an account at Coinbase is a multi-step process in which customers must open an account, add a funding source, and get verified before placing their first order, I suspect many of its users don't make it all the way to actually buying cryptocurrency with their accounts. Revenue per verified and funded user at Coinbase could be several times higher than my calculations, perhaps $300 per user, if not more.
Based on my analysis of TD Ameritrade's fourth-quarter earnings report, I calculate that the online discount broker earned about $119.30 per average funded account in transaction-related fees on an annualized basis in the fourth quarter. Coinbase almost certainly makes more in transaction-related fees on crypto trades than TD Ameritrade makes from trades on legitimate financial markets on a per-user basis.
Selling the dream a percentage point at a time
We probably shouldn't be surprised by Coinbase's billion-dollar revenue line. Whereas online discount brokers primarily charge flat-rate commissions on stock trades, crypto exchanges charge fees based on a percentage of the transaction value.
Coinbase's fees range from as low as 0.1% on its GDAX platform to as high as 3.99% when users buy bitcoin with a credit card on its retail platform, Coinbase.com. Thus, if you were to use a Coinbase.com account to buy a whole bitcoin at a recent price of $10,000, you'd pay anywhere from $150 to $399 in fees to do it.
In contrast, an online discount broker might charge as little as $10 on a trade in which a client buys or sells $10,000 of stock. (Interactive Brokers discloses that its customers paid an average of just 0.011% of the trade value in commissions and fees to place a trade via its service, 89% less than the least-expensive bitcoin trades on Coinbase's GDAX platform.)
High, variable fees are what make Coinbase's business model work. Whereas a small-dollar retail account might be unprofitable for an online stock brokerage, Coinbase can extract much higher fees on every dollar of transaction volume, resulting in more revenue per user.
All this is to say that selling the dream is a well-worn path to riches -- and Coinbase's success proves it.