Whether you love it or hate it, Bitcoin (BTC 0.17%) has been on fire. From a low of $4,106 during the coronavirus market crash, Bitcoin has surged fourteen-fold to over $58,000. An increasing number of prominent investors view Bitcoin as a hedge against monetary inflation in the wake of COVID-19. Even Tesla and Square have hopped aboard the Bitcoin train. 

Bitcoin's rally has set the stage for crypto exchange Coinbase to go public at a nearly $100 billion valuation. This is incredible, considering Coinbase was valued at $8 billion in October 2018.

For Bitcoin holders out there, Coinbase's listing is a big step toward mainstream crypto adoption. Its market debut will also shine a spotlight on one of today's most divisive investment topics. Ahead of this much-anticipated event, here are three things you should know about Coinbase.

A gold coin representation of a Bitcoin token

Image source: Getty Images

1. A pioneer in the crypto economy 

Coinbase began in 2012 as a way for people and businesses to send and receive Bitcoin from anywhere in the world. Since then, it has evolved into a one-stop shop for finance in the crypto world. 

Along with its popular trading platform, Coinbase provides "crypto-based products" for staking, spending, saving, and borrowing -- all using crypto assets. In doing so, the company "powers the crypto economy" -- a new, open financial system built on top of Bitcoin, Ethereum (ETH 0.50%) and the thousands of other crypto assets. 

On Coinbase, users can buy and sell over 45 types of crypto assets, and also send these crypto assets to other users on Coinbase's global platform. Using their crypto assets, customers can fund Coinbase Cards -- debit cards that users can use to pay at any merchant that accepts Visa. They can also put certain crypto assets to work, earning interest by holding them in their Coinbase account.

When Coinbase first launched, Bitcoin was nowhere as well-known as it is now. But Coinbase's bold bet on the Wild West of cryptocurrencies has paid off. According to its IPO prospectus, Coinbase today serves 43 million retail users, 7,000 institutions and 115,000 "ecosystem partners," a category that includes merchants, developers, and asset issuers. These customers are spread across 100 countries, giving Coinbase a truly global reach.

2. How Coinbase makes money

Coinbase makes money mainly through transaction fees and its subscriptions and services business. In 2020, transactions generated 86% of total revenue, while subscriptions and services accounted for 4%.

Every time users buy, sell, or withdraw assets on Coinbase, they pay a transaction fee. These fees vary based on the price and quantity of crypto assets involved in that particular transaction. As a result, transaction revenue depends on the trading volume on Coinbase, as well as the volatility of cryptoasset prices. Take 2020, for example. Transaction revenue rose 137% year over year, driven by 142% growth in trading volume. While this represents rapid growth, investors should also expect revenue from this segment to fluctuate -- and sometimes wildly -- subject to the whims of the volatile crypto market.

Coinbase's subscription and service business, on the other hand, provides a steadier stream of revenue. The company earns fees for crypto assets it holds under custody and generates income by validating crypto transactions. The company also earns license revenue from its data analytics tool, which law enforcement agencies and financial institutions use to monitor blockchain transactions. While this business generates just 4% of Coinbase's total revenue, it's growing fast at 126% year over year. Coinbase will need to expand this business to get a more stable source of profits.

3. Coinbase is just getting started

Between 2018 and 2020, assets on Coinbase's platform jumped more than tenfold -- rising from $7 billion to $90 billion. In 2020, as more investors piled into Bitcoin, Coinbase's revenue more than doubled to $1.3 billion. 

While Coinbase's recent growth is nothing short of remarkable, what lies ahead is even more exciting.

According to its IPO prospectus, the total market cap of crypto assets was $782 billion as of Dec. 31, 2020. That's not even 1% of the global financial system, which is valued in the hundreds of trillions. As the technology powering crypto assets matures and new use cases emerge, the crypto economy should only grow. With a 12% market share of all crypto assets, Coinbase is well-positioned to ride this once-in-a-lifetime trend.

There are many ways Coinbase can do this. To start, it has huge headroom to grow retail accounts from its current base of 43 million users. The company sees "anyone with a smartphone" as a potential customer, giving it an addressable market of 3.5 billion people.

Coinbase can also add new crypto assets onto its platform. It currently supports about 90 crypto assets for trading or custody -- or just 1% of the 8,859 crypto assets out there, according to data from CoinMarketCap. Moreover, it could roll out new services such as a way for developers to integrate payments into their applications, boosting crypto transaction volume.

While Coinbase has huge opportunities, the road ahead isn't all clear. The growth of the crypto economy will depend on all sorts of factors, ranging from adoption and regulation to technology. What's more, the bulk of Coinbase's revenue is still transactional in nature. This means a slowdown in demand for Bitcoin -- or other cryptocurrencies -- could hugely impact its financial performance. 

Bitcoin's price may have surged 300% in 2020, but there's no telling what will happen in 2021. Similarly, there's a risk Coinbase's future growth may not be as good as what it was last year. Investors should brace for up-and-down earnings performance.

Coinbase faces a rocky road ahead

As interest in crypto assets continues to rise, Coinbase wants to leverage its massive head start to become an even bigger player. It will go public at an opportune time, with a market valuation bigger than the New York Stock Exchange's owner, Intercontinental Exchange (ICE 0.53%); Nasdaq; and the London Stock Exchange.

But Coinbase is treading an unbeaten path in an emerging industry. Changes in technology, competitive threats, and regulatory risks could all derail its long-term growth outlook. So unless they have a crystal ball, Coinbase's investors may find themselves on a roller-coaster ride. And for most of us, it's probably best to stay on the sidelines for now.