Cryptocurrencies have been getting a lot of attention lately, and the public debut of Coinbase, a platform for trading in various digital currencies, is likely to ramp up that attention even more and potentially generate some volatility in the market.

Coinbase stock is scheduled to begin trading on the Nasdaq Exchange under the ticker symbol "COIN" on Wednesday. Here's what investors should know about this company with roughly 1,750 remote-first employees and a private market valuation of around $100 billion.

The mission and market opportunity

Coinbase's mission is to create an open financial system for the world. This goal is based on the belief that the traditional fiat-based financial system -- the way we currently spend, save, and invest money -- is inefficient. Instead, Coinbase sees a better solution: the cryptoeconomy.

Digital concept art depicting blockchain.

Image source: Getty Images.

The cryptoeconomy is a financial system in which digital (crypto) assets are built on blockchain technology. If you're unfamiliar with the term, the concept is simple enough: Blockchain is a widely distributed, self-governing database that validates and records all transactions on a network. This eliminates the need for a central bank (or authority) to mint and manage the currency. That in turn eliminates many of the transaction fees charged by payment processors and banks. Basically, blockchain is the foundation of a more efficient financial system.

When Coinbase was founded in 2012, the San Francisco-based company started as a place where users could buy and sell Bitcoin (CRYPTO:BTC). Since then, it has expanded its offering for retail users, and the company has added other cryptocurrencies and products for institutions and ecosystem partners.

In 2018, Coinbase started launching subscription products and services, including the ability to store, stake, borrow, and lend through its platform. Today, the company also licenses analytics tools to law enforcement and financial institutions, it provides software to help developers build blockchain applications, and it enables merchants to accept cryptocurrency payments.

The takeaway is this: Coinbase's total addressable market (TAM) depends heavily on the adoption of cryptocurrency. To that end, CEO Brian Armstrong recently said: "We believe the cryptoeconomy could eventually grow to become a sizable portion of global GDP." If that's true, Coinbase has an enormous market opportunity.

Competitive position

Coinbase is the largest cryptocurrency exchange in the United States. The company has differentiated itself by investing heavily in security and regulatory compliance. In fact, Coinbase is one of the longest-running crypto platforms that has never lost customer funds due to a security breach.

This focus on providing a simple, secure user experience has translated into a thriving financial ecosystem. At the end of 2020, Coinbase had 43 million retail users, 7,000 institutions, and 115,000 ecosystem partners on its platform.

This expanding client base creates a network effect: As more retail users and institutions store assets on Coinbase, the company's liquidity improves, meaning it has more cash to build innovative new products that attract more users. At the same time, as the cryptoeconomy grows, Coinbase's scale should attract more ecosystem partners, adding further value to its business.

As a final note, Coinbase currently stores $223 billion in crypto assets on its platform. For reference, that figure represents 11.3% of all crypto assets in the world -- that makes this company a significant player in a rapidly growing market.

Financial performance

Currently, Coinbase generates the vast majority of its revenue through transaction fees, which are highly volatile, since they depend on trading volume. Even so, the median trading volume has increased over time, rising from $17 billion in 2018 to $38 billion in 2020. That has translated into strong financial performance.

Metric

2019

2020

Change

Revenue

$534 million

$1.3 billion

139%

Free cash flow

($121 million)

$3.0 billion

N/A

Data source: Coinbase.

More recently, Coinbase reported preliminary results for the first quarter of 2021. Notably, revenue surged to $1.8 billion -- 844% higher than revenue from Q1 2020. Additionally, verified users jumped to 56 million, up 65% year over year.

Going forward, the company's efforts to grow subscription and services revenue should reduce its dependence on transaction fees. For some of these products -- like the ability to store, stake, borrow, and lend -- Coinbase earns revenue based on the percentage of assets on its platform that participate in the specific product or service. In other words, investors should pay attention to Coinbase's ability to drive growth in both users and crypto assets stored on its platform.

A word of caution

Investing in a newly public company is always risky. IPOs can be mispriced and sometimes companies fail to perform in the public spotlight. If anything, this situation is more risky than normal, since it's infused with frenzied enthusiasm about cryptocurrency.

Last September, Coinbase traded at a valuation of $5.3 billion in private equity markets. In March 2021, private buyers valued the company at roughly $68 billion. More recently, that figure has climbed to $100 billion. That means Coinbase is worth about 20 times more today than it was seven months ago. That's a big jump, and it's been driven by the booming interest in cryptocurrency. If that interest disappears, Coinbase's value will almost certainly plummet.

That's why I wouldn't commit to buying this stock right away. At the very least, wait to see where the company's market cap lands when it goes public; then ask yourself if Coinbase is worth that amount. In other words, can Coinbase impact the world broadly enough to justify a $100 billion valuation? What if the valuation is $150 billion? If you're not sure, it may be prudent to wait a few quarters before you invest. That gives you time to monitor Coinbase's financial performance as a public company.

Don't get me wrong -- I like Coinbase. The company has a noble mission, a solid competitive position, and a history of strong financial performance. But don't act irrationally just because you're afraid to miss out. If Coinbase is truly a good long-term investment, waiting a few quarters won't be the end of the world.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.