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Coinbase Investing 10% of Profits in Crypto Is Bigger Than You Think

By Rick Munarriz – Aug 20, 2021 at 10:45AM

Key Points

  • CEO Brian Armstrong expects the profit percentage it invests in cryptocurrencies to grow from 10% over time.
  • Coinbase is a very profitable company right now, and that's going to translate into a lot of crypto being purchased.
  • Unlike the evangelical Michael Saylor or mercurial Elon Musk, Armstrong is a relatable CEO that will reasonably stick to his board's game plan.

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The leading crypto exchange is buying $500 million in cryptocurrencies for its balance sheet and will continue to do so with 10% of its future profits.

We've seen a couple of CEOs make headlines after making big bets on Bitcoin (BTC -0.31%) this year. It isn't always pretty. Michael Saylor at MicroStrategy (MSTR 0.34%) has been vocal about parking his company's cash in crypto, but he's an acquired taste with his evangelical Bitcoin tweets. Tesla's (TSLA 3.23%) Elon Musk was a more prolific Bitcoin backer, but the tide turned when he grew critical of the most valuable crypto's energy efficiency and turned his attention to a meme coin. 

It's against this backdrop that Coinbase Global (COIN -6.00%) founder and CEO Brian Armstrong is putting his company's money where the leading cryptocurrency trading exchange's mouth is. Armstrong announced on Thursday that Coinbase has board approval to purchase $500 million in cryptocurrency, earmarking 10% of future profits for adding to its digital assets. Armstrong isn't as flashy as Musk. He's not as obsessed as Saylor. However, he's the CEO that crypto needs right now.

Person ripping apart a dress shirt, revealing the Bitcoin logo.

Image source: Getty Images.

A token of affection

It makes sense for Coinbase to hold at least a chunk of its loose change in Bitcoin and other leading digital currencies. It would be hypocritical for this not to be the case. It also wouldn't be as risky a move as it would be for another company to take this approach to stashing away some of its profits this way. After all, Coinbase operates an exchange that exclusively trades crypto. It's already connected to the highs and lows of next-gen currencies. 

We're also talking about a considerable amount of money. One of the biggest surprises so far in Coinbase's early tenure as a public company is how profitable it has become. Margins are insane given the scalable nature of this business and the low overhead. A whopping $771.5 million of the $1.8 billion it generated in revenue in the first quarter of this year made its way down to the bottom line. Nearly half of the $1.6 billion it earned in its latest quarter -- of the $2.2 billion it rang up on the top line -- was the handiwork of a one-time tax benefit related to its IPO. However, back out that gain and you still have a company that has clocked in with a net margin north of 40% in back-to-back quarters.

As crazy as it may seem that the niche-propelled Coinbase commands a $52 billion market cap, it's actually trading at a trailing earnings multiple in the teens right now. Coinbase using 10% of its net income to buy crypto is a big deal. If Armstrong is right about that percentage growing over time -- as Coinbase itself ideally grows -- it's going to be a lot of different types of cryptocurrencies bought and owned by Coinbase.

Investing in Coinbase was always about buying the entire crypto basket. Now that thesis is going to be even more accurate.

Rick Munarriz owns shares of Bitcoin, Coinbase Global, Inc., and Tesla. The Motley Fool owns shares of and recommends Bitcoin and Tesla. The Motley Fool recommends MicroStrategy. The Motley Fool has a disclosure policy.

Stocks Mentioned

Coinbase Global Stock Quote
Coinbase Global
$40.24 (-6.00%) $-2.57
Tesla Stock Quote
$179.05 (3.23%) $5.61
MicroStrategy Stock Quote
$203.25 (0.34%) $0.68
Bitcoin Stock Quote
$17,149.04 (-0.31%) $-53.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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