The cryptoeconomy can be an intimidating area for investors. There are thousands of different tokens and applications, and numerous public and private players looking to gain market share. Coinbase (COIN 4.68%) is among the best-known names in the industry, and while it's primarily known as a crypto trading platform, it's making some interesting moves into other related applications. However, it also faces fierce competition from a number of fast-growing venture-backed start-ups.
Is this a smart time to invest in Coinbase, or are its rivals putting its position at risk?
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Increasing competition fueling innovation
Currently, one of the biggest threats to Coinbase is privately held cryptocurrency exchange FTX, which is engaging in aggressive marketing in an effort to gain market share.
The upstart signed a deal to pay $135 million over 19 years for naming rights to the home of the NBA's Miami Heat -- now known as FTX Arena. And it took a page out of Coinbase's book by establishing a $2 billion fund to invest in crypto start-ups, with a focus on gaming and security companies.
FTX was founded in 2019 and has already raised $2 billion of venture capital, with most of the funding coming in over the past six months. In October, it raised $420 million at a $25 billion valuation. Only a few months later, the company closed a $400 million Series C fund round that gave it a $32 billion valuation. Since it's a private company, finding accurate revenue figures for FTX can be a bit challenging. However, at the time of this writing, Coinbase's market capitalization was roughly $50 billion. FTX is not only marching toward Coinbase's valuation, it's gaining ground at a remarkable pace.
Private equity investors are eagerly seeking the next crypto goldmine. According to data from market research firm Pitchbook, venture capital deal flow for crypto has grown dramatically over the last several years.
| Metric | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 YTD |
|---|---|---|---|---|---|---|---|
| Total deal value | $1.18 billion | $1.91 billion | $8.45 billion | $3.92 billion | $6.67 billion | $32.10 billion | $5.61 billion |
| Number of deals | 272 | 445 | 1,203 | 896 | 816 | 1,877 | 239 |
More capital is being deployed across a broader array of companies, each looking to establish its own niche in the cryptoeconomy. Although this could be viewed as a headwind for Coinbase, one could also argue that this increased pressure from the market has led to some savvy decisions from its management.
Crypto's role in Web 3.0
Although the growth of crypto applications is still in its early innings, enthusiasts foresee blockchain technology playing a big role in the development of Web 3.0. Web 3.0 has become synonymous with new concepts such as the metaverse, but more broadly, it's expected to be a new iteration of the internet that features more artificial intelligence and is more decentralized thanks to the use of blockchains -- the same underlying technology that supports cryptocurrencies and non-fungible tokens (NFTs).
Another Coinbase rival making a push into Web 3.0 is cryptocurrency exchange Binance. It was founded only five years ago, but since then, it has become the world's largest crypto exchange. Binance capitalized on this growth with a $200 million strategic investment in magazine and digital publisher Forbes. This deal marks the crypto industry's first notable investment in a traditional U.S. media property.
It is interesting to see how various crypto leaders are maneuvering around the chessboard. FTX has relied on heavy marketing spending to gain traction, while Binance is showing the influence crypto may soon have over traditional media. Additionally, the valuation of NFT platform OpenSea has increased dramatically over the past two years to $13 billion.
It may appear that Coinbase will have its work cut out for it to hold its own against rapidly expanding competitors. However, investors should be aware that even in the tech world, it is possible to grow too quickly.
Slow and steady wins the race
Just as Coinbase witnessed record levels of trading volume due to rising enthusiasm for Bitcoin (BTC -0.70%), Ethereum (ETH 0.53%), and meme coins such as Shiba Inu (SHIB -1.01%), NFT trading platform OpenSea was a major beneficiary of wider crypto adoption in 2021. In January, it raised $300 million in a Series C financing round, and increased its valuation from $1.5 billion in July 2021 to more than $13 billion in just six months. However, despite being flush with cash, OpenSea is enduring a number of growing pains.
It has been the target of multiple crypto fraud schemes, and some users' NFTs have lost value as a result. It has been reported that as of early February, OpenSea had reimbursed its users more than 1,000 ETH -- equivalent to about $2.7 million at the time. Although the company has grown to roughly 150 employees, it has fewer than 40 people working in product development. Given that OpenSea is estimated to process 98% of all NFT trading volume, it clearly needs to invest more in staffing to keep pace with its growth trajectory.
Although FTX, Binance, and OpenSea operate in different verticals of the cryptoeconomy, they share one common denominator: their relative youth. Unlike Coinbase, which is nearly a decade old, its major competitors have seemed to benefit from macro factors such as increasing interest in crypto from retail and institutional investors, but it remains to be seen if they have the business acumen to invest in innovative, money-generating features, rather than relying largely on marketing tactics.
Laying the groundwork for future growth
Coinbase understands what it's going to take to succeed in the long run. On a deeper level, the company has illustrated that the metaverse will be more than gaming, artwork, transactions, and socializing. All of these components must be stitched together through secure platforms to create an end-to-end full-spectrum crypto fabric.
Coinbase's NFT platform is set to launch later this year, and the company partnered with Mastercard to facilitate sales. Moreover, Coinbase responded swiftly to FTX's acquisition of crypto derivatives exchange LedgerX by acquiring crypto derivatives platform FairX earlier this year.
Although it faces fierce competition from well-funded upstarts, its management is not sitting on the sidelines. While FTX spends profligately on arena naming rights, and Binance invests in business media in an effort to increase coverage of the crypto universe, Coinbase is pouring its profits into hiring thousands of new employees to build additional products and services. Its calculated strategy reflects a mature business that's laying the groundwork for years of robust growth. As such, 2022 could be a great time to open a position in Coinbase.
