The cryptocurrency landscape can be a bit of an enigma. With legacy tokens such as Bitcoin (CRYPTO: BTC) or Ethereum (CRYPTO: ETH), newly popular protocols such as Solana (CRYPTO: SOL), and meme coins like Doge (CRYPTO: DOGE), it can be daunting for investors to keep up with the rising number of crypto applications.
Some investors spend countless hours sifting through new non-fungible tokens (NFT) projects and reading whitepapers, hoping to identify the next big crypto play.
Coinbase (COIN -0.34%) recently reported its full-year 2021 results, which included several interesting and potentially bullish catalysts. It's a 10-year-old "overnight success," and the company is proving why it is a leader powering crypto investing. An investment in its stock could broaden your exposure to many aspects of the crypto industry, not just an individual coin or project.
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Strong financial position
Coinbase's strong 2021 performance illustrates the rising adoption of crypto investing. For the full year 2021, Coinbase generated $7.4 billion in revenue, which represented a 545% year-over-year increase.
Interestingly, the company saw dramatic growth in both its retail customers and institutional clients. Transaction revenue from retail customers increased 525% year over year to $6.5 billion, while institutional transaction revenue increased 518% year over year to $346 million.
The company's top-line growth is far outpacing its expense profile, thus providing Coinbase with favorable operating leverage. In 2021, Coinbase's net income was $3.6 billion, or 49% of revenue. By comparison, the company's net income margin was 28% just a year prior. This level of profitability has allowed Coinbase to make several strategic investments, many of which are not reflected in the results above.
Investments yet to pay off
One of the most exciting developments for Coinbase is its NFT platform. Although the company faces fierce competition from industry leaders like OpenSea, Coinbase views the NFT landscape as nascent and is seeking to build upon its existing infrastructure to propel even further innovation in the space.
Just as crypto tokens have evolved from first-movers like Bitcoin or Ethereum, the NFT market has the potential to elevate beyond digital art. Management believes gaming and virtual reality, particularly as it relates to the metaverse, will drive growth in the NFT space in the long run. The intersection of gaming, the metaverse, and crypto is exciting for Coinbase because all three industries are still in their infancy, yet they are beginning to get more attention. These trends have the potential to drive additional revenue streams down the line and possibly generate a stickier customer base via cross-selling.
Earlier this year, Coinbase acquired crypto derivatives platform FairX. This was a direct response to its competition, namely FTX and Gemini, both of which offer crypto derivatives trading. Investors may have learned a bit more about why management was so keen on derivatives as a product offering.
Derivative products are in high demand because they allow investors to make more complex, albeit riskier, trades outside of traditional spot markets. In the spot market, financial instruments such as stocks or currencies are traded for immediate delivery. However, a derivative is based on the delivery of the underlying asset at a future date, allowing investors to use these securities as a hedge against their positions in the spot market. For example, an investor may bet on a cryptocurrency price increase in the spot market, but they could also short its futures as a hedge. In turn, the investor is in a position to profit even in a situation where the crypto price moves in the opposite direction to the one specified in their bet.
Although the institutional business grew over 500% in 2021, revenue from this segment pales in comparison to the retail side of the business. It is not uncommon for large financial institutions to create and trade complex derivatives such as futures contracts or options. Coinbase deliberately thought about products that existed in traditional facets of Wall Street and parlayed them to crypto as part of the company's roadmap to bolster its institutional efforts. Should the company's thesis take form, there are some fairly obvious synergy opportunities for Coinbase. If institutional clients use the derivatives feature, Coinbase will have the ability to cross-sell other products and services and increase customer engagement.
Keep an eye on valuation
As of the time of this writing, Coinbase stock is down 36% year to date, and it is hovering near its 52-week low. There is little doubt that Coinbase stock has been dragged down in the broader tech sell-off.
During times of economic uncertainty, it is even more important to assess company earnings with a pronounced level of vigilance. Although the crypto market is likely to remain volatile in the short term, Coinbase has done a solid job of navigating these unchartered waters and has made several potentially savvy decisions that could propel the company ahead of its competition.
The addition of NFTs and derivatives should help diversify Coinbase's revenue and customer mix over time. Given the number of different products and services it has built and its appeal to retail and financial institution demographics, Coinbase could, in some ways, be viewed as a long-term call option on crypto. If you are interested in crypto and looking for some exposure for your portfolio, Coinbase certainly offers a unique investment at these levels.
