There are few other companies that have had as many ups and downs as Coinbase Global (COIN 4.41%) this year. Ranging from partnerships with companies such as investment management giant BlackRock (BLK 1.65%) to coming under investigation by the U.S. Securities and Exchange Commission (SEC), this battleground stock has much to be hopeful -- and also concerned -- about. Let's take a look at the good and the bad to get a better idea on what to expect from Coinbase in the future.

Green Flag: Institutional investors offer promise

RJ Fulton: It probably isn't well known among its users, but Coinbase also creates products for non-retail investors. Referred to as institutional investors, these investors tend to be large businesses that typically have much more capital at their disposal than retail investors. 

Coinbase is attempting to diversify its revenue streams by offering services to these institutional investors. Called Coinbase Prime, this is a solution for institutional investors to trade crypto, research trends, and even integrate with their existing software to provide a seamless trading experience.

Ensuring that institutional investors have access to crypto is a valuable endeavor that can further generate revenue. Institutional investor-trading volume dwarfs that of their retail counterparts. On average over the last year, institutional investors traded more than 40% more than retail investors and peaked at $371 billion in the fourth quarter of 2021.

Despite Coinbase's institutional revenue shrinking by 17% from Q1 2022, the crypto exchange added another 1,500 institutional investors, which now totals more than 14,500. In addition, the number of institutional investors has doubled since Q2 2020.

Of the 1,500 institutional clients added in Q2, one stands out from the rest and could signal a growing trend. In August 2022, the world's largest asset management firm, BlackRock, signed up for Coinbase Prime to integrate with its existing investment management platform, Aladdin. BlackRock's Aladdin software manages more than $21 trillion as of 2020. Yes, trillion, with a capital T. 

That $21 trillion is now exposed directly to Coinbase and its crypto products. This isn't to say that all of the $21 trillion will be allocated to crypto, but even if 1% was used for crypto, roughly $210 billion, that would double the total value of institutional assets on Coinbase today.

BlackRock's decision to partner with Coinbase is a by-product of a growing trend among institutional investors -- the desire to trade crypto. If other asset management competitors begin to follow a similar course, which they could if they want to remain competitive with BlackRock, then Coinbase is best positioned to become the primary provider of institutional crypto trading. And that is exactly what Coinbase wants. Their goal is to become the leading institutional crypto broker in the world. If Coinbase can capitalize on this opportunity, then the recent drop in its stock could be viewed as a buying opportunity in preparation for the day this crypto winter ends. 

Crypto trader making decisions.

Image source: Getty Images.

Red Flag: Rising competition

Michael Byrne: To its credit, Coinbase has announced plenty of positive developments in recent weeks. However, it's always important for investors to keep an eye out for any looming threats on the horizon, and Coinbase faces a major challenge in the form of emerging competition from some formidable players.

Many equity market investors think of Coinbase as the 800-pound gorilla in the crypto space because it is the largest and highest-profile publicly traded crypto company. However, Coinbase is not the world's largest crypto exchange; that distinction belongs to Binance, which far outpaces Coinbase in terms of daily volume. Binance has deep pockets and a highly visible CEO in Changpeng Zhao, commonly referred to as "CZ" in the crypto industry. Binance's native token, Binance Coin (BNB 2.91%), is the fifth-largest cryptocurrency, and its market cap of $43 billion is far larger than Coinbase's market value of $17 billion. Binance is building a presence in the U.S. market with Binance.US. 

FTX, led by crypto billionaire Sam Bankman-Fried, has been busy making deals and acquiring stakes in other platforms during the crypto winter and is also making a big push into the U.S. market.

FTX was recently in talks to raise $1 billion at a $32 billion valuation, and Bankman-Fried recently became Robinhood's (HOOD 2.07%) largest shareholder when he purchased a 7.6% stake in the company. His investment has led to speculation that there could be a future collaboration between the two companies.  

The crypto market is certainly large enough for multiple winners, but the entry of these two power players into the U.S. market is a challenge for Coinbase. Coinbase derives the vast majority of its revenue from transaction fees, but Binance.US announced that they will be offering commission-free trading on Bitcoin (BTC 1.46%), which is the largest cryptocurrency and thus the asset that drives the most trading fees. Whether this is a good move by Binance.US remains to be seen, but it could create fee compression for the entire industry in a "race to the bottom" akin to what we saw when traditional brokerages began to eliminate their commissions on trades several years ago. 

There are plenty of reasons to be optimistic about Coinbase, but this is one looming concern that interested parties would be wise to keep an eye on.  

Green flag: Growing subscription and services 

Neil Patel: One of the biggest knocks on Coinbase's business model is that the company generates the bulk (81.6% in Q2 2022) of its sales from fees when individual and institutional customers trade various digital assets. Given that the cryptocurrency market is extremely volatile, falling in and out of favor with investors at the drop of a hat, it shouldn't be a surprise that this makes the business's financials very unpredictable quarter to quarter. 

That's why Coinbase's founder and CEO, Brian Armstrong, recently said that he wants 50% of the company's revenue to come from subscriptions and services one day, compared to 18.4% in the latest quarter. This segment, which increased sales 43.7% year over year in Q2, makes money primarily from blockchain rewards, mainly consisting of staking revenue, and custodial fees. Ethereum's (ETH 1.87%) completion of The Merge, transitioning to a proof-of-stake consensus mechanism, should help grow the revenue Coinbase makes from blockchain rewards. 

In their short history thus far, cryptocurrencies have been characterized mostly as a tool for financial speculation. And this can't be a shock to anyone. Some digital assets have produced monster returns in extremely short periods of time, encouraging a gambling mentality. And once interest fades, as it quickly does, asset prices tank. 

Management, therefore, understands that in order to boost the long-term prospects of the business, they need to help usher in the next phase of cryptocurrencies, one that is dominated by the utility as opposed to pure profit-seeking behavior. A particularly interesting offering, called Coinbase Cloud, is a tool that third-party developers can use to build blockchain-based applications without the need to create their own complex and expensive infrastructure. And it could prove to be a major winner for Coinbase to diversify its revenue stream over time.