As one of the international leaders in the cryptocurrency market, Coinbase Global (COIN 5.68%) has had quite a turbulent journey since its initial public offering (IPO) in the spring of 2021. Unfortunately for Coinbase, the company's IPO coincided with the peak of the recent crypto bull market. While this coincidence helped the company post a record $1.6 billion in profit in the second quarter of 2021, when the crypto market took a turn, Coinbase's bottom line swung from a profit to a loss.
Despite the company's struggle to turn a profit, recent earnings statements and other key metrics indicate that this crypto winter might be thawing. With progress mounting and its position clear as a beneficiary of growing crypto adoption, Coinbase remains a promising under-the-radar opportunity for investors who are in for the long game.
Image source: Getty Images.
Reshaping the revenue model
Coinbase's initial challenges revolved around its heavy reliance on transaction fees, which, at one point, accounted for more than 90% of its total revenue. The fallout of the crypto winter sent shockwaves through the company, causing it to record a colossal $1 billion loss in Q2 2022. However, Coinbase has swiftly responded by diversifying its income streams. Today, revenue comes from a mix of innovative products, with transaction fees accounting for only 63%.
The company's foray into staking and subscription rewards significantly contributes to this transformation. These offerings encompass a suite of products, such as staking rewards, custodial fees, and earnings derived from its partnership with the issuer of USDC, a stablecoin pegged to the US dollar. This approach has diminished Coinbase's dependence on transaction fees, making it much more robust in times of market turbulence.
The path to profitability
Coinbase's newfound resilience isn't just a result of revamped revenue sources. It's also rooted in its ambitious initiatives that extend its reach and capabilities. This summer witnessed the birth of Base, Coinbase's very own blockchain. Today, Base has quickly become one of the most sought-after Layer 2 blockchains while generating nearly $5 million in revenue for Coinbase within just three months of its launch.
Additionally, Coinbase is steadily releasing an array of derivative products aimed at both retail and institutional investors. In November, the company received regulatory approval to offer crypto futures in the U.S. Furthermore, in May of this year, the company unveiled a new global derivative exchange. Accounting for over 75% of total crypto trades worldwide, Coinbase's entrance to the derivative market adds another means to bolster profits.
Arguably, the most ambitious aspect of Coinbase's revamped business model is its "Go Broad, Go Deep" expansion strategy. Recognizing that crypto-friendly horizons lie beyond U.S. borders, Coinbase is strategically establishing its presence in international markets. In 2023, Coinbase ventured into Germany, the U.K., Ireland, Canada, Brazil, and Singapore, furthering its reach to more than 34 countries.
With these efforts beginning to produce new revenue, Coinbase has also prioritized cutting costs to increase margins. Compared to just a year ago, total expenses are down more than one-third. Coinbase has been able to reduce costs mainly by decreasing its workforce size. Due to having fewer staff members, the company has focused on automating processes that enhance efficiency while also restructuring its expensive data infrastructure. Additionally, with a smaller headcount and a shift toward remote work, Coinbase has significantly cut costs by reducing its real estate footprint.
A diamond in the rough
When all these facets come together, Coinbase is on the brink of a significant turning point. As per its latest Q3 earnings report, it's merely $2 million away from closing the chapter on the crypto winter it has had to weather for more than two years.
Coinbase has demonstrated remarkable resilience over the past 18 months, making it an ideal under-the-radar growth stock. Although its profitability remains correlated to the overall crypto market, its ability to adapt to unfavorable market conditions is a reassuring sign. Given the increasing adoption of cryptocurrencies and Coinbase's leading position in the burgeoning industry, as well as the likelihood of an upcoming crypto bull market, Coinbase holds the promise of being a rewarding long-term investment.
