A lot of companies wanted to carry the Web3 tag while the crypto market was hot, but now companies are running toward the new hottest trend on the market -- artificial intelligence.
While the drop in cryptocurrency values may have been bad for the industry's hype cycle, many companies in cryptocurrency and Web3 continue to build. Payment networks are getting faster and cheaper and on-chain asset ownership is being abstracted away in websites and apps, making Web3 easier to use. For long-term investors, this presents opportunities in the one publicly traded company that's focused on Web3 -- Coinbase (COIN 5.68%).
Coinbase's bounce back
The crypto business has been down big since the peak in late 2021, and Coinbase has had to make several changes. Management was quick to cut costs and has focused on subscriptions and services, which has helped the company return to being free cash flow positive.
COIN Free Cash Flow data by YCharts
The balance sheet is also better than you might think for a company in a down cycle. There's $5.1 billion in cash and equivalents on the balance sheet and just $3.1 billion in debt, which management is starting to buy back at a discount. More importantly, Coinbase's products are starting to get wider usage.
Subscriptions and stablecoins drive growth
As trading revenue has dropped, Coinbase has generated more revenue from non-trading products. The company's stake in the USDC token, which is now run by Circle, generated $172.4 million in revenue during the third quarter of 2023, up from $76.9 million a year ago, and interest on the company's cash generated $39.5 million.
Blockchain rewards increased from $62.8 million to $74.5 million, and that's before the Base blockchain Coinbase launched generated significant revenue. The company's focus on stablecoins and infrastructure for developers is paying off with growing sustainable sources of revenue.
Web3 and crypto are recovering
Coinbase has adjusted to the new realties of crypto and Web3, and at the same time the market is recovering. Bitcoin and Ethereum are trading higher and volume has increased sharply at Coinbase, who is no longer facing competition from FTX and has seen Binance weakened after a $4 billion fine from the Department of Justice.
Trading volume on Coinbase is $3.4 billion in the last 24 hours, and was regularly around $1 billion as recently as last summer. This should drive higher trading revenue in the fourth quarter -- and if momentum continues in 2024, that will help financials.
The future of Web3 and crypto
Most investors associate Web3 and cryptocurrencies with the boom and bust cycle of 2021 and 2022, but there's a lot more going on in the industry. Major companies are testing using stablecoins, and uses of the blockchain for financial transfers and loyalty programs are being tested as well.
Smart contracts have always been an ideal use case, but it's been too costly to use smart contracts on most blockchains. Coinbase's blockchain Base helps answer some of those cost questions, and is gaining widespread adoption as a result.
It's still early in the Web3 industry and there are ups and downs ahead for companies like Coinbase, but I think this is still the best way to invest in the future of the blockchain and Web3.
