Buoyed by the continuing uptrend in the crypto market, the stock of cryptocurrency exchange Coinbase Global (COIN 0.72%) is up a head-spinning 375% this year. Largely, this has been due to improving sentiment about crypto in general, and what that means for trading volume on the Coinbase trading platform. It's not rocket science: The more that people trade crypto, the more money Coinbase makes.
But many investors may not realize just how much Coinbase has been diversifying its core business, so as to become less dependent on the ebbs and flows of cryptos such as Bitcoin (BTC 3.35%). In fact, there's a new $10 trillion opportunity that Coinbase appears to be seizing on quite aggressively. If it works out as planned, it could make Coinbase stock an even better buy than it already is. Let's take a closer look.
The asset tokenization trend
The new opportunity for Coinbase is known as real-world asset tokenization, sometimes abbreviated as simply RWA tokenization. This just means converting real-world assets (such as stocks or bonds) into digital assets that can be traded on a blockchain. Once these "tokens" are on the blockchain, it's easier for Wall Street to trade them.
Image source: Getty Images.
Earlier this year, crypto investment firm 21.co -- the same company working with Ark Invest on the launch of a spot Bitcoin exchange-traded fund (ETF) product -- projected that RWA tokenization might be a $10 trillion market opportunity by the year 2030.
Granted, it might sound a bit redundant to have blockchain versions of real-world assets, but it actually makes an incredible amount of business sense for Wall Street firms. In addition to speedier settlement times, they also get cheaper transactions, as well as greater transparency about ownership. Since everything is stored on the blockchain, it means any tokenized asset can be traded 24/7, just like crypto.
At the beginning of 2023, BlackRock Inc. (BLK +0.00%), the largest asset manager in the world, noted in its annual letter to shareholders that asset tokenization was one of the most exciting trends in the financial world. Other high-profile firms on Wall Street have echoed this sentiment. For Coinbase, this could be a home run opportunity, if it can somehow get involved in the trading of these digital assets.
Project Diamond
That's where things get really interesting, because Coinbase appears to be taking the types of proactive steps needed to become a key player in asset tokenization. At the end of August, Coinbase introduced its own proprietary blockchain known as Base. The product launch actually attracted a lot of buzz, because Coinbase became the first publicly traded company with its own blockchain.
NASDAQ: COIN
Key Data Points
At the time, I thought that Base could become the foundation for new Coinbase initiatives related to decentralized finance (DeFi). And that's what it looks like is happening now. In mid-December, Coinbase Asset Management officially launched Project Diamond, which will enable institutions to create and trade digital tokens using the Base blockchain.
The project is still very much in beta mode, and is taking place in Abu Dhabi, not in a Western financial capital like New York City or London. Long story short, Project Diamond is a bit too hot to handle for certain regulatory jurisdictions. The first test case will be a short-term debt instrument that is denominated in USD Coin (USDC +0.05%), not U.S. dollars.
From my perspective, Project Diamond could end up being a win-win opportunity for both Coinbase and major Wall Street institutions. Currently, only 0.25% of total global assets have been tokenized and moved to the blockchain. If more assets get tokenized, and if Base becomes the blockchain of choice for trading them, then this could turn into a huge opportunity for Coinbase.
How long is long-term?
The only problem, of course, is that this is a very long-term opportunity for Coinbase. There are plenty of steps along the way where this opportunity might flame out -- and, of course, the regulatory issues are almost too complex to consider. If the Securities and Exchange Commission has a hard time with people trading regular cryptos like Bitcoin, what are they going to think about people trading tokenized assets?
But, taking a big-picture view, I think real-world asset tokenization is a trend with tremendous staying power. There are a lot of big names on Wall Street that want this to happen. And, as they say on Wall Street, "The trend is your friend." Of course, the asset tokenization opportunity won't happen overnight, but it seems to be picking up momentum headed into 2024.
Thus, if you're generally bullish on Coinbase stock, but are concerned about the prospects for long-term growth, then I have just two words to say to you: "asset tokenization." If Coinbase can become a key player in this emerging $10 trillion industry, its future growth prospects could soar.
