Ever since it went public almost exactly three years ago, Coinbase Global (COIN 7.41%) has been one of the most talked about, most analyzed, and most polarizing crypto stocks. On the one hand, its price is up 209% over the past 12 months, and more than 300% over the past 24 months. On the other, naysayers assert that the stock is overvalued.
Fair enough. By some metrics, Coinbase does appear to be richly valued at this point. But there are two under-the-radar reasons why you should still be thinking about buying Coinbase stock like there's no tomorrow.
Bull market? Bear market? No worries
The big game-changer for Coinbase is that it finally seems to be figuring out how to make money in all market conditions. That will help to address a major complaint with Coinbase -- that it's too dependent on the vagaries of the crypto market. When crypto prices are rising, Coinbase will profit from trading fees. But what happens when the market goes south, as it did in 2022? Retail investors disappear, transaction revenue dries up, and Coinbase faces a lot of difficult questions from Wall Street analysts.
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So that's why it's worth taking a closer look at Coinbase's non-transaction revenue, which comes from four "subscription and services" items: stablecoin revenue, custodial fees, blockchain rewards, and interest income. Its revenues from these sources continue to expand, and are starting to account for a bigger slice of the top line. For example, subscription and services revenue was up 78% in 2023. When Coinbase last reported quarterly earnings in February, this figure was up 12% from the previous quarter. These new revenue sources are helping to smooth out the impact of the crypto market's ebbs and flows on its results.
In 2024, the primary non-transaction revenue item I'm keeping my eye on is custodial fees. As of January, Coinbase was the custodian for eight of the 11 new spot Bitcoin (BTC 1.15%) ETFs. That's a big deal since these ETFs now have more than $30 billion in assets under management. Coinbase is essentially making money by looking after Wall Street's Bitcoin. As long as investors keep putting funds into these Bitcoin ETFs, Coinbase will continue to make money from custodial fees.
Coinbase's secret weapon
The second big game-changer for Coinbase is something called Base, which is a blockchain that the company launched in August. At the time, Coinbase got a lot of attention for being the first publicly traded company with its own blockchain, but nobody really knew what that would mean in terms of growth.
Well, nearly nine months later, we're starting to get an idea of what Base is all about, and quite frankly, I'm blown away. Base has already become a mini-innovation engine inside Coinbase that few people really know about or understand.
For institutional investors, Base has become a platform for testing out new concepts related to decentralized finance (DeFi). For retail investors, Base has become a go-to destination for trading meme coins. There have been so many new projects launched on Base that some have even compared it to an "early Solana."
I'm particularly impressed by the amount of trading activity taking place on Base. Normally, we think of Coinbase as a centralized cryptocurrency exchange where investors trade in approximately 250 different cryptos. So you would expect the trading on its main platform to dwarf anything happening on Base.
That doesn't appear to be the case. As of March, decentralized crypto exchanges on Base are now seeing 24-hour trading volumes of more than $1 billion per day. That is almost exactly the same amount of 24-hour trading volume that Coinbase sees on its main platform for Bitcoin.
So why is Cathie Wood dumping Coinbase?
"OK, OK," you're probably thinking. "Sounds great, but given all that, why is Cathie Wood of Ark Invest dumping Coinbase stock?" In a single week in March, for example, Ark Invest sold more than $150 million worth of Coinbase. The easy narrative here would be that she's simply given up on the stock.
NASDAQ: COIN
Key Data Points
But I think a big reason for those sales involves portfolio rebalancing. The valuation of Coinbase has increased so quickly that Ark Invest now needs to pare back its positions. Ark Invest says that no position in any of its ETFs will exceed 10% of the fund's total portfolio value, and keeping its Coinbase positions below that threshold has required it to sell shares. So I'm not particularly concerned that we keep hearing about Wood and Ark Invest selling Coinbase.
As a long-term investment, Coinbase continues to make sense. And with this month's Bitcoin halving, the price of all cryptos should continue to go up across the board. That's obviously good news for Coinbase's core business. Now that the company also has these two other under-the-radar factors working in its favor, these could be the secret to outperforming the market for years to come.
