Love it or hate it, the crypto winter is well and truly over. Coinbase co-founder and CEO Brian Armstrong thinks that crypto adoption will come in three phases. First, as a new asset class that people want to trade. Next, crypto will power new financial services. And finally, crypto will become the new application platform for the internet—potentially reinventing identity, social media, governance, and more.
If Armstrong is right about crypto, and if he plays his cards right, Coinbase could become a cornerstone of the future internet much like Google led in the www era. As the only publicly traded crypto exchange, Coinbase has positioned itself as the regulatory-compliant exchange in the crypto Wild West.
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Phase 1: A new asset class
After 15 years, crypto is being realised as a mainstream asset—580 million individuals own cryptocurrency according to Crypto.com. Institutional adoption has been somewhat slower, less than 50 public companies hold a combined 276 thousand bitcoins (worth $16bn) according to bitcointreasuries.net.
Trading is a major source of revenue for the crypto industry. Coinbase’s transaction revenue in 2023 was $1.5bn, just $90m of which came from institutional traders.
Most crypto trading is done via derivatives. While Coinbase is a leader in crypto spot trading, it was late to derivatives, launching its derivatives trading platform in Q2 2023. It took longer than its competitors, instead prioritising regulatory compliance.
Coinbase’s compliant-focused approach may have cost it in derivatives volume, but it may have started paying off—Coinbase was selected as the custodian for eight of the 11 bitcoin ETFs approved in January. Coinbase’s custodial fee revenue was just 2% of total revenue in 2023. The bitcoin ETF has already become the second-largest commodity in the US ETF market, behind only gold. So, expect Coinbase’s custodial fee revenue to grow significantly going forward.
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By GlobalDataPhase 2: A new financial system
The next phase can be seen in the rise of decentralised finance (DeFi). Pieces of the legacy financial system—such as lending, exchanges, payments, and insurance—will be increasingly replaced by decentralised counterparts.
As the asset class matures, more competition enters the space, and trading fees are driven lower. Because of this, Coinbase is diversifying its income away from trading. In 2022, transaction revenue made up about 75% of Coinbase’s revenue. Whereas in 2023 this decreased to roughly half, with subscription and services revenue growing nearly 80% to $1.4bn.
The growth in Coinbase’s subscription and services segment was largely driven by stablecoin revenue, which grew 180% from $245m to $694m. Stablecoin revenue is derived from an arrangement with the issuer of USDC. A stablecoin launched in 2018 by a joint venture Coinbase co-founded. USDC is the second-largest stablecoin with a market cap of $28bn (second to USDT, which has a market cap of $97bn).
In Q2 2023, Coinbase launched Base, an Ethereum Layer 2 (a second blockchain, on top of Ethereum’s with the aim of scalability & low fees). On Base, USDC can be sent globally, instantly, and freely. While not listed as a revenue stream, the launch of Base marks Coinbase’s aim to become integrated within phase two of crypto adoption—decentralised finance (DeFi).
Phase 3: The new application platform for the internet
The third and final stage of crypto adoption is when crypto becomes a new application platform for the internet. The internet has become increasingly centralised, with large companies dominating. The hope is that crypto will re-decentralise the internet, revolutionising identity, governance, social media, and more.
Coinbase is making significant efforts to accelerate this trend. For example, it is making substantial improvements to the Coinbase Wallet, including integrating decentralised applications (dApps). While it is still early days and many of these applications may seem rudimentary, Coinbase is hopeful. It aims to bring together many decentralised protocols to create a compelling customer experience, thereby driving the next wave of internet evolution.
Edward Bickerton is an analyst at GlobalData
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