Comprehensive analysis of Coinbase's market value, how should other CEX and DEX be valued?

This article was published on ChainDD, with the original title: "【ChainDD Exclusive】A Comprehensive Breakdown of Coinbase's Listing Valuation, DEX and Binance's Value Models Emerge," author: Ling Ge.

On April 14 at 9:30 AM Eastern Time, Coinbase went public on Nasdaq under the ticker symbol "COIN," opening at $380, peaking at $425, and closing at $328, a 31% increase from the reference price of $250. Based on the latest trading prices, Coinbase's total outstanding shares amount to 192.9 million, giving it a market capitalization of $76 billion.

Previously, on April 1, Coinbase announced that its S-1 registration statement for a direct public offering of its Class A common stock had been officially effective with the Securities and Exchange Commission (SEC). It is expected that its Class A common stock will begin trading on the Nasdaq Global Select Market on April 14, with plans to register nearly 115 million shares of Class A common stock, under the ticker symbol "COIN."

Additionally, Coinbase is not going public through a traditional initial public offering (IPO) but rather through a direct listing, which does not raise new funds, as existing shareholders sell their shares.

Since the announcement of its listing, the "Coinbase Effect" has emerged, with mainstream cryptocurrency prices rising. On April 14, both Bitcoin and Ethereum hit new all-time highs, with Bitcoin surpassing $64,000 and Ethereum reaching $2,400.

According to calculations by digital asset research firm Delphi Digital, if Coinbase's price-to-earnings ratio is above average, its valuation could range between $160 billion and $230 billion. Why does Coinbase, as the "first crypto stock," have a valuation exceeding $100 billion, even surpassing $200 billion? How will its unlisted CEX rival Binance and DEX be valued? How does Coinbase's listing propose a pricing model from a traditional capital perspective, thereby providing mainstream valuations for numerous leading projects still in the crypto private domain?

How Profitable Is It? Last Year's Net Profit of $320 Million, Paying Tribute to Satoshi Nakamoto

Coinbase included an address in its prospectus that is marked with the name of Bitcoin's creator, Satoshi Nakamoto. A copy of the S-1 filing was sent to this address.

This address is the miner reward receiving address for the Bitcoin genesis block, which was mined on January 3, 2009, at 10:15:05 UTC. A blockchain explorer shows that this address has transacted 2,832 times on the Bitcoin blockchain, receiving a total of 68.38386996 BTC (approximately $4.32 million), but has never sent out any Bitcoin.

Coinbase S-1 Document

Total Revenue Exceeds $3.4 Billion, Net Profit of $320 Million in 2020

From its inception until December 31, 2020, the company generated total revenue exceeding $3.4 billion, with trading fees accounting for over 96% of net revenue. Its fair value is $187.9 million, including $130.1 million in Bitcoin, $23.8 million in Ethereum, and $3.4 million in other crypto assets.

In 2020 and 2019, the company's total revenue was $1.277 billion and $530 million, respectively, with net profits of $320 million and a loss of $30.4 million, and adjusted EBITDA of $530 million and $24.3 million, respectively.

In terms of expenses, the largest portion is general administrative expenses, totaling $279 million, a 20% increase from 2019; followed by technology and development expenses of $271 million; transaction fees, primarily miner fees, amounting to $135 million, a 64% year-on-year increase; and sales and marketing expenses of $56.78 million, a 135% increase year-on-year.

Coinbase Revenue Data

How Many People Are Involved? Cumulative Trading Volume of $456 Billion, 43 Million Users

Since its establishment, Coinbase has directly integrated over 15 blockchain protocols, supporting over 90 crypto assets for trading or custody. As of December 31, 2020, the platform had verified user numbers of 43 million, a 34.4% increase from the end of 2019. Additionally, there are 7,000 institutional clients.

Coinbase's cumulative trading volume is $456 billion. In 2020, Coinbase's crypto asset trading volume was $193 billion, a 142% year-on-year increase. Among this, BTC (Bitcoin), ETH (Ethereum), and other crypto assets accounted for 41%, 15%, and 44% of Coinbase's overall trading volume, respectively.

As of December 31, 2020, the total value of fiat currency and crypto assets held by Coinbase on behalf of clients was $90.3 billion, a 432% increase from 2019, with the total value of crypto assets at $86.8 billion, accounting for 11% of the total market capitalization of the crypto market.

Coinbase Cumulative Trading Volume

Who Calls the Shots? How Much Is Their Wealth? Founders Hold 22% Voting Rights, Wealth Reaches $13 Billion

Coinbase is divided into Class A and Class B shares. Each Class A share has 1 voting right, while each Class B share has 20 voting rights. Class B shareholders can convert their shares into Class A shares at any time. As of January 31, 2021, Coinbase had a total of 22,463,455 Class A shares and 168,867,898 Class B shares.

According to the disclosed documents, the largest shareholder of Coinbase is co-founder and CEO Brian Armstrong, holding 21.7% of the shares, valued at approximately $13 billion; venture capitalist and board member Marc Andreessen's related entities hold 14.3%; board member Frederick Ernest Ehrsam III holds 9%; and venture capitalist and board member Fred Wilson's related entity Union Square Ventures (USV) holds 8.2%, valued at approximately $6.2 billion, collectively holding over 50% of the voting rights.

Coinbase Voting Rights Distribution

How Many Ways to Make Money? Custody, Lending, Fees, and Other Ten Areas

In terms of revenue sources, approximately 85.8% of Coinbase's revenue comes from customer trading fees; about 3.5% comes from subscription and service revenue, mainly from asset custody fees paid by customers; and about 10.6% comes from other income.

Other income mainly refers to the revenue Coinbase earns by using its own held crypto assets to help customers complete transactions during unexpected interruptions in the trading system. As the company continues to expand, its current business scope covers ten areas, including custody and lending:

1. Payments and Receipts (Send&Receive): User transfers within the platform.

2. Investment (Invest):

• Coinbase offers over 45 types of crypto assets for trading against fiat or other crypto assets. 1) Fiat trading: Provides trading services between USD, EUR, GBP, CAD, SGD, and crypto assets for users in over 40 countries; 2) Crypto-to-crypto trading: Provides trading services between crypto assets for users in over 100 countries.

• Retail users can use the wallet service Coinbase Wallet. Institutional users can use OTC trading.

1. Spending (Spend): In 2019, Coinbase partnered with Visa to launch the Coinbase Card, a debit card backed by users' crypto assets held on Coinbase. UK users can spend at Visa-accepting merchants in Europe. The principle is that Coinbase sells users' crypto assets, with the transaction priced in fiat.

2. Payments (Pay): Allows developers to receive payments from mobile crypto wallets.

3. Distribution (Distribute): Users can earn crypto asset rewards by watching videos or completing other tasks on the Coinbase platform.

4. Custody (Store): Supports over 90 types of crypto assets, cold wallet.

5. Saving (Save): Supports USD stablecoins USDC and DAI. Among them, 1) USDC is issued by Circle, backed 1:1 by USD. Coinbase earns interest from the underlying assets (USD) used for USDC and shares part of it with users as a reward for holding USDC on Coinbase. 2) Users will receive their first reward within 5 business days of holding DAI, and thereafter daily rewards. During the holding period, users retain ownership of DAI and can withdraw at any time.

6. Staking (Stake): Provides the necessary software and hardware environment for clients to operate blockchain POS nodes.

7. Borrowing and Lending (Borrow&Lend): 1) Retail users are only supported in the US. The first product is a 12-month loan where users collateralize crypto assets to obtain USD loans. 2) Provides trading capital advance/credit services for qualified institutional users, with repayment after trading.

8. Empowerment (Build): Data analytics platform, cross-chain service Rosseta, USDC (Coinbase and USDC issuer Circle formed the Centre Consortium, Coinbase supports ecosystem partners to develop APIs based on USDC, such as payment APIs).

Is It More Profitable in a Bull Market? Projected Total Revenue of $1.8 Billion in Q1, Monthly Users Increase by 117%

In a conference call on April 6, Coinbase also released its earnings forecast for the first quarter of 2021. It is expected that Coinbase's monthly trading users (MTU) will increase by 117%, from 2.8 million in Q4 2020 to 6.1 million in Q1 2021. The number of verified users (i.e., total number of people with Coinbase accounts) increased from 43 million at the end of 2020 to 56 million.

The total revenue for the quarter is projected to be $1.8 billion, with net income of approximately $730 million to $800 million, and adjusted EBITDA of about $1.1 billion; trading volume is expected to be $335 billion. The assets on the platform increased from $90 billion to $223 billion in Q1, a nearly 150% quarter-over-quarter increase; accounting for 11.3% of the cryptocurrency market share.

Direct Threat! Coinbase Names: Binance, DEX

The success of Coinbase's listing signifies that the crypto industry has entered a new stage of compliance, which will facilitate the entry of ordinary investors and institutions outside the crypto market. However, Coinbase's business model is relatively simple, primarily generating revenue from digital currency trading fees on its platform.

As mentioned in the business risks in Coinbase's S-1 document, other CEXs and DEXs still pose a significant threat:

"We operate in a highly competitive industry, competing with unregulated or lightly regulated companies and those with more financial and other resources. If we cannot effectively respond to competitors, our business, operating results, and financial condition may be adversely affected. We also compete with many companies that focus solely on the cryptocurrency market and have varying degrees of regulatory compliance, such as Binance. Our existing competitors have potential competitive advantages over us, and we expect our potential competitors to have various competitive advantages. We will compete with an increasing number of decentralized and non-custodial platforms, and if we cannot effectively compete with them, our business may be adversely affected."

Compared to Coinbase, other centralized exchanges (CEXs) surpass Coinbase in trading methods, trading volume, and transaction amounts, especially Binance, which Coinbase has always regarded as a strong competitor.

According to CoinMarketCap data, Binance's 24-hour trading volume is 126 times that of Coinbase, and its weekly visits are also six times that of Coinbase.

Binance's 24-hour trading volume far exceeds Coinbase Data: CoinMarketCap

In terms of revenue, Coinbase reported a net profit of $320 million in 2020, while Binance founder Changpeng Zhao disclosed to Bloomberg that Binance's profit in 2020 was between $800 million and $1 billion, with a profit of $577 million in 2019 (both unaudited).

From the above charts, comparing Coinbase with other exchanges shows that BNB's trading volume in Q1 2021 and even daily trading volume is 18 times that of Coinbase, with revenue nearly three times higher. However, in terms of conversion rates, Coinbase excels, thanks to its focus on mainstream cryptocurrencies, which have seen significant price increases recently, leading to better conversion rates for exchanges. Coinbase is relatively more "stable," which is one of the factors that meet its listing requirements.

Moreover, other centralized exchanges are also making compliance arrangements.

Binance has an independently operated Binance US, which is also taking a compliance route. Huobi has obtained digital asset trading compliance licenses in countries and regions such as Thailand, Japan, and Gibraltar. OKEx has also obtained compliance licenses in countries and regions such as the Philippines and the US.

As mentioned by Garrick Hileman, head of research at Blockchain.com, in an email to Barron's, "The regulatory transparency of the entire crypto asset space in the US continues to improve, and more exchanges are reaching levels of regulation and compliance similar to Coinbase, with some exchanges even surpassing Coinbase in certain areas. These developments may erode Coinbase's influence."

At the last moment before the listing, Binance officially announced the launch of Coinbase stock token COIN, entering the traditional capital market through equity tokens.

How Will Coinbase's Valuation Provide Pricing References for Mainstream CEXs?

Looking back at Coinbase's listing application, it reveals a shadow of compliance everywhere. In fact, among the three major exchanges, Huobi and OKEx have both associated with listed companies in the Hong Kong stock market, but their businesses are unrelated to crypto trading.

The performance of Coinbase on its first day of trading was not particularly stunning, but as the first to take the plunge, its subsequent development remains to be seen. However, since its valuation has exceeded $100 billion, unlisted crypto exchanges may need to reassess their valuations, and the value of platform tokens may also warrant further exploration. By benchmarking Coinbase, a rough valuation can be made based on the "buyback and burn volume" of platform tokens. According to public data:

• In 2020, Huobi continuously burned 49,736,600 HT, approximately $203 million (based on the price at the time of burning). Based on static data (not accounting for future HT burns), the market-to-sales ratio of HT is 33.83 billion ÷ 203 million, which equals 16.66.

• In 2020, Binance continuously burned 12,725,152 BNB, approximately $346 million (based on the price at the time of burning). Based on static data (not accounting for future BNB burns), the market-to-sales ratio of BNB is 230.19 billion ÷ 346 million, which equals 66.53.

• In 2020, OKEx continuously burned 14,570,351.1 OKB from December 1, 2019, to November 30, 2020, approximately $8 million (based on the price at the time of burning). Based on static data (not accounting for future OKB burns), the market-to-sales ratio of OKB is 2.743 billion ÷ 8 million, which equals 34.29.

Taking BNB as an example, according to Binance's previous statement, it would use 20% of its net profit to buy back tokens from the market (this statement has now been removed), meaning Binance's valuation would exceed $100 billion, while CoinMarketCap data shows that BNB's market capitalization is currently $85.9 billion, indicating that platform tokens still have room for further appreciation.

OKEx CEO Jaylen stated, "In the long run, the public's value expectations will likely be linked to the rise of platform tokens, which is undoubtedly beneficial. During a bull market, whether it's Bitcoin, Ethereum, or platform tokens, the significant increases are supported by both technology and usage, which can be elaborated as the extension of usage breadth and technological assurance."

From the data above, it can be seen that the three major platform tokens have all increased by over 300% in the past year, with BNB's increase reaching 3700%. In the past week, due to the favorable results of parallel valuations such as Coinbase's listing, the three major platform tokens have surged rapidly, short-term compensating for the undervaluation of reference values.

Next Stop "Valuation Queen," DEX Decentralized Exchanges

Due to the core characteristics of decentralized exchanges, it is difficult for them to enter traditional capital markets for public trading in the future. However, decentralized exchanges (DEXs) already clearly possess all the expected indicators for becoming the next liquidity hub for crypto asset trading platforms. The value of core centralized exchanges (CEXs) is deeply underestimated; at the same time, due to their early development stage, they face enormous potential for growth and business expansion.

Coinbase's ultimate success in going public will still have a direct reference impact on the off-market valuations of decentralized exchanges.

According to data statistics from ChainDD's DeFi product D-Market Cap, as of March 13 at 20:00, the total locked assets in DeFi protocols amounted to approximately $82.944 billion, with the total market capitalization of the DeFi market around $67.966 billion, and the total locked volume in the DEX field reaching $3.79 billion.

Taking the current DEX leader Uniswap as an example, in 2020, Uniswap's trading volume was $58 billion, a 150-fold increase from $390 million in 2019, and by the end of the year, it had $2 billion in liquidity, a 170-fold increase from $12 million at the beginning of the year. In September 2020, the protocol's weekly trading volume briefly surpassed that of Coinbase. Uniswap was born in late 2018 and has only been around for two and a half years.

In September 2020, Uniswap issued UNI as a governance token. The initial total issuance of UNI tokens was 1 billion, with 15% of the total token supply distributed to users who had used Uniswap before September, with each account receiving approximately 400 tokens as a reward.

On April 13, the price of UNI tokens was around $35, and based on the market's circulating supply, the circulating market capitalization was approximately $18.3 billion. If calculated based on the total token supply of 1 billion, the market capitalization would be $35 billion. Although there is a continuous increase in token supply, UNI's valuation may further expand.

As an open-source community, DEXs, which have risen with AMM (Automated Market Maker), are impacting CEXs from a completely different dimension. The era of decentralized trading DEXs has just begun.

For Coinbase, going public is a new starting point, and similarly, for unlisted CEXs and DEXs, the value of their platform tokens or governance tokens still has potential for further exploration.

What Impact Will Coinbase's Listing Have on the Crypto World?

The influence of Coinbase as the "first crypto stock" is self-evident. Entering the traditional capital market represents the continuous recognition of crypto assets by the mainstream market. In the future, not only will there be potential for crypto spot trading, but also large-scale derivatives trading may enter traditional financial markets.

As described by Jiang Zhuoer, founder of the Liebit mining pool: "The listing of a pure exchange like Coinbase gives virtual currency trading an official positioning: I acknowledge its value, I acknowledge its legality. Previously, when ordinary investors mentioned Bitcoin, they subtly felt it was a tool for money laundering or speculation, but Coinbase's listing will improve this situation and regain the trust of mainstream investors."

In addition to its core crypto trading business, Coinbase's layout has also extended to more areas.

According to the S-1 document, Coinbase Ventures has invested in over 100 companies in recent years, including Compound, Labs, StarCard, Inc., and Amber Global, with a total investment of $26.14 million, averaging less than $260,000 per investment. Among these, it invested $200,000 in Compound Labs in April 2018, $150,000 in Amber Global in January 2020, and $300,000 in Arweave in February 2020.

In the document, Coinbase also disclosed the specific prices of its last three acquisition deals. In January 2019, it acquired blockchain intelligence company Neutrino for $6.4 million. In August 2019, it acquired Xapo's institutional custody business for $68.3 million. In July 2020, it acquired cryptocurrency brokerage Tagomi for $41.8 million.

It is evident that Coinbase's ambition is to build a richer crypto ecosystem, as stated in the document, Coinbase aims to provide crypto-based financial services to anyone with a smartphone, becoming the primary entry point for 3.5 billion smartphone users to access the crypto economy.

As Coinbase brings cryptocurrencies into traditional capital markets, it also drives various emerging phenomena in the crypto world into mainstream view.

Huobi University President Yu Jianing stated, "The wave of wealth digitization has already begun, and human society is facing a significant transformation from traditional forms of wealth to digital forms. Coinbase's listing is an important milestone in this era's wave."

One of the more important points is the promotion of regulation and compliance. Marcus Swanepoel, CEO of crypto platform Luno, believes that Coinbase's listing will accelerate the legitimization of crypto companies, while also demonstrating the scale of the crypto industry and its growth rate.

Large traditional institutions are continuously entering the market, from Tesla to Meitu, with crypto assets increasingly becoming one of the underlying assets of traditional enterprises. As the crypto market continues to develop, regulation will inevitably become more deeply involved. With Coinbase as a precedent, it can further facilitate the integration between the crypto market and regulation, making a compliant crypto world possible.