Coinbase refers to future the in its prospectus: Tokenise new assets.” The section goes on:  “We will invest in infrastructure and regulatory clarity to pave a path for the digitization of  more traditional financial assets to help pave the path for new assets to be represented as  crypto assets.” This is a clear indication that Coinbase is likely to use its equity to continue  

its buying spree of acquisitions (having already executed 16 acquisitions) and, as a public  company, it will no doubt use its paper, not cash reserves. Who knows, maybe Coinbase will  even acquire traditional asset managers, or a bank, and thus further blur the lines between  the traditional finance sector and decentralised finance (DeFif)? 

Once Coinbase is publicly traded on a recognised exchange it offers institutional investors a  way to gain exposure to the crypto currency market in a manner that, to date, has simply  not been possible. Also, given the dominance of Bitcoin (accounting for over 60% of the  capitalisation of the crypto market) one could make an argument that the buying of shares  in Coinbase could be seen to be a proxy for gaining exposure to Bitcoin, which is currently  not a permitted asset for UK pension funds. It is of no surprise therefore that as the price of  Bitcoin rises so does the volume of trading in the entire crypto currency market, thus  boosting Coinbase’s profits (although Coinbase is far more than just a way to get exposure  to Bitcoin!

Coinbase’s clients continue to grow 

Source: Coinbase 

As a crypto currency platform Coinbase states, it has: “Approximately 43 million verified  users, 7,000 institutions, and 115,000 ecosystem partners in over 100 countries”. Meanwhile  in its prospectus, Coinbase claims it generated $1.1 billion of trading income on the $193 billion of crypto trading, (page 107). This indicates that Coinbase generates a margin of  approximately 0.57%, with Bloomberg noting “the traditional U.S. stock exchanges - which  collectively trade more volume in a day than Coinbase does in a year - collect on the order of  0.01% of volume in exchange fees, conservatively. Running a crypto exchange is at least 60  times more lucrative than running a stock exchange”. Indeed, the entire payments world is  changing as increasingly clients are using digital wallets. As ARK Investment Management's analysis has pointed out:” PayPal’s Venmo and Square’s Cash App have amassed roughly  60 million users organically in the last 10 and 7 years, respectively, a milestone that took  J.P. Morgan more than 30 years and five acquisitions to reach.” If ARK is correct in stating  that “a digital wallet is worth conservatively $3650, (the average valuation per US bank  customer at year-end 2019)” this alone means that, with 42 million customers, Coinbase  could command a valuation of $150+billion!

Growth of traditional bank accounts v digital wallets 

Source: ARK Investments

However, trading and private clients are not the only way that Coinbase is generating  profits. Coinbase charges 0.5% to offer custody for the digital assets it stores for  institutional clients. According to Forbes, in December 2020 Coinbase had $20 billion in  custody but, given that the capitalisation of the crypto market has increased over 3 fold and  that institutions are investing in cryptos, it would not be unreasonable to assume that  Coinbase has $70billion of assets in custody - which at 0.5%p.a. generates $350million of  fees. However, Coinbase’s website claims it has “$90 billion of assets on its platform” which  if all these were to generate 0.5%, it would equate to $450million of fees! This figure seems  almost too high to be believed……  

The ability and experience of offering custody for digital assets could prove to be a  significant driver of revenue for Coinbase if we are to see existing assets such as equities,  bonds, real estate, commodities, etc being digitised. We have already witnessed changes in  legislation in Luxembourg and Switzerland which enable the issuance of securities in a  digital format, as opposed to having to have paper documentation, meaning it is now  possible to issue equites in a digital manner for as little as CHF 50,000. However, given the  recent announcement from the DTCC in the US that it is looking to move the settlement of  stocks from two days to one day, surely this could be an added ‘spur’ as regards the  digitalisation of securities in America? The change from a two-day to one-day settlement is  undoubtedly going to necessitate thorough examination of the infrastructure on Wall  Street. Once Coinbase becomes part of the ‘establishment’ (i.e., quoted, and subject to  audits and greater transparency) it increasingly makes commercial sense as to why Coinbase  is looking to become a publicly quoted company. 

If indeed Coinbase is valued at $100billion it would potentially account for 0.8% of the  NASDAQ index and be the 26th/27th largest stock in this index, based on current valuations.  Coinbase would almost be the same valuation of US bemouths such as IBM, Goldman Sachs,  GE, Boeing and Morgan Stanley. Each of these well-known firms are valued around $100 to  $110 billion and each account for approximately 0.34% of the S&P500 index. Coinbase truly  has been a huge financial success but there is another company in the digital assets sector that eclipses it. This company is Binance, which some claim to be worth $200 Billion. But  that is a story for another day……! 

Bitpay, the largest provider of crypto payments globally, has teamed up with Apple Pay  whereby enabling its debit card Mastercard clients to use Apple Pay. The cryptos that BitPay will initially allow its users to hold include Bitcoin, Bitcoin Cash, BUSD, Ether, PAX, USDC and GUSD. In addition to Apple, Samsung Pay has also announced an agreement with BitPay and  confirmed that the cost to process transactions will be 1%, whereas some cards that use  cash charge up to 3%. Even Google Pay has joined in on signing up Bitpay so its customers,  too, will be able to buy and store crypto as well as make online payments. All three of these  firms will use BitPay’s app so they can convert fiat currencies into crypto currencies and vis  versa. Given Apple, Google and Samsung now offer their clients the opportunity to spend  crypto is further evidence of how easy it is to use the likes of Bitcoin and Ethereum, which have been subject to criticism in the past. Indeed, Visa has 32 cards which offer the ability to  use crypto on a Visa-powered debit card at any of the 40 million merchants worldwide that  accept Visa. In a statement from Visa at the beginning of February, Jack Forestell, its chief  product officer announced: “We set out to make Visa the bridge between digital currencies  and our global network of 70 million merchants and today we are the leading network for  crypto wallets with 35 crypto platforms choosing to issue with Visa. With this pilot program,  we want to extend the value of Visa to our neobank and financial institution clients by  providing an easy bridge to crypto assets and blockchain networks.”  

Mastercard has seven firms which allow crypto/fiat services and, not wishing to be left  behind (according to Reuters), has said it will support a select number of cryptos - thus  enabling its merchants to accept certain digital assets as a form of payment. It would appear  that the race is on since PayPal as well has recently announced it will be offering UK clients  the ability to access cryptos. PayPal, with 26 million merchants globally, has informed investors of its plans to create a division to be focused on digital currencies. Its CEO, Dan  Schulman, has been quoted as saying:” There’s no question that digital currencies and  underlying technology have the potential to drive the next wave in financial services and I  think those technologies can help solve some of the fundamental problems of the system.” 

How people rate the trustworthiness of digital currencies 

Source: The Economist Intelligence Unit 

Facebook’s ‘Diem’ digital currency is still waiting for approval from the Swiss regulatory  authorities and arguably it was Facebook’s proposal that initially stirred central bankers into  taking digital currencies seriously. However, given research from The Economist Intelligence  Unit, which has reported that 65% of the people it surveyed would rate a digital currency from a large international technology firm as balanced and trustworthy, one cannot help  wondering how long it will be before we do actually see a digital currency being issued by a  global brand.