Why Coinbase Could Soar

Among the best business models in the world is the money management one. While fees have come down substantially in recent decades, you can certainly still find examples of financial advisors charging north of 1% on assets under management while another 1% is charged through commissions, 10b-1 fees, and mutual fund costs.

Sum those up and 2% of invested capital is lost each year to these hefty fees. So what, that’s no big deal people think because if the market makes 8-10%, they’re ahead.

But what happens when the market falls? Those same fees amount to 2% of the capital invested while 100% of the risk is saddled by the client. And then there’s the real problem with the economics that most fail to think about until it’s too late. Those pesky 2% fees extrapolated over 40 years wipes out 80% of the originally invested principal.

Now if you think that’s a good business model, we might have found an even better one, and it’s one you can invest in publicly.

Key Points

• • Financial advisors often charge over 1% on assets plus additional fees, resulting in a 2% annual cost that significantly impacts returns, especially during market downturns.
  • Over 40 years, these 2% annual fees can erode 80% of the originally invested principal as well as much of the gains.
  • Coinbase charges 1.49% per transaction, leading to around 18% in annual fees for active users who trade 12x per year, supplemented by additional charges like spreads and conversion fees, making it a highly profitable business model.

Is This The Best Business Model Ever?

Now if money management sounds like a good business, it does have a drawback, which is time. The money manager has to wait a whole year to capture those economics. It’s why very few money managers actually scale their businesses.

But what if you could capture 1.49% of the principal immediately? That’s how Coinbase operates. And yet it gets better because Coinbase is a platform that services traders. And what do traders like to do if not transact, often.

So, imagine an eager crypto speculator deposits $100,000 into Coinbase and buys that amount of bitcoin, for example. Coinbase keeps $1,490 right off the bat. Now the speculator gets nervous and wants to sell, another 1.49% of whatever is leftover is taken by Coinbase as the toll for providing the trading platform. Before you know it 3% is in Coinbase’s coffers.

But how often does an average Coinbase client transact? As of 2023, Coinbase had approximately 9.5 million monthly active users, defined as users who make at least one transaction on the platform during a 28-day period​, or 12 transactions per year.

If each one of those transactions led to near 1.5% charge, almost 18% of principal invested is captured by Coinbase within 12 months. Now can you see the economics?

Is There a Downside?

Some transactions incur lower fees, for example:

• $0.99 is charged when the transaction is under $10 while $2.99 is charged when the transaction amount is between $50 and $200 per share.

Above $200, the 1.49% fee is charged while for credit card purchases the fee can be as high as 3.99%.

There is also the risk that the bottom falls out of the crypto market and so Coinbase is inextricably linked to the price of bitcoin, ether and so on.

Still, Brian Armstrong has created an extraordinary economic machine that profits beyond transaction fees. By way of example, Coinbase takes a spread when cryptocurrencies are bought and sold, ranging from 0.5% to 2%.

It also charges conversion fees to different cryptocurrencies that can amount to 2% as well as 25% commission on rewards for staking.

As you can see, Coinbase has numerous ways to make money, and it does, and so it’s no surprise that revenues are up by over 2x last quarter and 115% in Q1 when compared to 2023 figures. In addition, the bottom line is forecast to grow at a 77% CAGR over the next 5 years, making the current price-to-earnings ratio just north of 30 look very appetizing indeed.