OEEC OKEx Research Institute: Decrypt the first cryptocurrency share of Coinbase

Original source: OE OKEx

Abstract:

On February 25, 2020, Coinbase formally filed with the SEC for A direct listing of its Class A common stock on the Nasdaq Global Select Market. Based on the development background of the blockchain industry and crypto digital market, this paper makes an in-depth analysis of Coinbase's business scope, revenue composition, target groups, business performance and profitability. Finally, this paper gives Coinbase an outlook on the future risks and opportunities cryptocurrency exchanges will face.

From the perspective of industry development, in recent years, countries have introduced blockchain support policies, and the epidemic has also promoted the R&D investment of blockchain in all walks of life. The scale of the cryptocurrency market is developing rapidly, which is reflected in the market value growth of 293.1% in the last year. The market value of Bitcoin alone has surpassed that of well-known companies such as Tesla, Tencent, Alibaba and Facebook. Institutions rushed to increase their holdings of cryptocurrencies, fuelling the bull market in cryptocurrencies.

From the perspective of company operation, Coinbase's business scope is diversified, mainly providing online trading platform with additional subscription items, services and other businesses, which effectively reduces the volatility of income. Coinbase turned profitable for the first time in 2020, with net income of $320 million. In terms of earnings metrics, Coinbase's ROE and ROA outperformed those of traditional exchanges. According to DuPont's analysis, asset turnover is the main contributor to ROE growth, the equity multiplier is at the bottom of the industry, and other measures are roughly in line with the big three traditional exchanges. From the perspective of capital structure and debt paying ability, Coinbase has a strong growth capacity. At the end of 2020, the net profit attributable to the parent increased by 1247.35% year on year. The asset-liability ratio has been rising year by year, which indicates that we have confidence in the business operation and are able to bear the interest and risk of borrowing.

In terms of future development, Coinbase is subject to increasingly stringent legal and regulatory requirements around the world. As a result, Coinbase has had to invest heavily in compliance to meet legal and regulatory requirements. On the other hand, with the rapid growth of the crypto economy, Coinbase has a huge opportunity to further expand its footprint and revenues, and to remain the leader of the crypto industry.

1. Digital Currency Exchanges Listed Stock Exchanges: The Beginning or End of the Cryptographic Industry?

On February 25, 2020, Coinbase formally filed with the SEC for A direct listing of its Class A common stock on the Nasdaq Global Select Market (ticker symbol "COIN"). Coinbase is a US-based cryptocurrency exchange with users in more than 100 countries, approximately 43 million verified users, 7,000 institutions and 115,000 ecosystem partners that invest, spend, save, earn and use cryptocurrencies. If Coinbase goes public, it will be a milestone for the crypto industry.

Figure 1: History of Coinbase

  Source: Coinbase prospectus, collated by OE OKEx Research Institute

  Between 2012 and 2020, the overall market value of crypto assets grew from less than $500 million to $782 billion, with a compound annual growth rate (CAGR) of more than 150%. Over the same period, Coinbase's retail users grew from about 13,000 to 43 million, and its number of institutions grew from more than 1,000 in 2017 to 7,000 in 2020. As of the end of December 2020, customers collectively traded more than $456 billion on Coinbase's platforms and had more than $90 billion worth of assets stored on the company's platforms. Today, Coinbase has grown into a leading provider of financial infrastructure and technology for the crypto economy.

2. Coinbase at the forefront: The blockchain industry and the digital currency market are growing rapidly

2.1 Countries have introduced blockchain support policies, and the epidemic has promoted investment in blockchain research and development

In 2020, the increased global uncertainty and mistrust caused by COVID-19 is driving investment in blockchain technology research and development. According to the China Patent Protection Association's "2020 Blockchain Global Authorized Patents Report", the diameter of virtual currency, public chain and alliance chain is not differentiated. As of May 2020, there are a total of 3924 authorized patents in the blockchain field worldwide. The US accounted for 39 per cent, South Korea 21 per cent and China 19 per cent.

Figure 2: Blockchain patents worldwide

  Source: "2020 Blockchain Global Licensed Patents Report", collated by OEC OKEx Research Institute

  At present, the development of blockchain technology has also attracted the great attention of governments around the world. Governments of various countries are rushing to issue a number of documents and policies to promote the development of blockchain technology and strengthen the governance of blockchain technology. With the application of blockchain technology, it will bring subversive changes to the traditional social production relations and promote the development of global politics, economy and society. According to the survey data of China Telecommunications Institute, from 2019 to 2020, 24 countries around the world issued special policies or laws and regulations specifically for the development of the blockchain industry and industry regulation. The European Union, China, Australia, India, Mexico and other countries are actively developing the blockchain industry and have formulated overall development strategies for the industry. For example, in September 2019, Germany released its "National Blockchain Development Strategy"; In November 2019, the European Commission announced new investment plans for artificial intelligence and blockchain-focused startups in Europe; In February 2020, Australia released the National Blockchain Development Roadmap; In March 2020, Korea Science and ICT announced the launch of the "Blockchain Technology Verification Support Plan 2020".

Table 1: Blockchain industry support policies of major countries/international organizations in the world 2019-2020

  Source: China ICT Institute, collated by OEIC OKEx Research Institute

2.2 The global cryptocurrency market has developed rapidly and remains strong

Cryptocurrency is a trading medium that uses the principles of cryptography to ensure the security of transactions and control the creation of trading units. It takes on many functions such as the medium of exchange, store of value and power for applications. It is the most active part of the global Cryptocurrency market. Nowadays, the public has widely recognized that blockchain technology is the three major tuyeres that will change the future. In such an era, cryptocurrency relying on blockchain technology is undoubtedly the eye of the storm in the tuyeres.

Global encrypted digital currency market scale growth from $10.4 billion in 2013 to $764.7 billion in 2020, the compound annual growth rate of over 3.2%, increased by nearly $570 billion market value in 2020 alone, as high as 293.1%, not only such, encryption market in 2021 is still high, as of March 3, 2021 in 2021 after only two months and three days, encryption market scale is expanded by 94.5%.

Figure 3: Global crypto market capitalization and growth

  Source: CoinMarketCap, OEC OKEx Research Institute

2.2.1 The market value of Bitcoin has exceeded one trillion yuan

In the global crypto market, Bitcoin (BTC) is the creator and unquestionably the number one. COINS since created in this hearing, high market share, since 2021, the currency market share basic maintain above 60%, the lowest market share of 33%, after it is etheric fang (ETH), but the etheric lane market share was just hovered around 10%, the current is far from contend with COINS, other counterfeit currency even more so, compete for the rest of the currency "cake", has a market share of more than 3%.

Bitcoin, meanwhile, has risen to prominence amid the broader economic gloom of late. Market capitalization climbed rapidly in a short time, even breaking the trillion-dollar mark on February 19, 2021.

Figure 4: The Bitcoin market

Source: OEC OKEx Research Institute

In terms of the market value of the world's listed companies, only Apple, Microsoft, Amazon and Google have surpassed the trillion-dollar market value mark, among which Apple has the highest market value, which has reached two trillion US dollars. Add bitcoin to the mix and it's already worth more than Tencent, Tesla, Alibaba, Facebook and other well-known companies. Even more striking is the speed at which Bitcoin became a member of the trillion-club: it took Apple 42 years, Amazon 24 years and Google 21 years to reach a $1 trillion market cap, while Bitcoin only took 12 years.    

Figure 5: Growth in market capitalization over 10 years ($100 billion)

Source: OEC OKEx Research Institute

  Bitcoin's return rate is far ahead of that of major global asset classes, reaching 301.46% in 2020. From the perspective of market return rate, in the past year, the S&P 500 index's return rate is 16.26% in the same period, and gold is only 25% in the market. It can be said that the performance of Bitcoin in 2020 has far exceeded all other major assets.

Figure 6:2020 returns by major asset classes (%)

Source: OEC OKEx Research Institute

  2.2.2 The COVID-19 epidemic is the flashpoint, and institutions are striving to be the first to help

In 2020, the world experienced black swan events such as "pandemic" and "negative oil price", which had not been seen in a century. In order to cope with the economic recession caused by the epidemic, countries adopted quarterly loose monetary policies. In an environment of high inflation and low growth, investors' need to hoard cash in order to avoid the loss of nominal principal and the need to pursue higher returns has naturally evolved into the demand for cryptocurrencies such as gold and bitcoin, thus fueling the cryptocurrency bull market with bitcoin as its head.

By the end of 2020, 15 listed companies around the world had purchased and held more than 100,000 Bitcoins themselves, 12 of them in the US or Canada, according to Bitcoin Treasuries. In February 2021, Elon Musk, the father of Tesla, the world's richest man, even made a $1.5 billion bet on the Bitcoin market. Wedbush, an American broker, predicts that nearly 5% of listed companies will follow Tesla's investment diversification strategy and join the Bitcoin investment wave in the next 12 to 18 months.

3. Alternative financial market exchanges: How strong is Coinbase?

3.1 Diversify business scope to effectively reduce income volatility

As we all know, there are two ways to get bitcoins. The first is to deploy complex and powerful computers to mine bitcoins by solving complex mathematical problems, or to buy bitcoins on an exchange. The former is prohibitively expensive and requires a lot of technical know-how, while the latter requires only an account on one of these exchanges, of which Coinbase is the best.

Coinbase's primary business is to provide an online trading platform that allows buyers and sellers to meet and invest, spend, send and receive, store, hold, mortgage, lend and lend, distribute, build, pay, and more broadly access and trade crypto assets at the right price. Its income consists of the following parts: transaction income, subscription and service income and other business income.

Transaction revenue includes net revenue from transaction fees incurred from the platform. The company charges around 0.50 percent for the purchase and sale of cryptocurrencies, though this rate varies depending on market conditions. From the middle of 2019 to the end of 2020, transaction services revenue rose 366% to $1,09617 million from $235.35 million. Transaction services revenue is the most important component of operating revenue, accounting for about 86 percent.

Subscription and service revenues include Store, Stake, Distribute and Build. These incomes are calculated using the interest method, which depends on the balance of the legal funds in custody and the current interest rate environment. Subscription and service revenue accounted for about 4% of the total operating revenue. From 2019 to 2020, this income will increase by about 355%.

Other business revenue includes revenue from the sale of crypto assets. Companies regularly use their own crypto assets to complete customer transactions. Before some small orders are sold to customers, the company maintains and controls the crypto assets in those orders and records revenue at the point in time when the sale is processed. The Company records the total value of the sales as revenue and the cost of the crypto assets as other operating expenses. Other income includes interest income earned through cash and cash equivalents. Such revenues, which account for about 11 per cent of total revenues, rose 329 per cent over the past year.

Table 2: Subscription items and service income

Source: Coinbase Prospectus, OE OKEx Research Institute

Figure 7: Coinbase revenue composition and growth

  Source: Coinbase Prospectus, OE OKEx Research Institute

In terms of user base, Coinbase has a target revenue group of approximately 43 million retail users, 7,000 institutional users, and 115,000 ecosystem partners. These customers are located on every continent and in more than 100 countries. Among them, the company's retail users are spread across geographies and age groups, indicating that Coinbase has received widespread acceptance as a crypto economy provider. At the end of 2020, Coinbase had more than 43 million retail users and 2.8 million monthly transaction users, an increase of approximately 180 percent from the end of 2019.

In addition, Coinbase's institutional clients include hedge funds, major trading firms, small and large financial institutions, family-owned businesses, and, more recently, companies seeking to allocate a portion of their portfolios to crypto assets. As of December 31, 2020, the company has 7,000 institutional customers on its platform. Take, for example, One River Asset Management, an innovative investment manager.

On Eco Partners, Coinbase is looking for businesses that can build their own products and services or distribute them through the Coinbase platform. For example: developers building new blockchain protocols and applications that leverage blockchain protocols; The creator of the new token on these protocols; Merchant partners who see commercial value in accepting these tokens as a new payment method for their business; Organizations and financial institutions that use Coinbase Analytics technology to monitor various use cases (such as compliance) for blockchain transactions. In addition, the Company's partners on the DEFI agreement include Compound.

Figure 8: Coinbase target user groups and corresponding businesses

Source: Coinbase Prospectus, OE OKEx Research Institute

3.2 Arsenic or Honey, Coinbase takes advantage of the situation

Since the outbreak of COVID-19, the global economic situation has become more and more depressed, and people have turned their focus to the cryptocurrency industry. Cryptocurrency is racing to be the first to appear, which has driven the business development of virtual asset trading platform. Coinbase's operating revenue soared from RMB1.82 billion in the second half of 2019 to RMB5.666 billion in the second half of 2020, a compound half-year growth rate of 76.44%.

Coinbase has yet to match the size of the traditional exchange giants in terms of revenue, but the gap is narrowing fast, with a gap of only 2.268 billion yuan between it and the Hong Kong Stock Exchange in the second half of 2020. At the same time, Coinbase has great growth potential: in 2020, other stock exchanges (Hong Kong Stock Exchange, London Stock Exchange, Intercontinental Exchange, etc.) have experienced a decline in revenue level, while Coinbase has gone ahead and increased its revenue in half a year to 2.12 times that at the beginning of the year.

In terms of net profit, with the outstanding performance of cryptocurrency, the trading volume of major crypto market exchanges rose rapidly. Coinbase realized profit for the first time in 2020, and increased rapidly from 45 million yuan in the first half of the year by 262.48% to 165 million yuan at the end of the year, while Hong Kong Exchanges and Intercontinental Exchange only increased by 2.57% and -35.86% in the half year of 2020.

图九：营收增速高达 76.44%（亿元）, 资料来源：Wind，欧易 OKEx 研究院

图十：净利润 2020 年半年增长 362.48%, 资料来源：Wind，欧易 OKEx 研究院

  From return on equity (ROE) and return on total assets (ROA), Coinbase exchange in the second half of 2020 the ROA and ROE to catch up with the major traditional exchanges, ROA and even the Hong Kong stock exchange, the intercontinental exchange 2.50 times, 3.51 times, this is mainly due to the outbreak in 2020 and "black swans" and other important events occur, the traditional exchanges, encrypted digital money market Coinbase exchange by dongfeng instead, become the eyes of investors "properties".

 图十一：20 年 ROE 首次领先, 资料来源：Wind，欧易 OKEx 研究院

图十二：20 年 ROA 远超其他三大交易所, 资料来源：Wind，欧易 OKEx 研究院

  According to DuPont analysis, except asset turnover and equity multiplier, other indicators are basically the same as the three traditional exchanges. Asset turnover is the main contribution to the growth of ROE. In the past 20 years, the asset turnover of Coinbase was 0.31, while that of Hong Kong Stock Exchange and Intercontinental Exchange was only 0.06 and 0.05, and that of London Stock Exchange was even 0. As a virtual digital currency trading platform, Coinbase, compared with the other three traditional exchanges, has unique technical characteristics and application scenarios in the virtual market, which makes Coinbase's trading procedures simpler, production and operation faster, and it can obtain greater income with less resources.

Coinbase's equity multiplier is the lowest in the industry at 3.19, while ICE, the lowest of the three traditional exchanges, has a multiplier of 6, 1.88 times Coinbase's equity multiplier. The capital invested by Coinbase shareholders accounts for a large proportion in the assets, indicating that there is little borrowed capital and little financial risk, which may be related to the fact that Coinbase has just entered the market.

Table 3: DuPont analysis of the four major exchanges in 2020

Source: Wind, OKEx Research Institute

From the perspective of capital structure and debt paying ability, the asset-liability ratio of the three traditional exchanges is all over 80%, and the asset-liability ratio of the London Stock Exchange has even reached over 99% in recent years. According to the disclosure of Coinbase's annual report and prospectus, although the asset-liability ratio of Coinbase also shows a trend of increasing year by year, rising from 55.61% at the end of 2019 to 73.94% at the end of 2020, which is still a big gap with the three traditional exchanges. However, the current development trend of Coinbase is relatively healthy. The rising asset-liability ratio indicates that Coinbase has great confidence in enterprise operation and is able to bear the interest cost and risk of borrowing from the bank.

In addition, Coinbase has strong growth capacity and huge development potential. In the first half and the end of 2020, the net profit attributable to the parent increased by 710.87% and 1247.35% respectively compared with the same period last year. While the other three traditional exchanges have developed more mature and have less room for growth. The old London Stock Exchange's net profit attributable to its parent increased by -13.13% and -8.13% year-on-year.

图十三：资产负债率呈上涨趋势, 资料来源：Wind，欧易 OKEx 研究院

图十四：归母净利润增速远超其他三巨头, 资料来源：Wind，欧易 OKEx 研究院

  3.3 Coinbase has performed well in key business indicators

In addition to financial performance, the company uses business metrics such as verified users, monthly transaction users (MTU), assets on the platform, transaction volume, and non-GAAP financial metrics to evaluate the business, measure performance, identify trends affecting the company's business, and make strategic decisions. Verify that users represent users who have shown interest in the platform. For all quarters ended December 31, 2018, the number of verified subscribers increased from the previous quarter for both 2019 and 2020. The retail e-wallet app, which launched in mid-2018, grew by more than 2 million users year over year through December 31, 2020.

MTU represents the company's active and passive retail user transaction base and reflects revenue opportunities on the platform. MTU drives the growth of retail transaction volumes and includes transaction-based products with which retail users interact, such as investing, spending, sending and receiving, investing and distributing. MTU has historically been associated with the price of bitcoin and the volatility of crypto assets.

图十五：验证用户（百万）,资料来源：Coinbase 招股说明书，欧易 OKEx 研究院

图十六：每月交易用户和加密资产波动,资料来源：Coinbase 招股说明书，欧易 OKEx 研究院

The assets on the platform are a measure of the total value held by the platform, reflecting the trusted nature of the platform and profit opportunities. The indicator is influenced by market factors, for example, platform assets declined in 2018 as cryptoasset prices (dominated by those of Bitcoin and Ethereum) fell from their highs in 2017. Between December 31, 2017 and December 31, 2018, the price of Bitcoin and Ethereum fell by approximately 74% and 82%, respectively, and the total market value of crypto assets fell by 80%. During the same period, the assets on the platform fell 73 percent. Despite the short-term fluctuations, assets on the platform increased from $7 billion to $17 billion to $90 billion over longer periods as of December 31, 2018, 2019 and 2020, respectively, due to the growth in the price, volume and type of cryptocurrencies.

Volume is the product of the number of trades an asset makes and the transaction price at which the trade was executed. Since trading activity directly affects trading revenue, the metric reflects liquidity on a company's order book, trading conditions, and the potential growth of the cryptocurrency economy. Retail trading volumes are more influenced by bitcoin prices and crypto asset volatility than institutional trading volumes, and institutional trading volumes fluctuate less over time. The correlation between Bitcoin prices, crypto asset volatility, and trading volume is expected to decrease as institutional trading increases, expanding the number and types of crypto assets supported by the platform, and the utility of crypto assets expands.

图十七：平台资产和加密货币市值, 资料来源：Coinbase 招股说明书，欧易 OKEx 研究院

图十八：交易量和加密资产波动, 资料来源：Coinbase 招股说明书，欧易 OKEx 研究院

The GAAP financial index refers to the adjusted EBITDA, which adjusted EBITDA is defined as the net income (loss), adjusted to exclude interest expense, the income tax (income) reserves, depreciation and amortization, stock based compensation fees, goodwill, assets acquisition of intangible assets, and encryption, restructuring charges, minus the recurrence of the acquisition of related compensation fees, unrealized foreign exchange gains and losses, the fair value of derivatives adjustment and the current legal provisions and related costs. The increase in Adjusted EBITDA for the year ended December 31, 2020 compared to the year ended December 31, 2019 was mainly due to the increase in trading revenue.

Currently, Coinbase has strong strengths in brand influence, user trust, compliance, and product experience. The company has built a strong back-end technology platform to support the real-time and uninterrupted demands of the global crypto asset market. By working with regulators around the world to develop policies, the company has made significant investments in regulatory compliance and pioneered industry-leading security practices to protect crypto assets. The company attracts retail users, institutional and ecosystem partners to the platform, creating a powerful flywheel: retail users and institutions store assets and enhance liquidity, enabling the company to scale and offer and launch new, innovative crypto assets, thereby attracting more new customers to join. The scale and leadership of the company further enhances the value of the platform by attracting ecosystem partners to connect with our millions of customers around the world.

4. From Dread to Die: The Risks and Opportunities of Cryptocurrency Exchanges

4.1 Exchanges face complex risks from national scope to business involvement

As a result of its global operations, Coinbase is subject to a variety of laws and regulations enacted by U.S. federal, state, local and foreign governments, as well as regulatory agencies. Globally, Coinbase is subject to increasingly stringent legal and regulatory requirements related to detection and prevention of terrorist financing, anti-money laundering, fraud and other illicit activities, competition regulations, economic and trade sanctions, privacy, cyber security, information security and data protection. These laws, regulations, and rules (and their interpretation) are constantly changing and increasing in number.

表四：美国联邦政府内部的监管机构, 资料来源：欧易 OKEx 研究院

表五：美国部分州政府在区块链领域的监管, 资料来源：中国科学技术发展战略研究院，欧易 OKEx 研究院

  Money laundering and terrorist financing are a common crisis for all cryptocurrency exchanges. Coinbase is subject to various anti-money laundering and counterterrorism financing laws, including the BSA in the United States and similar laws and regulations abroad. Coinbase has implemented a compliance program designed to prevent the platform from being used for money laundering, terrorist financing, and other illegal activities in countries or with individuals or entities (including on designated lists issued by OFAC and equivalent foreign authorities). Compliance programs include policies, procedures, reporting protocols and internal controls designed to meet legal and regulatory requirements and assist in managing risks associated with money laundering and terrorist financing. Anti-money laundering legislation is evolving and varies from jurisdiction to jurisdiction. The Company continuously monitors compliance with anti-money laundering and anti-terrorist financing regulations and industry standards and implements policies, procedures and controls in accordance with the latest legal requirements.

4.2 With abundant cash flow and innovative products, the Exchange has broad prospects in the future

Coinbase operates in a market with one of the deepest pools of liquidity and network effects, with plenty of liquidity to exchange for a wide range of crypto assets. The good mix of retail and institutional activities provides the company with deep liquidity, highlighting the synergies and network effects among customers on the platform. Liquidity begets liquidity, and this advantage will deepen as we continue to expand the range of supported crypto assets and attract new customers to the company's platform.

Coinbase has grown along with the crypto economy. Powerful incentives drive online exchanges in almost every aspect of economic activity. More importantly, Coinbase has enormous opportunities to grow its customer base: increasing customer adoption and engagement, expanding and accelerating retail user reach, expanding institutional reach and support, developing good ecosystem relationships, increasing payment options and international expansion, etc. Increasing the depth and breadth of crypto assets on the platform: including expanding support for digital currencies and crypto assets, supporting the exchange's blockchain protocol capabilities, and marking new assets; And launch new and innovative products to actively drive the business by building on any existing and additional financial and non-financial products that are yet to be created for the crypto economy.

Literature reference:

[1] Wang Jialing, A Brief Analysis of the Current Situation and Future of Blockchain Technology, Rural Economy and Technology, August 2020

[2] PwC "s Global Blockchain Survey 2018,

https://www.pwccn.com/en/research-and-insights/publications/global-blockchain-survey-2018/global-blockchain-survey-2018-report.pdf

[3] Global Blockchain Development Trends Report in 2020https://www.weiyangx.com/377569.html

[4] China ICT Institute, Blockchain White Paper 2020,2020.12

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