Add to Cart: Coinbase’s Acquisitions

Coinbase had a stellar run last year, with its US$86 billion Nasdaq debut, 4x YoY increase in monthly transacting users (MTU), and an 11x YoY increase in net income, but since the beginning of this year, its shares have tanked almost 20%, falling from US$252 on Dec 31^st, 2021 to around US$202 as of Mar 28^th, 2022. So what explains the steep drop in its share price? Has Coinbase’s listing provided much-needed legitimacy for crypto? What does Coinbase’s entry into the NFT space mean for OpenSea? What are the acquisitions made by Coinbase? What sectors do they belong to? 

Let’s dive into the eighth edition of Add to Cart and analyse Coinbase’s acquisitions and more. 

Stamp of validation

Brian Armstrong made a controversial bet when he founded the company by agreeing to cooperate and work with regulators. Controversial because the underlying reason for bitcoin is to bypass governments and regulators. But Armstrong figured out early on that it was better to establish Coinbase as an entity that works within the system. He understood that regular investors would want an easy way to trade crypto. 

The company, which was part of Y Combinator’s summer 2012 batch, made its Nasdaq debut on April 14^th, 2021. For many, this was a watershed moment in the crypto world. With the blessings of the regulators and Coinbase’s financials now under deeper scrutiny, the thinking was that there’d be increased transparency into the company that is a key part of the US$2.1 trillion crypto market and bitcoin and other virtual assets could finally get the stamp of validation as legitimate financial assets. But that may not be necessarily true, as there have been false dawns before. 

Between 2017 and 2018, when bitcoin futures started trading on a major exchange in Chicago and Goldman was setting up a trading operation for bitcoin derivatives, it was widely believed that institutional investors would be more willing to invest in crypto, and that would legitimise digital assets. But instead, bitcoin peaked at around US$19,000 on Dec 17^th, 2017 and lost 82% of its value within a year. And consequently, Coinbase’s MTU fell from 2.4m in March 2018 to 900k in December of that year. 

Coinbase, which currently has a market cap of US$52 billion, down from US$86 billion during its market debut, is still around 2x more valuable than Nasdaq, which has a market cap of US$29 billion. The difference is explained by the fact that financial markets for stocks, commodities, and derivatives are well established, highly competitive, and therefore have less room for growth. In contrast, cryptocurrencies are an emerging market with vast potential for growth. 

Bitcoin dependent

Key highlights from Coinbase’s Q4 2021 earnings

• A 307% YoY increase in monthly transacting users from 2.8m to 11.4m.
• A 766% YoY increase in trading volume from US$193 billion to US$1.67 trillion.
• A 545% YoY increase in net revenue from US$1.1 billion to US$7.4 billion. 
• A 1025% YoY increase in net income from US$322 million to US$3.6 billion.
• Bitcoin contributed to 24% of trading volume, 25% of transaction revenue and 40% of assets on the platform. Ethereum made up 21% of trading volume and transaction revenue and 25% of assets on the platform. 
• Institutional investors made up 68% of the trading volume in 2021, up from 62% in 2020, while retail investors contributed 32% of the trading volume in 2021, down from 38% in 2020.

Since going public, Coinbase is down by around 43%, falling along with other tech stocks. Given that Coinbase primarily derives its revenue from transactions, its profits and stock price move in tandem with the increasing or decreasing price of crypto. And crypto hasn’t been doing well lately. 

The crypto market cap has fallen by more than 30% since its peak in Nov 2021, driven by macroeconomic factors such as the Fed’s hawkish stance and geopolitical instability. As exposure to crypto increases among institutional investors, cryptocurrencies like bitcoin start acting more like stocks.  

Given these circumstances, Coinbase believes that retail MTU and total trading volume will both be lower in Q1 2022 as compared to Q4 2021.

But there’s a silver lining. Coinbase has tried to diversify its revenue away from transactions and has generated over US$500 million in subscription and services revenues. Subscription and services revenue made up 7% of total revenue, which is still small but a notable improvement from 3.9% in 2020. Coinbase has increased its base of institutional investors and has launched Coinbase Prime, its integrated solution for institutional crypto needs.

It is also entering new markets and is planning to launch its non-fungible token (NFT) platform. Factoring in bitcoin’s growing mainstream acceptability, Coinbase’s diversification efforts, its entry into new markets, and its attractive price point, analysts have given it a strong buy rating. They expect the stock price to reach US$316 in the next twelve months.

OpenSea

Coinbase was not the only one that had a stellar 2021; sales of non-fungible tokens (NFT) reached nearly US$20 billion in 2021 compared with less than US$100 million in 2020, according to Cryptoslam.

SuperRare, MakersPlace and Nifty Gateway were some of the early entrants in the NFT segment that functioned as online NFT marketplaces. But OpenSea quickly swooped in and became the top player. According to data from Dapp Radar and CryptoArt, of the US$2.8 billion spent on NFT marketplaces in September 2021, US$2.72 billion was on OpenSea, while SuperRare, with a measly US$25 million in trading volume, came in second. 

OpenSea’s rise to the top is explained by its support for different kinds of blockchains, strong analytics, and the credibility that it has built with verified user profiles. 

In Oct 2021, Coinbase announced that it is creating its own NFT marketplace. 

To transact on a platform like OpenSea, users must purchase the cryptocurrency ether on a crypto exchange and set up a crypto wallet to connect to the platform. Coinbase could drastically simplify the process by allowing customers to directly purchase NFTs on the exchange with a credit or debit card. For Coinbase users who already dabble in the NFT space, having the option to trade NFT and cryptocurrencies on a single platform could be very appealing, while those who are new to NFTs will find it easy to start trading. 

Acquisitions

The analysis is based on data from Crunchbase. The startups have been classified according to various industries based on data from Pitchbook, and the sector classification is based on Global Industry Classification Standard (GICS). The sector classification is subjective and has been made considering the sector/industry that the startups closely resemble. A total of 21 acquisitions have been considered for this analysis, and this is by no means an exhaustive list of all the companies that Coinbase has acquired over the years. 

Coinbase has made 21 acquisitions, and they are spread across six countries, from the US in the west to Israel in the middle-east. Coinbase has made around 76% of its acquisitions in its home base of US, while the rest are split evenly among the other countries. 

The financial sector accounted for 67% of the acquisitions, and the startups in this sector had a median age of 3yrs. 

Coinbase acquired Tagomi, a crypto prime brokerage platform, in May 2020 to boost its offerings for advanced traders and sophisticated crypto investors. 

The acquisition will help Coinbase offer professional trading features, custody, and prime brokerage services on one platform. Tagomi has become the go-to platform for many hedge funds, advanced traders, and family offices. 

With the aim of offering turn-key solutions to power distributed and scalable crypto infrastructure, Coinbase acquired US-based blockchain infrastructure platform Bison Trails in Jan 2021. Bison Trails is a pioneer in fully managed blockchain infrastructure whose platform has powered billions of transactions for many of the biggest names in crypto today. Coinbase and Bison Trails’ relationship goes back to 2019, when Coinbase Ventures, the venture capital arm of Coinbase, made an investment in the startup. This was then followed by a commercial partnership with Coinbase Custody in 2020. Bison Trails will continue to operate as a standalone product and function as an operating subsidiary. 

The information technology sector made up 29% of the acquisitions, and the startups in this sector had a median age of 3.5yrs. 

In the first week of Nov 2021, Coinbase announced the acquisition of Agara, an AI-powered support platform with operations in India and the US. The acquisition will help Coinbase in providing world-class support for customers and bring Agara’s expertise in machine learning (ML) and natural language processing (NLP) to Coinbase’s engineering team. Agara’s Deep Learning and Conversational AI technology will be used to automate and enhance the customer experience tools.

The acquisition is also part of Coinbase’s strategy to build out a tech hub in India. In March this year, it was reported that Coinbase is looking to recruit for roles to expand its user base and revenue and build policy muscle in the country.

Towards the end of Nov 2021, Coinbase announced the acquisition of Unbound Security, a cryptographic security startup. The Israeli startup is a pioneer in several cryptographic security technologies, including the emerging field of secure multi-party computation (MPC). The acquisition will help Coinbase gain access to some of the world’s most sophisticated cryptographic security experts and establish a tech centre of excellence in Israel.

Conclusion

Despite its efforts at diversifying its revenue base, Coinbase is still very much reliant on transaction-based revenue and has to do a lot more to shield itself from the rise and fall of cryptocurrencies like bitcoin. For now, Coinbase technically falls between the gaps of oversight by the Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), but more stringent regulation in the future could dent its profits or more. 

In the newly entered NFT space, Coinbase is bound to make waves, given that it opens up NFTs to a whole new audience and reduces the friction of getting started in the NFT market. 

Coinbase’s strategic acquisitions in emerging markets like India and Israel are a welcome move, given the potential for growth in these markets. The US$7.1 billion in cash and cash equivalents that Coinbase has on its balance sheet will enable it to continue investing in long-term growth opportunities regardless of crypto market conditions.

But ultimately, it remains to be seen if bitcoin and its peers will become a genuine alternative to traditional financial assets or continue to be nothing more than speculative investments.

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