The capital markets feel like one giant game. With the profound volatility of crypto assets, the billions of issuance in special purpose acquisitions companies (SPAC) trying to take fintechs public and incredible monetary printing by the U.S. government, it is hard to know whether anything has real value. The animal spirits are on full display.
It is in this fantastical moment that Coinbase, a household name for crypto trading, is planning its direct listing. The implications of such an offering is liquidity for founders, investors and employees, as well as the opportunity for deep visibility into Coinbase’s economics. Is the company worth $10 billion? Or $100 billion? In this analysis, we explore the question using a detailed financial model.
We then consider the valuations and multiples of capital markets protocols in decentralized finance, now making up over $60 billion in token value. Lastly, we look at Binance’s $1 billion in profits, its $35 billion BNB token and the activities on Binance Smart Chain. This context helps us understand and evaluate how Coinbase comes to market.
Last time we talked about Coinbase, we gave it a $15 billion valuation. Maybe it was right at the time, but it was fairly wrong given where things are going now. Today’s Coinbase private valuation is floating between $50 billion and $100 billion in the private secondary markets on Nasdaq. That distance made us revisit the financial model for the company with a February update.
The core drivers that changed are as follows:
- The last quarter generated $600 million in revenue, which was as much as the first three quarters combined. So we think 2020 year-end was somewhere around the $1.2+ billion range, and the company is annualizing at over $2 billion.
- The price of the core crypto assets doubled, doubled and then doubled again. When BTC is at $60,000 and ETH is at $2,000, Coinbase has a symmetrically large increase in its core business. Reminder that in July, BTC was at $7,000. As a result, cumulative trading volumes jumped to $450 billion from $200 billion.
- Institutional money has arrived, and the world’s richest man is Elon Musk and not Warren Buffett. Elon has chipped in $1.5 billion and Coinbase’s institutional custody and prime brokerage business has become 50% of their $90 billion under custody.
In 2017, Coinbase nearly hit $1 billion in revenue. The year before, it did between $10 million and $20 million.
Working backwards through the numbers, we see this was in large part driven by asset appreciation and massive surge in retail interest. How do you predict when that happens again? You can literally be working in the heart of the crypto ecosystem and not see it coming three months before it actually materializes.
We can project out continued moderately-aggressive growth in the crypto asset class, and see large increases in the Coinbase revenue base. While a lot of that will come from retail, we expect an increasing amount of prime brokerage business to start yielding results on the institutional side – perhaps generating $250-$500 million in fees. While the assets under custody are roughly the same, according to a year-end report from the company, the pricing on the two differs substantially.
Here is a simple print of the valuation history. We also project forward a 2021 valuation based on revenue.
What can we learn?
Coinbase has floated around between a 20x and 50x multiple depending on the year of operation. In 2021, we expect that multiple to be towards the higher end of the spectrum. And yet, how much and how fast can we expect companies with a $100 billion valuation to grow? This is a conundrum.
Second, we see revenue per user at about $50 for 43 million users. This is a fantastic feat. The ability to continue to extract these numbers depends on market volatility, of course. Last, we note that the implied $2,600 valuation per user metric feels quite high relative to the rest of the neo-banks, which sit at $500 to $1,000 per user. But who knows? We quote again from the ARK Invest "Big Ideas" report that a digital wallet user, or alternately a fintech bundle user, could be a $20,000 annual revenue customer.
We are excited about seeing Coinbase’s real economics because everything here is just a guesstimate. The direct listing will create a wave of crypto entrepreneurs and investors that will continue driving interest and creativity in the space.
DeFi as a $60 billion sector
Decentralized finance (DeFi) is not without its metrics. For the data-curious, you can figure out the amount of total value locked (TVL, collateralized assets), revenue from particular protocols, the directions of various cash flows and other financial metrics.
DeFi protocols including Uniswap, Sushiswap, Balancer and Curve are most like Coinbase in providing trading and market making functionalities directly on the Ethereum mainnet. The Ethereum computer executes the code that competes with Coinbase. We could also, for argument, look at Compound, Aave or Cream as the prime brokerage competitors. Those protocols provide leverage and transform various risks into other risks. But this is a smaller part of Coinbase’s business, so let’s put it aside for the moment.
Uniswap is running at $1.2 billion in annualized revenue, and at the time of making the chart was worth $6 billion in token market value. It is now at $7 billion. This is the problem of doing analysis in crypto using Excel. Uniswap’s volume of $100 billion runs a bit behind Coinbase’s $450 billion. But, honestly, that is a difference of timing and not an order of magnitude. If we were Coinbase, we would be a bit bothered.
Note also the difference in valuation – $100 billion vs <$10 billion. This is, we think, in part a discount on what UNI, the protocol governance token, really represents. If it were a security for shareholders, it should absolutely be worth 50x rather than 5x on revenue. But that ownership is held by VCs after an $11 million fund raise, so time will tell on how the value accrual will flow between the equity and the token. Notably, the prime brokerage/leverage markets protocols do trade at higher multiples – looking more like the 50x discussed.
One way to understand this is to say that expected growth is higher in the laggards than in the leaders. Another way to look at it is to say that revenue generation actually doesn’t matter, and it is engagement and usage that does. The simple measure of that is TVL, on the basis of which all DeFi protocols are more similarly priced, and float between 1x to 3x.
All that said, DeFi is now in the same league as Coinbase, with the various protocol tokens adding up to $60 billion.
Binance at $200 billion
If Coinbase is some sort of crypto Superman, Binance is the shadowy Batman. Or perhaps Coinbase is Wonder Woman to Binance’s Catwoman. (You get the idea. We’re nerds.)
Binance is deeply impressive on multiple fronts. As a centralized exchange founded in 2017, it has survived multiple in attempts to shut down bitcoin trading in China. It is multi-jurisdictional, holding redundant licenses across the long tail of small countries willing to grant it the equivalent of economic asylum. It is also aggressively inclusive, having a reputation for the widest selection of assets and a lightning quick propensity for execution.
On top of that, it launched an exchange token that mattered – BNB. And it did the launch when initial coin offerings were starting to sour. The token made promises of future features, and functioned largely like a referral mechanism for affiliate trading fees. This catapulted Binance into volume that would make Coinbase blush. Here are the key 2020 numbers.
Look, $3.88 billion in average daily trading volume times 365 days in a crypto year is $1.4 trillion in volume. Naively, that’s about three to five times where Coinbase is today. With the lowest trading fees of a 0.1% spread, we are looking at $1.5 billion to $5 billion in revenue for the company. That ignores all the revenue from its derivatives footprint and a variety of other revenue sources; 2020 profits will be in the $800 million to $1 billion range.
Now, just because Binance is crushing it, doesn’t mean Coinbase isn’t crushing it. Everything is relative, but the space does grow better together. For example, Binance will not be able to be America’s institutional crypto chassis, and that adoption is a big driver of capital appreciation. And yet, even with a regulatory risk valuation haircut, a 40x multiple on $5 billion in revenue gets you a $200 billion company in 2020. Who knows what the next year will bring? But we can see Binance becoming an Ant Financial-sized company given its current growth path.
Lastly, Binance is now assimilating the Ethereum DeFi ecosystem through a variety of open source copying/forks. It launched the Binance Smart Chain in 2020 to be compatible with Ethereum. However, the chain is widely criticized for being centrally managed and therefore not performing the core function of blockchain, i.e., censorship resistance and decentralization. It is more akin to a private cloud.
Just because Russian Facebook clone VKontakte looked like Facebook at first hasn’t prevented it from creating $40 billion in annual revenue.
Similarly, Binance is capturing an audience of people for whom true decentralization is not currently a meaningful goal. Now that will very likely change over time if sovereigns attempt to seize more of Binance’s assets, including those on the chain it controls (think Mt. Gox) or if Binance compromises its reputation. As decentralized solutions become faster and cheaper, more controlled environments will also appear less attractive.
At this particular moment, regular people have not fully grokked the core importance of the digital scarcity that Ethereum manufactures and provides. As a result of this market environment, the BNB token currently stands at a $38 billion market capitalization, or four times revenue like UNI and SUSHI.
Absolutely none of the above is an investment recommendation or specific financial advice.
Rather, we want to help you get oriented to the market valuations of the different types of players that touch crypto capital markets. Because, let’s face it, a massive amount of emotion and attention will be spent on taking these companies public and finding new ways to regulate them and turn them into banks. The windfalls from these activities will continue to grow and expand the crypto fractal. If you are reading this, you are at the very edge of that expansion.
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