The ascension of Coinbase Global (COIN +0.02%) stock after it debuted on the Nasdaq in April 2021 likely marked the pinnacle of the most recent crypto bull run. Peaking at $369, shares of the crypto exchange have had a brutal descent since and have shed more than 80% of its value, trading for about $63. Most of the blame for this lackluster performance can be placed on a weaker cryptocurrency market.
Coinbase generates the bulk of its revenue from transaction fees on cryptocurrency purchases and sales on its trading platform. But the current crypto winter caused Coinbase's revenue to fall more than 60% in the past year. Yet, despite this pummeling, the company is building for a brighter future.
The institutions are coming
One of Coinbase's most impressive achievements in 2022 was related to its development of offering institutional investors crypto exposure. Although retail investors are more numerous, institutional investors typically have much more capital at their disposal.
Coinbase is building out its institutional product suite to take advantage of this lucrative universe of investors. Named Coinbase Prime, this software lets institutional investors easily gain data insights and purchase crypto. Coinbase's goal is to become the primary solution for institutional crypto investors -- and the numbers seem to be proving it's on that track.
Since 2020, the number of institutional clients using Coinbase Prime has doubled and now sits at more than 14,500 users. But arguably the most important institutional client Coinbase partnered with happened just this year.
In August 2022, the world's largest asset management company, BlackRock (BLK +0.00%), agreed to a landmark deal with Coinbase. Although Bitcoin will be the only cryptocurrency accessible to BlackRock clients, the plan is for Coinbase Prime to integrate with BlackRock's portfolio management software, Aladdin, so users have the ability to gain exposure easily and seamlessly within the existing product.
This agreement could produce two benefits. First, it signals a growing trend among institutional investors looking to gain exposure to crypto. As a leader in asset management, BlackRock's actions will likely be followed by other competitors such as Fidelity, Charles Schwab, and Vanguard.
Second, garnering attention from BlackRock gives Coinbase a sort of stamp of approval and makes it the de facto leading provider of institutional crypto solutions.
NASDAQ: COIN
Key Data Points
More progress is being made
To further diversify its revenue, the crypto exchange is creating new business models that revolve around subscription-based services, rather than just transaction fees.
Chief Executive Officer Brian Armstrong provided investors with a clear vision of where the company is headed, saying that he hopes Coinbase can "get to a place where more than 50% of our revenue is subscriptions and services." Subscriptions and services now account for 18% of profits, but have grown from just 5% last year.
To reach this lofty goal, Coinbase will pursue development of multiple products and new models. The first is called Coinbase Cloud and provides blockchain developers with infrastructure to build Web3 applications. It's similar to Amazon Web Services, but tailored to blockchains.
In addition, Coinbase is expanding its staking business. Coinbase makes staking easy for users and profits from this model in two ways. By staking, Coinbase earns blockchain rewards and also generates profit from custodial fees users pay to securely store their cryptocurrency on Coinbase.
Lastly, Coinbase is providing a new trading plan for investors who buy and sell cryptocurrencies regularly. For $30 a month, investors can now waive those pesky transaction fees and make unlimited trades.
Unfavorable conditions limit growth
For Coinbase's stock to escape these depths, it will need more than just some changes to its business model. Until macroeconomic conditions like inflation and interest rates start to come down, the chances of Coinbase generating any real momentum are slim. As Armstrong said, this most recent bear market "just happens to coincide with the broader macro environment coming down."
However, should Coinbase continue to build great products, Armstrong believes that it's "going to do fine over the next five or 10 years." Vindication in this belief stems from the fact that Coinbase has been around since 2012 and Armstrong has led the company through several crypto winters. Although this one might be more challenging, Coinbase has been here before and is proving that it's preparing for better days ahead.
