A Deep Dive Into The Coinbase Business Model

Transcript

I do want to bring us back to what uh you know Coinbase because you mentioned something which is there seemed to be a lot there first mover advantages often produce a lot of value. You know Coinbase for a long time it and still is the dominant synonymous when people in the US at least want to buy crypto. Coinbase is top of mind, has been for a while, then you can think in second there is is Kraken, but they've had some regulatory modes and they've had some some, you know, um advantages around that. Um, of course, they have great contract on the USDC, right? They they negotiated that one. Well, but you had a really interesting tweet which I'm going to reference now um that I'd like to just make it center. I think it fits

so much into the discussion of what are fundamentals and how you think about that. So you tweeted um this uh April 10th you said honestly don't know how coin survives hood and bulge brackets will win trading business custody has no moat stablecoin interest income is going to zero presumably because rates go down. Um their customers hate them. Look at the comments. Acquisitions have been flops. Management makes baffling decisions buying back 0% debt. Not to mention they um you know constantly support the VC community while putting zero efforts into supporting secondary trading. Um and um you know of course they they've

listed some assets but not others and uh their Coinbase Ventures uh team like the assets in that book get listed and they haven't listed Hyperlid for instance. So these are some of kind of the things that you tweeted. So, I'd like to just go one by one or just overall walk me through your thesis for coin. Talk about what made you think about this and tweet it. Sure. Um, and just be clear, I mean, we have no position in coin. We're not we're not shorting it. It's not like I I think it's going to zero tomorrow. Um, you know, we we've been customers of Coinbase for, you know, since inception at Arca. We've we've, you know, been fortunate enough that across multiple different divisions of our business, you know, we've touched almost every

business line that Coinbase has. Um, and it's it's not a great experience as a customer. Um, but that's not a reason to think that the stock won't go higher, right? Just because we um, you know, don't particularly like the services doesn't mean others won't like it. But, but I think, you know, going down the list of what you just read off, I I think it's a really just hard business to wrap your head around. So, so let's let's go back to when Wall Street first started covering the Coinbase stock, right? When they did the direct listing. You can start right there. The direct listing was just a baffling decision in the first place. Like, why not hire an investment bank and actually build a book and actually do a road show and actually do the things that actually make people care about your stock and

understand your company? The direct listing was like, it almost seemed like it was like a random decision at like 2 am at a bar. They're like, "Hey, let's just, you know, we're Coinbase, we're crypto. We're we're we're anti-Wall Street. Therefore, let's do it without Wall Street." Like that's not how it works. Like if you're going to issue a stock in a new industry, I mean look at the coverage you have of Wall Street analysts who cover it. So sometimes it's their tech coverage. Sometimes it's a brand new digital assets unit. Sometimes it's their banking unit. Like you have multiple different types of analysts across these Wall Street banks covering the Coinbase stock because nobody even knows what it is. Is it a is it a fintech company? Is it a bank? Is it a you know some new entity that they don't have coverage of yet? um you have to

educate and first of all they probably should have just done a fully you know underwritten uh offering instead of a direct listing or if you want to just buy into the crypto ethos go completely the other way and tokenize your stock and say if you want to get you know exposure to the hottest and most diversified company in crypto come you know open up a wallet and buy a tokenized version of the stock uh through our Coinbase wallet or something like that right I mean there's other avenues they could have done so even just even just the beginning of Coinbase's journey as a publicly traded company was a baffling decision in my opinion. But then you just look at some of the things that they've done and the reason Wall Street kind of hated the Coinbase stock at first was because 99% of their revenue was being driven by um

you know retail trading at a super high fees, right? I mean if you go on the retail Coinbase app, you're paying like 3% per transaction, which is insane. And everyone everyone in Wall Street knows high margin businesses eventually go to zero, right? Isn't that what Jeff Bezos said? like your margin is my opportunity because somebody's going to eat into that high margin business. So the the the initial Wall Street analysts and including you know I'm I'm using the word Wall Street loosely but traditional stock analysts kind of hated the the Coinbase business because it was so one-dimensional and to Coinbase's credit they said okay we have to fix this. So that's why they started looking at other business lines, right? That's why they started looking at institutional and prime and custody and uh making acquisitions and um ultimately base and and the circle stable coin stuff. So to

their credit, they recognize that and they tried to diversify, but when you actually look at what they have, it's just sort of a series of businesses that don't work together in any way, shape, or form. And they all have massive competition and no moat in my opinion. So, for instance, like you know, if you use Coinbase custody and you also use the Coinbase exchange or Coinbase Prime to trade, they don't talk to each other. It's not like it's not like a true prime brokerage experience where, you know, if I have a prime broker and I'm like, "Hey, I want to go buy this stock. I just go ahead and buy it." And then my prime broker later finds the cash and settles the trade. If you have assets at Coinbase custody and you want to go sell it on the exchange, you can't even do

it. you have to wait like 48 hours for them to locate it at Coinbase custody, move it over to the exchange. The exchange and the custody don't even talk to each other and it's like it's just a horrible nonseamless uh process. So, and and that's that's just one example of a lot of different business units that they have that just don't work together. They don't talk to each other. So, like their effort to diversify the company made logical sense, but the way they went about doing it just really didn't work. Um, and then you know, you go further into what their business lines and the stuff you read and it's like, okay, well, on the retail trading side, Robin Hood does everything Coinbase does and probably does it better because it's a better app and it's a, you know, you can trade stocks, they have way more

distribution, so they have the funnel for stocks that they can then eventually port over to crypto. Yeah, exactly. I mean, people want a seamless experience. Like, I don't want to be like, all right, let me go to Meil Lynch and trade my Tesla stock and then let me go log into Coinbase and trade my Bitcoin. It's like, no, I want to do it in one place. I'm going to go to Robin Hood. I'm gonna trade my Bitcoin. I'm gonna trade my Tesla all in the same place. So, I don't understand how they're going to compete with with retail when Robin Hood is basically going after their business. We already know that the big custodians, State Street and BNY are going to start getting into custody, not to mention banks, you know, after some of these uh uh rules that are coming out of Washington. So, I don't know how they

compete on custody alone. Like, that seems like a, you know, basically a zero zero margin business over time because there's going to be such high competition and such low rates. Um the stablecoin stuff is just baffling as well. For those who don't know, like Circle's about to go public. So if you read the S1 on Circle, um they basically have a relationship where uh uh you know, Circle, who runs the USDC stable coin, they're paying BlackRock to effectively manage the treasuries that they own and then they're paying Coinbase for the distribution of it. Um but basically all of Wall Street is built on float. You know, who can actually earn the interest? There's no way that stable coins are going to exist forever where Coinbase and Circle take all the money and the actual owner of

the stable coin gets nothing. So either rates are going to come down and that interest income goes away because rates are coming down or there's going to be competition out there where they actually pay out the yield to the person who owns the stable coin, not just the um the issuer of it, right? I mean, Tether makes 13 billion a year, Circle makes a couple billion dollars a year, and Coinbase gets half of that. Like that's just I don't think that's going to survive. I think eventually that interest is going to have to be passed through to customers. [Music]