Investing in Cryptocurrency Startups: The Next Coinbase

Capital Flows to Crypto Exchanges Amid Coinbase Earnings

Today’s earnings report from Coinbase has coincided with significant investment activity in competing cryptocurrency exchanges globally.

While presented playfully, the timing is notable; private investors have recently injected $210 million into an alternative exchange platform.

FalconX Valuation Soars

The recipient of this investment, FalconX, is now valued at $3.75 billion. Bloomberg reports this represents a five-fold increase in valuation within a mere six months.

FalconX previously secured a $50 million funding round in March, with participation from Coinbase Ventures.

This surge in funding for FalconX isn’t an isolated incident. CoinDCX, an Indian crypto exchange, recently raised $90 million, achieving a $1 billion valuation.

Furthermore, Pintu, an Indonesian cryptocurrency exchange, secured $35 million this past weekend.

Earlier in the year, FTX, a Hong Kong-based crypto exchange, raised a substantial $900 million at an $18 billion valuation. These instances demonstrate a broader trend.

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A Global Race for the Next Coinbase

A considerable amount of capital is being directed towards a worldwide competition to identify and fund the next major cryptocurrency exchange, akin to Coinbase.

This investor interest is understandable, given Coinbase’s proven success during periods of high crypto engagement. The U.S. exchange reported $1.8 billion in trading revenues during the first quarter of 2021, as detailed in its latest 10-Q filing.

This revenue translated into a net income of $771.5 million for Coinbase. On a per-share basis, the company achieved earnings of $3.05 per diluted share.

Coinbase Earnings Expectations

These were impressive results. Current analyst forecasts predict Coinbase will report revenue between $1.77 billion and $1.83 billion today, with earnings per share around $2.57.

Based on the company’s Q1 performance, it’s possible to estimate the corresponding net income from this EPS figure.

Typically, Coinbase’s earnings would significantly influence venture investment and valuations within the private crypto exchange sector. However, the substantial capital already invested in numerous startups globally aiming to become the leading exchange in their respective markets suggests this influence may be lessened.

Understanding the Competitive Landscape

Instead, Coinbase’s earnings and market commentary will provide valuable context for understanding the environment in which these other crypto exchanges are operating, albeit from a primarily U.S. perspective.

Coinbase generated approximately 81% of its revenue from the domestic market in the last quarter, offering a relevant data point.

Nevertheless, opportunities for analysis remain. We can compare trading volumes and valuations to assess which exchanges appear overvalued or undervalued.

Let's delve into the data to explore these comparisons.

Trading Volume as an Indicator of Revenue Potential

According to its 10-Q filing for the quarter concluding March 31, 2021, Coinbase experienced a trading volume of $334.74 billion. This represents a substantial increase of 1,022% compared to the $29.83 billion recorded in Q1 2020.

The company’s transaction revenues – specifically those derived from trading – totaled $1.54 billion for the same period. Consequently, Coinbase generated approximately $0.0046 in revenue for every dollar of cryptocurrency traded on its platform during that quarter.

It's important to acknowledge that the following analysis involves speculative calculations. The results should be considered directional rather than definitive. Evaluating the valuations of other exchanges based on their trading volumes will provide valuable insights, but requires further data.

More comprehensive S-1 filings and similar reports will be necessary to achieve a higher degree of certainty.

However, with Coinbase’s figures established, let’s gather data from other sources:

• FTX Volume: Reported at $10 billion per day, as per CoinDesk.
• FalconX Volume: Estimated at $10 billion monthly, according to Bloomberg.

Obtaining precise verification proves somewhat challenging, but FTX’s own volume tracking page indicates a total trading volume of $12.58 billion yesterday. A significant portion, exceeding $10 billion, stemmed from derivatives trading.

This aligns closely with the previously stated daily figure. Considering these values, FTX appears to process around $900 billion in quarterly volume, while FalconX handles approximately $30 billion.

This positions Coinbase within a comparable range of quarterly trading volume when compared to these two exchanges.

Acknowledging the potential discrepancy between Q1 2021 Coinbase data and the more recent figures from FTX and FalconX is astute. However, investor expectations suggest Coinbase will report comparable revenue figures for the second quarter.

This minimizes the impact of the time difference on our comparative analysis. It’s crucial to remember that we are primarily engaged in directional calculations.

Applying Coinbase’s revenue per dollar transacted, we can estimate the potential performance of these exchanges:

• FTX Quarterly Revenue (implied): $4.14 billion.
• FalconX Quarterly Revenue (implied): $138 million.

With a valuation of $18 billion, FTX’s current valuation appears remarkably low, potentially due to a different fee structure impacting revenue. Even with a reduced take rate, the company would still demonstrate substantial financial strength.

This analysis clarifies the rationale behind the significant capital investments made in FTX earlier this year.

FalconX, valued at $3.75 billion, exhibits an implied yearly run rate of approximately $552 million. This valuation also appears conservative, though less dramatically so than FTX’s.

Potential headwinds exist. Robinhood has indicated declining trading volumes and revenues for the third quarter. Given Robinhood’s considerable exposure to cryptocurrency trading, these warnings are significant.

A decrease in crypto exchange revenue during the latter half of 2021, compared to the initial surge, is a possibility. Such a decline could affect the revenues of all the exchanges discussed.

However, investors anticipate this cyclical pattern. The inherent volatility of cryptocurrency trading demand, and its impact on revenues, is a known factor. This likely contributes to Coinbase’s current valuation of approximately $73.5 billion.

Despite its historical growth rate, a higher valuation might be warranted. However, factoring in anticipated seasonality and uneven growth, slightly lower multiples – compared to software companies with similar profiles – may be justified.

Coinbase will release its latest report later today. Many industry stakeholders with recent investments will be closely monitoring the results, hoping for positive outcomes to support existing valuations or even justify upward revisions.

Regardless of the reported figures, Coinbase’s public success has demonstrated to investors that crypto exchanges can achieve substantial revenues, profits, and attractive valuations through initial public offerings. This is a significant catalyst for venture capital investment.

Further analysis will follow once Coinbase’s numbers are released.