Summary Blockchain investing has generated alpha in recent years, and I believe there's still meaningful upside potential and momentum. Coinbase is my largest personal investment with a four year investment horizon. The Trump agenda of cutting taxes while simultaneously reducing the budget deficit points to the necessity of DOGE to deploy blockchain technology in the public sector. Coinbase is heavily invested in legacy and emerging cryptocurrencies, meaning there is lots of room for its balance sheet to appreciate as blockchain technology assets rise in valuation. I expect increased prices of cryptocurrencies and elevated trading volume to contribute to Coinbase's bottom line more than the market currently expects. Thesis Coinbase ( COIN ) is currently my largest personal investment, as I mentioned in my recent article, TBT: Inverse Bond Exposure Is The Key Hedge to My Trump Portfolio. Crypto can be tough to write about, but I'm glad that a couple years ago, I published a Strong Buy call on Ether in Grayscale Ethereum Trust: Buy This NAV Discount Opportunity. I recently converted the investment to ( COIN ) for several reasons. For one, I am generally very bullish on the underlying fundamentals of blockchain technology. I've followed the space all my career, and I remain confident in the positive vision I have expressed in my prior work. The real economic and social benefits of its societal integration outweigh the costs and risks in my opinion. I've concentrated my real money portfolio on blockchain exposure through ( COIN ) for the following reasons. Coinbase casts a wide net into the growing blockchain business environment, while it trades with strong correlations to the major three cryptocurrencies, plotted below. Holding a wide variety of tokens, Coinbase's balance sheet presents a stake in many smaller ecosystems with identified use cases and distinct upside potential. Data by YCharts 2. Coinbase stands to make money in a bear market through potential surges in transaction volume, elevated fees, and demand for short exposure trading products. Recent expansion into derivatives trading should further grow revenues and make the platform useful to the financial community in all market conditions. 3. A centralized and institutionally trusted cryptocurrency exchange like Coinbase is the gold standard for moving cryptocurrency into "TradFi" cash and accessing connectivity to the ACH network. The name and reputation of the exchange making the market for any given asset speaks distinctly to the risk of the investment. Coinbase is reputable to me and fully compliant in its offerings in my experience as a customer with them. Lots of Upside Potential for Future Valuations Investors must be comfortable with the fact that Coinbase's book value fluctuates dramatically with the crypto markets. I also suggest that investors spend some time becoming familiar with Coinbase Ventures, which is the only public information on the projects in which Coinbase has a stake. The image below shows the most current balance sheet, disclosed in the most recent 10-K a little over a week ago. The majority of assets are either cash or crypto holdings. Coinbase Global, Inc. Crypto assets held for investment is the line that piques my interest. Amounting to an excess of $1.5 billion at year end in 2024, it is up more than 4x YOY. The key question is whether these numbers represent predominately capital gains or other capital invested into cryptocurrencies. The information below breaks out assets held for investment on Coinbase's balance sheet. Coinbase Global, Inc. The difference between cost basis and fair value shows Coinbase's successful investment operations across the portfolio. Some analysts have shrunk Coinbase to a secular Bitcoin opportunity. While Bitcoin is the largest investment holding on the balance sheet, hundreds of millions of dollars have been invested successfully across Ethereum and other blockchain projects, so I warn against such thinking. The balance sheet is further buffered beyond crypto with over 60% growth in cash holdings YOY. USDC holdings more than doubled to over a billion dollars, as Coinbase strategically positions itself as a leading integrator of fiat and crypto currencies. Customer deposits into custodial accounts grew over 40%, reflecting the increased value-add and reputation of Coinbase as a leading depository institution for cryptocurrency. Most importantly, Coinbase expanded its book value nearly in lock step with valuation changes over the past year. Mere 6% expansion of the price/book value, given the momentum in the crypto market fundamentals, reflects to me that the security is likely undervalued, as the multiples should be expanding as earnings improve and the balance sheet assets appreciate rapidly. Undervalued Revenue And Earnings Growth What I find particularly attractive about Coinbase is that, as an equity rather than a crypto, it generates income the old-fashioned way, through business operations. Operating income is at an inflection point, as FY 2023 yielded operating losses. As I argued in the prior section, with Coinbase you get index-like exposure to an array of coins, but it is essential to highlight the operations that generate income and cash flow available to further strengthen the balance sheet. In the most recent 10-K mentioned in the prior section, Coinbase disclosed that it earns increased revenue through both higher coin prices and higher trading volume. I found the following data worth pointing out. Coinbase Global, Inc. Coinbase disclosed, "Trading Volume growth outpaced the 105% growth in overall U.S. spot market trading volume, as we were able to capture a larger portion of the trading activity due to our competitive position and product strategy." I am particularly bullish on the "Other crypto assets" growing proportion of total volume, as it highlights interest and liquidity in Coinbase Venture's appreciating investments. Elevated trading volume and coin prices have driven triple digit revenue growth year over year. Coinbase discloses its revenue in categories of transaction revenue, subscription and services revenue, and other revenue. Total transactions revenue grew 162%, while subscriptions revenue grew 64%. While transaction processing is my main focus as an investor, I do not underestimate the trading fee schemes that Coinbase has created through retail products like Coinbase One that incentivize trading activity through reduced fees based on user transactions. The majority of the transaction volume in institutional, 4-5x that of retail, and the vast majority of transactions revenue comes from retail, at around 10x the revenue generated from institutions. I therefore believe that in terms of valuation, Coinbase deserves a higher multiple than Robinhood ( HOOD ) which is unlikely to attract much institutional money at all in my view. A recent article by Seeking Alpha News Editor Max Gottlich lays out the competitive advantages indicated by total market share favoring Coinbase. Read his article if you haven't already and note additionally that Robinhood is worth about 17x its sales, while Coinbase is at only at around 10x its sales. With relatively modest increases in operating expenses, Coinbase grew net income from $95 million in 2023 to $2.6 billion in 2024, and I do not think the markets have reacted appropriately to this announcement, or have passed it off as "windfall" due to the election result. DOGE Likely To Stimulate Crypto Markets On January 23, 2025 President Trump signed "Strengthening American Leadership In Digital Financial Technology" which has several important implications for the crypto markets. Cryptocurrency can be viewed as a commodity, literally referred to as "gas" in the crypto community, and several nations have already developed strategic reserves either by passively holding seized Bitcoin or by investing directly in it. There is potential for the U.S. government to actively move public funds into crypto assets, which would endorse investing in the technology to the general public. In my view, DOGE is likely to pressure the Federal Reserve to begin conducting open market operations in crypto markets and/or through blockchain technology to enforce a rules-based approach to monetary policy. Blockchains can help government agencies operate more efficiently, reducing the need for expensive personnel to conduct tasks related to determining and collecting taxes, making transfer payments, issuing benefits, and collecting/storing data to enforce the law. My interpretation of Trump's mass firing of government administrators i s that it is can only be justified by the incorporation of some technological replacement, and that would likely be blockchain technology. Both these forces, if they come into fruition, will propel coin prices higher, increase trading volume, and boost Coinbase's balance sheet. As a value and growth investor, I am not as concerned about the fundamental picture of the past. The fundamental picture of the future, to the extent we can envision it, should be the determinant of valuation. I predict DOGE to be a multifaceted driver of fundamental growth in Coinbase. It is currently a good value to me, because I do not believe the magnitude and probability of its sustained growth potential are priced in. Risks To My Thesis There are several risks to my thesis worth pointing out. In the very long run, I am not sure that centralized exchanges like Coinbase will prevail over decentralized exchanges, which are essentially deployed blockchains to transact cryptocurrencies. Mitigating this risk are the compliance concerns that these exchanges present, operating in legal grey area with extremely leveraged derivatives and lots of meme coins. Another risk is severe contraction of the book value in a crypto bear market, though this seems like an off-chance event to me. Near term, I am expecting interest rates to increase in response to inflation, and for the Trump tide to raise valuations across all asset classes on account of real GDP growth. Finally, as a canary in the coal mine when it comes to regulation, Coinbase will likely be the target of anti-cryptocurrency lawsuits. It may well be Coinbase that finally settles whether or not cryptos are securities. Recent news of lawsuits against Coinbase have caused volatility. In my opinion, a mitigating factor here is Trump's power and willingness to fire and/or replace officials, specifically bureaucrats, that preclude his authority. Final Remarks U.S. Presidents are studied very carefully, over centuries. For me, Trump's DOGE creation and blockchain interest stand to make him the Thomas Jefferson of the technology New World. As Jefferson completed the Louisiana Purchase, setting the U.S. up for its "manifest destiny" to expand from sea to sea on Earth, Donald Trump appears to be similarly pushing the envelope by pushing to stick flags into the technology landscape, starting with blockchain. Through several different channels, Donald Trump's creation of DOGE should drive increased trading volume and elevated prices of cryptocurrencies, which are key drivers of Coinbase's earnings. Coinbase is heavily invested in the next generation of blockchain innovations, while also exposed to leading blockchains, giving investors the best of both worlds and two paths to a higher valuation. I reiterate that Coinbase is a Strong Buy.
