Coinbase, Inc. is a company that provides digital currency wallets. Coinbase provides a platform that allows users to transact in bitcoins, along with a global digital asset exchange and merchant solutions.
Additionally, it provides a platform for customers, merchants, and cryptocurrency exchanges to buy, sell, and store Bitcoin, Ethereum, and litecoin.
The company also runs the Global Digital Asset Exchange (GDAX), a cryptocurrency trading platform for Bitcoin, Ethereum, and Litecoin. It also contains an application programming interface (API) for creating Bitcoin addresses and wallets.
Coinbase business model is a product business model where the platform users and businesses buy/sell/store digital currencies.
What is Coinbase?
Coinbase is a cryptocurrency exchange platform where users may purchase and sell bitcoins. The company’s services extend beyond trading; clients can store assets, obtain a Coinbase credit card, learn about cryptos, and accept crypto payments through their e-commerce store.
Coinbase’s business model revolves around cryptocurrency trading fees. A custody service and revenue from startup investments round out the revenue streams, along with credit card transaction fees for course promotion.
The company, headquartered in San Francisco and founded in 2012, is now the first widely adopted bitcoin startup. Coinbase plans to list on the stock exchange in 2021.
How Does Coinbase Work?
Coinbase is a digital currency trading platform that offers consumers to trade a variety of digital currencies. Customers can buy and sell more than a dozen different types of cryptocurrencies, such as:
… and plenty others. Moreover, the Coinbase Pro and Prime platforms enable a greater level of customization for consumers and institutions. The Coinbase API allows traders to access real-time market data and create automated trading bots.
Consumers can sign up for the Coinbase Wallet (also known as a crypto wallet) along with the Coinbase trading platform (alternatively referred to as an exchange wallet). Coinbase Wallet is available on Android and iOS as a separate app.
The two primary distinctions between the exchange and crypto wallet are that the latter is a) more secure (by storing data on the user’s device rather than on Coinbase servers) and b) enables cryptocurrency transfer between wallets.
Furthermore, the wallet simplifies the process of exchanging products and services. Individuals can use their cryptocurrencies for advertising employment and pay.
Coinbase offers a variety of additional goods and services to both individuals and businesses, in addition to the trading platform.
The company developed USD Coin (USDC) as a cryptocurrency. A USDC is always redeemable for $1.00 because it is pegged to the US dollar. Coinbase is a platform that facilitates international transactions using cryptocurrency based on the Ethereum platform.
You can purchase and sell USD Coin on Coinbase, plus more than ten additional trading platforms.
Coinbase also offers various educational classes on cryptocurrencies like Dai and EOS. Users receive these currencies as a reward after completing a course.
The Coinbase Card is a VISA debit card issued by Coinbase, which consumers can acquire. The card comes with an app that lets you track your spending. Customers can use the card to spend their accumulated cryptocurrency in real life.
Coinbase Commerce also provides tools for businesses to accept digital currency payments.
Coinbase, like other payment providers like Stripe and PayPal, has developed plugins for major eCommerce platforms, particularly Shopify, WooCommerce, and Magento. A user merely needs to install the plugin, and they may get started immediately.
Coinbase Commerce claims to have processed more than $200 million in cryptocurrency transactions since its launch.
How Does Coinbase Make Money?
The business model of Coinbase has evolved significantly since its inception. The company was originally primarily dependent on trading fees but now generates revenue from several additional sources.
Coinbase makes money in many ways today, including trading fees, maker and taker fees, interchange fees, interest on cash, sales of software tools, and interest on personal loans.
Let’s take a closer look at each of these income tiers.
Coinbase’s primary source of revenue comes from the fees it charges to purchase and sell cryptocurrency.
Coinbase’s commission system is tiered, which means its fees differ based on location and volume of transactions. The following is how the corporation breaks it down:
- The cost is $0.99 | €0,99 | £0,99 if the total transaction value is less than or equal to $10.
- If the total value of the transaction exceeds $10 but is less than or equal to $25, the fee is $1.49 | €1.49 | £1.49.
- If the total transaction value exceeds $25 but does not exceed $50, the cost is $1.99 | €1,99 | £1,99.
- If the total value of the transaction exceeds $50 but does not exceed $200, the fee is $2.99 | €2,99 | £2,99.
For example, if you live in the United States and wish to purchase $100 worth of bitcoin using a US bank account or a USD Wallet, the flat cost will be $2.99.
A spread margin is applied when a user trades currencies (e.g., $100 worth of Bitcoin for $100 worth of Litecoin). The spread margin for cryptocurrency is approximately 2% but is subject to market swings in its price.
Furthermore, consumers will be required to pay a payment processing fee, which may vary based on their location and payment method preference. An American cardholder is purchasing with a credit card results in an additional cost of 3.99 percent.
The firm generates the bulk of its revenue from fees. Coinbase indicated in its S-1 that fees account for more than 90% of its income.
Credit cards are completely free for clients to obtain and use. The transaction fee, which Coinbase earns from every transaction with that card, is how Coinbase makes money.
Any time you use a credit card to pay, you will be charged fees (so-called interchange fees). A merchant will be required to pay the funds after the deduction of the total volume of transactions.
VISA and Coinbase do not disclose their fees publicly, but it is reasonable to assume that they have a revenue-sharing arrangement. Numerous FinTech startups, such as Brex and Revolut, operate under a similar agreement and business model.
Coinbase also charges ATM fees (for cash withdrawals) and a 2.49 percent cryptocurrency liquidation fee (for users who do not use USDC).
Coinbase announced the debut of their Visa debit card in October 2020. Card membership was previously restricted to Europe and the United Kingdom.
Debit cardholders in the United States are eligible to receive cashback benefits. According to the firms, you can earn up to 4% in Stellar Lumens or 1% in Bitcoin.
Many businesses today offer cashback without paying for it. The incentive is instead sponsored by advertising partners who pay for the costs.
In this instance, the advertising partner (Coinbase) is also compensated through affiliate commissions for marketing their products and services.
We may assume that Coinbase is reimbursed in the case of Stellar Lumens, at least.
Coinbase Pro & Prime
Traders who make their living by trading cryptocurrencies will benefit from Coinbase Pro and Prime. There are many additional features to the goods, including the following:
- Advanced filtering options and a complete trade history API are available to help you access real-time market data and develop trading algorithms.
- Insurance coverage for digital assets (up to $250k) in the event of a hacker assault
- A dedicated Coinbase team will assist Prime members in integrating the program.
- While the tools are free, clients will be charged when purchasing or selling currencies.
- Coinbase calculates its trading costs using a so-called maker-taker fee model.
If you place an order close to the market price and it is immediately filled, you are considered a taker, and you will pay a rate of between 0.04 percent and 0.50 percent.
Whenever you place an order that does not match an existing order immediately, it is added to an order book. A fee ranging from 0.00 percent to 0.50 percent will be charged if another client submits an identical purchase.
The fee structure for Coinbase Prime is somewhat reduced because most of its customers are companies that conduct daily transactions worth millions of dollars.
Interest On Cash
Coinbase, just like any bank, lends the funds in its customers’ accounts to other parties, including other banks.
They are then paid interest by these institutions (also known as Net Interest Margin). Statista shows that all banks in the United States had a net interest margin of 3.35 percent in 2019.
Custody refers to the act of holding securities on behalf of another client. Coinbase Custody will, on the other hand, hold and store crypto-related assets on behalf of third parties.
Coinbase Pro and Prime users can connect directly to the tool, including several features, such as financial reporting tools, audited statements, capital insurance, and four-hour withdrawal SLAs.
The Coinbase Custody unit is a wholly-owned subsidiary of Coinbase Inc. Custody services offered by Coinbase are governed by the New York Department of Financial Services (NYDFS) as fiduciaries.
Users must deposit a minimum of $1 million to become members of the custody service. Coinbase makes money by charging a $10,000 implementation fee.
The corporation charges a 50 basis point custody fee (annualized). A consumer with $10 million in their account will be charged $50,000 (10,000,000,000 x 0.0050). (Paid for the entire year).
CEO Armstrong estimated that the company received $200 to $400 million in deposits per week from institutional customers in 2019.
Coinbase’s cryptocurrency classes help customers learn more about new cryptocurrencies.
The user will earn a payout in the currency of the course once the course has been completed. Users must watch many videos and respond to questions after each video to complete a course.
It was acquired by Coinbase for $120 million in 2018 when Earn.com was acquired by Coinbase. The founders of Earn.com founded the company as a means to connect busy professionals with small fees.
Those busy individuals would receive cryptocurrency as compensation for accepting the requests.
Coinbase has not made any public agreements about these cryptocurrencies to date, so it may be assumed that they are not advertising voluntarily.
Coinbase will instead charge a fixed or referral fee to the company that created the currency.
Coinbase announced in August 2020 that customers would be able to apply for personal loans. Cryptoassets serve as collateral.
A limited number of states within the U.S. are now offering the service. A user can borrow up to 30% of their Bitcoin balance and a maximum of $100,000 (a $2,000 minimum volume is required).
Coinbase earns money from these loans by charging interest. An 8% annual percentage rate is charged on company loans. You have one year to pay back the loan.
A document reveals that both the Drug Enforcement Administration (DEA) and the Internal Revenue Service (IRS) intend to opt into a Coinbase product called Analytics between April and May 2020.
Coinbase began working on Analytics following the acquisition of intelligence firm Neutrino in 2019. The Neutrino acquisition caused considerable controversy due to the founders’ involvement with Hacking Team, an Italian spyware outfit. Coinbase ultimately severed ties with members of the Hacking Team.
The Analytics software collects cryptocurrencies’ macro- and micro-analysis data from publicly available sources (and does not rely on Coinbase customer data).
The program is currently sold on a contract basis. The Secret Service signed a $183,750 contract that expires in May 2024, for example.
Coinbase Ventures was formed in 2018 as a specialized investment team. The fund invests in blockchain and cryptocurrencies companies at an early stage.
The Venture unit may sell shares in the companies they invest in for a profit (if they don’t acquire them) even if their primary objective isn’t profit.
What is the Funding and Valuation of Coinbase?
Crunchbase reports that Coinbase has raised $547.3 million in nine rounds of funding. Coinbase raised $300 million in a series E financing round valued the business at $8 billion.
The company is expected to list directly on the public markets. Experts believe Coinbase’s valuation will soar to over $100 billion on its first day of trading.
The company is backed by Andreessen Horowitz, Y Combinator, Wellington Management, Tiger Global Management, and Ribbit Capital.
What is the Revenue of Coinbase?
According to Coinbase, the company made $1.28 billion in revenue for 2020, up more than 100% from the previous year ($533 million in 2019).
A first-time profit was realized by the corporation as well. Coinbase earned approximately $322 million in 2020 after expenses (the business lost $30 million in 2019).
Success Story of Coinbase
Brain Armstrong (CEO) and Fred Ehrsam created Coinbase in 2012. Armstrong formerly worked at Airbnb as a software engineer.
The company reportedly processed $500 million in payments annually in 192 countries, with each network charging a transaction fee.
There were only a few dedicated financial specialists who were using bitcoin (and the blockchain concept).
A cryptocurrency discussion group introduced Armstrong to Ben Reeves, a developer who built Blockchain.info, which tracks bitcoin transactions. They discussed many options before settling on one: PayPal for bitcoin.
Shortly after that, they were accepted to propose their idea at Y Combinator, the world’s most prestigious startup accelerator program. A quarrel between Reeves and his co-pilot resulted in separation, just as Reeves took off for San Francisco.
Working alongside Ehrsam, a former Goldman Sachs banker, Armstrong founded the company through Y Combinator instead. The company was already selling Bitcoins worth $1 million per month within a year.
A few years later, the company became the most valuable bitcoin startup globally, breaking numerous records for the biggest fundraising round at the time.
Coinbase’s iPhone app became the most downloaded app in the American iTunes store during the late-2017 crypto-mania when Bitcoin reached over $20,000. The company hit the 30 million user threshold in 2019.
Bitcoin has historically been the subject of numerous controversies, including hacker assaults against user wallets and instances of fraud. Coinbase, on the other hand, has avoided controversy for most of its existence.
This is because Coinbase has always cooperated with and worked with governments when it comes to adopting cryptocurrency.
The corporation, for example, provided the IRS with data on almost 13,000 of its users who allegedly withheld gains to avoid paying taxes. Ehrsam left the company to pursue other interests at the same time.
And in 2019, some of the company’s users took to Twitter (using their hashtag #DeleteCoinbase) to protest the company’s acquisition of Neutrino. This Italian business tracked bitcoin transactions using publically accessible blockchain data.
The negative news continued into 2020. Coinbase CEO Armstrong announced in September 2020 that no employees would be allowed to discuss politics at work (or push their political agenda).
He also offered generous severance incentives to anyone uneasy with the cultural shift. A few weeks later, the company announced that more than 5% of its workforce (about 60 employees) had opted to quit.
A New York Times report revealed that minorities working at Coinbase endured hundreds of public harassment and humiliation to compound problems.
While Coinbase experienced upheaval in 2020, it expanded significantly. Bitcoin’s rise in late 2020 was largely responsible for the company’s most prosperous year since conception.
So, Coinbase applied to be listed in the early part of 2021. An initial public offering is anticipated for March 2021 through a direct listing of the company.
Today, Coinbase is the largest and most successful cryptocurrency-related platform in the world. The company employs approximately 600 individuals and has a 35 million-strong user base.