The Finale (For Now)

To my loyal follower(s),

It seems that this will likely be the last post for the Ex-College class. However, that does not mean it will be the last post ever. I intend to continue writing about interesting blockchain topics as they appear- in particular as Coinbase becomes more mature. I hope to discover the accuracy of my business and valuation predictions that will become more apparent as the company develops and the industry becomes less cyclical.

In this article, I hope to address some of the major assumptions that I plan to implement into my financial model. While I have not built the model yet, I plan to incorporate the model into my financial project to help try and justify the $8B price tag on the company.

First, I will produce bull and bear cases for revenue growth based on the potential addressable market for Coinbase. Using a top-down approach to model serviceable addressable market, I assumed a 2% market penetration for the population of the world with a smartphone. I also assumed a 1% fee on all transactions, with the average transaction size being 10% of the average net worth. However, if the crypto market continues to grow, this number will be significantly bigger.

The bottoms-up approach looks at historical sales data of a comparable company then extrapolates the information to the broader market. It usually produces a smaller addressable market than the top-down approach. The current bull approach I used for the bottoms-up approach begins with the number of transactions that Binance completes per year, then applying a 17% CAGR (compound annual growth rate found from historical data). I projected out the transactions five years from before the company reaches its terminal value.

The bottoms-up and top-down approaches will provide a rough estimate of the potential revenue Coinbase can draw in the next five years. However, this will be highly variable on the state of the crypto market. As a result, I will also look some comparable blockchain companies trading on the market now and potentially the success of other successful companies during the dotcom mania. In the worst case scenario, the crypto market drops to essentially zero and investors will seek to cash out into crypto. If Coinbase thinks the market will never recover, it is not obligated to cash out customers into fiat and absorb a loss on crypto. At this point, the downside is likely floored at the retained earnings of the company to date, since it has no debt repayment due. However, depending on the clauses of their investor contracts, they may have to pay out a preference to early stage investors that could make investing in the company now a greater risk. Any way the valuation is cut, the investment potential is tied to the success of the greater crypto market.

Stay tuned for my for the full research report coming soon.