![]() Notice that institutional investors generated only a minority of trading revenue (4.4% of revenue), despite contributing the majority (or 64%) of the total trading volume in Q4 2020. The majority of this revenue comes from retail investors (81.4%). This is the largest part of Coinbase’s business (about 86% of total revenue in 2020). As a comparison, in the world of traditional asset class, these functions are carried out by different major companies. It has a crypto market-making business, acts as a crypto exchange, as well as serves as a custodian, brokerage, and payments provider ( Figure 2). In reality, the company is trying to be more than just a broker/trading application it is vertically integrating across the entire stack of the cryptoeconomy (the term is mentioned 63 times in its prospectus). ![]() Most retail investors are most familiar with Coinbase as a crypto trading app. Which leads us to how Coinbase makes money… How Coinbase makes money It has been reported that Coinbase’s prime brokerage arm was the one to help both MicroStrategy and Tesla acquire their Bitcoin investments. The increase in investors looking to invest in Bitcoin has contributed to the growth of cryptocurrency trading platforms such as Coinbase. ( Note: Since Tesla’s initial US $1.5 billion investment in Bitcoin in early February 2021, the company has likely made about US$384 million in unrealized profits, which is about half of its 2020 profits! Making cars is hard – investing in Bitcoin is easier…). Tesla and MicroStrategy are two companies with the largest Bitcoin holdings. Several public companies have disclosed that they have made Bitcoin part of their treasury holdings.US bank regulators have declared that banks can hold custody of cryptocurrency for their clients, paving the way for potentially more institution adoption.( Note: To be clear these institutions are not impartial when it comes to Bitcoin – they have a vested interest in hyping the asset). More and more institutions are bullish in Bitcoin as digital gold.With the most recent price rally, Bitcoin seems to continue to grow as a vehicle for speculative investment, with increased participation beyond that of retail buyers. And Coinbase was there to take advantage of the trend.†Instead, Bitcoin has emerged as an alternative store of value, a vehicle for speculative investment. €œ As a medium of exchange, Bitcoin is too volatile and too slow (Bitcoin’s throughput is 7 transactions per second, while Visa’s network can handle up to 24,000 transactions per second). Maybe so, but what is driving this adoption?Īs we discussed before, adoption of Bitcoin as a replacement of money has not taken off:
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