Coinbase is one of the most popular cryptocurrency exchanges. The company makes money in a variety of ways with transaction fees making up a significant part of their revenue. But Coinbase also has a number of other sources of revenue.
Coinbase primarily makes money via transaction fees on cryptocurrency bought or sold on its crypto exchange. Coinbase also makes money on things like interest on cash they are holding, capital gains on crypto assets, personal loans, merchant fees, and other fees.
Founded in 2012 by Brian Armstrong and Fred Ehrsam, Coinbase is the largest US-based cryptocurrency exchange.[1] However, its competitor Binance is the world’s largest crypto exchange.[2]
What is Coinbase & How Does It Work?
Coinbase is an online platform for buying, selling, and storing digital currencies and assets like cryptocurrencies. The company is known as being easy to use for newer cryptocurrency traders looking to learn about buying and selling digital currencies.
Coinbase makes buying, selling, and holding digital currency easy because they offer a wallet, an exchange, and tools to help traders better understand the market. It also offers free transactions between Coinbase wallets or with merchants on Coinbase. Coinbase also offers Coinbase Pro, a premium trading service, for those who want to make high volume trades or who want more trading options.
Trading on Coinbase is easy. The company allows users to buy fractional shares of expensive coins. For example, rather than buying a whole Bitcoin, you can buy one third of one. Coinbase supports hundreds of cryptocurrencies including Bitcoin, Ethereum, Dogecoin, and Solana.
While Coinbase makes money on its app, it also allows developers to use their platform via an API that allows them to integrate Coinbase’s technology into their own apps and websites.
Though cryptocurrencies aren’t insured by the Federal Deposit Insurance Corporation (FDIC), Coinbase claims to ensure all the currency held on their platform against things like security breach, hacks, employee theft, or fraudulent transfer.[3] That provides Coinbase’s customers with more peace of mind.
Business Model of Coinbase
Like many cryptocurrency exchanges, Coinbase’s revenue streams revolve mostly around transaction fees. However, they also have a number of other revenue streams like subscriptions, interest income, and other revenue such as through the sale of Coinbase-held cryptocurrency assets.
Coinbase’s business model involves providing services for two kinds of traders: a retail trader who trades in small volumes and an institutional trader who trades in larger volumes. Coinbase offers Coinbase Pro to attract more frequent traders. Coinbase Pro fees are lower than the fees the company charges its general user base.
Coinbase also has a number of ecosystem partners such as digital currency developers, merchants, and others that the company makes money off of in various ways.
While Coinbase likely makes more money from the high frequency traders who use Coinbase Pro, the company also seems to have a goal to get more people investing in digital currencies. To accomplish this, they have deployed a broad marketing campaign to try to lure retail investors to their platform.
A great example of this was when they bought a 30-second commercial spot during the 2022 Superbowl. Their commercial was just music and a QR code on screen that directed people watching to their website to sign up.[4] Coinbase seems to be basing their business model on the belief that more people will be investing in cryptocurrency in the future.
While cryptocurrencies have experienced significant hype in recent years with prices skyrocketing and more people investing in the sector, there are signs that public interest in and the market for digital currencies could be souring.
One big concern is the environmental impact of digital currency mining which is done via server farms that consume significant amounts of electricity to cool them.[5] However, there are other strategies for creating currencies that that use less electricity than the proof of work method used by Bitcoin like proof of stake.
But digital currencies and their exchanges also face regulatory challenges. Many countries are looking to create tighter regulations around the creation and trading of digital currencies in order to protect investors and maintain financial stability.[6]
Finally, the biggest challenge to Coinbase’s business model is the lackluster performance of digital currencies themselves. A major factor souring would-be investors is the sometimes dramatic volatility of certain digital currency projects like what happened to Luna when one of their coins collapsed in spring 2022.[7]
In 2022, cryptocurrency markets are down significantly in what some are calling a, ‘crypto collapse.’[8] That seems to be affecting Coinbase’s bottom line. In April, the company laid off 1,100 people or about 18% of its workforce. CEO Brian Armstrong said that this was to help the company navigate what he called an upcoming, ‘crypto winter.’[9]
Coinbase also has considerable staffing, platform, and development expenses without much predictability. They are operating in a highly volatile financial market where sudden downturns could unexpectedly impact their business for months or years.
Despite that, in 2021, Coinbase brought in $7.8 billion in total revenue against total operating expenses of $4.7 billion leading the company to an impressive $3.6 billion in revenue. This was a significant improvement over their 2020 results that saw the company bring in $1.2 billion in revenue and make just $322,317 in net income.[10]
Whether their 2022 results will be on target is yet to be seen given the recent downturn in crypto markets and the concern over the future of digital currencies.
How Does Coinbase Make Money?
Coinbase makes money in more than eight different ways. These include trading fees, Coinbase investments, personal loans to investors, Coinbase cards, merchant fees, conversions, subscriptions, and other revenue.
Coinbase’s business model is focused on increasing the number of people who invest in cryptocurrency and expanding their reach into other countries. They have multiple income streams and an easy-to-use platform.
While Coinbase made a considerable amount in revenue in 2021, the company does not break down the source of all of their revenue in their annual report so it is unclear how much the company makes on each of these individual lines of business.
Trading Fees
Coinbase charges fees along the maker-taker fee model. If you place an order at the market price that gets filled instantly you are thought to be a taker and pay a fee between 0.05% and 0.6%.
When you place an order that isn’t immediately filled the customer that purchases yours pays a fee between 0% and 0.4%. The amont paid depends on the pricing tier the order falls in based on the amount of currency being traded.
Coinbase Investments
Coinbase buys and sells cryptocurrencies and fiat currencies and can realize capital gains on those purchases and sales. They also earn interest on the funds they hold. They can also, however, realize capital losses on their digital assets. This is both a potential upside and downside for the company.
Coinbase Personal Loans
Coinbase users can borrow cash from Coinbase using Bitcoin that they hold in Coinbase wallets as collateral. Customers can borrow up to $1,000,000 at 8.7% APR with no credit check if they meet certain requirements.[11] Coinbase makes money from interest payments on these loans.
Coinbase Cards
Coinbase offers a number of cards to their users. For example, they offer a Visa debit card that allows users to earn crypto rewards on their everyday spending. They also offer a Coinbase Card that allows you to spend the crypto currency in your account. These cards are only available in certain countries.[12] The company earns money on these cards through transaction fees.
Coinbase Subscriptions
Coinbase offers subscription programs where people pay monthly or annually for certain privileges. One example is the Coinbase One subscription program which is currently in beta. It offers subscribers no trading fees, dedicated phone support, premium staking rewards, and account protection of up to $1 million. [13]
Coinbase Commerce
Coinbase offers eCommerce companies the ability to accept cryptocurrencies as payment on their platform via an integration or a fully functional API. Companies who use this service pay a 1% transaction fee on all Coinbase-facilitated transactions.
Currency Conversion
When you use fiat currencies to buy digital currencies on the platform, Coinbase charges you a fee just like you might pay a fee at a bank to convert one currency into another. The fees Coinbase charges for conversions are variable.
Other Revenue
Coinbase has a number of other smaller sources of revenue including things like advertising fees, referral fees, and partnership fees for advertising offers from digital currency partners. It is unclear how much this revenue adds up to or the percentage of the company’s income that it represents.
Coinbase Funding, Valuation & Revenue
Coinbase ($COIN) is currently a public company after launching its IPO on the NASDAQ exchange in April 2021.[14] However, prior to going public the company went through seven funding rounds and garnered $300 million in it’s last Series E offering. Investors in the platform include Venture Partners, Andreessen Horowitz, and Y Combinator.[15]
Coinbase currently has a market cap of $15.73 billion. The company has significantly increases its revenue in recent years going from just $533 million in 2019 to $7.8 billion in 2021.
| Year | Total Revenue | Total Expenses | Net Income |
|---|---|---|---|
| 2019 | $533 million | $579 million | ($30 million) |
| 2020 | $1.2 billion | $868 million | $322 million |
| 2021 | $7.8 billion | $4.7 billion | $3.6 billion |
Is Coinbase Profitable?
Coinbase is, indeed, profitable. The company made a profit of $3.6 billion in 2021 on $7.8 billion in revenue. However, given recent shakeups in the digital currency markets, it’s unclear if Coinbase will be profitable in 2022 and beyond. The company recently laid off 18% of its workforce and seems to be preparing for a significant downturn in the crypto markets.
Conclusion
You should now have a pretty good idea of what Coinbase does, its business model, and how it makes money. It’s no wonder that Coinbase has become so popular in recent years—the company offers a wide range of services and makes it easy for users to buy and sell cryptocurrencies.
But what is it about Coinbase that has allowed them to be so successful?
Well, for one thing, they have done an incredible job of capitalizing on the idea of cryptocurrency and blockchain technology. Their platform is simple to use, and they have made it possible for even those who don’t have much experience with blockchain or cryptocurrencies to get involved in these new technologies.
Another reason why Coinbase has been so successful is that they offer more than just cryptocurrency trading. They also have a wallet service that allows users to store their digital currency in an easy-to-use interface.
And finally, Coinbase was one of the first companies out there that allowed users to buy cryptocurrencies with fiat currency (like USD). This made them accessible to everyone who wanted to invest in cryptos but didn’t have any experience with buying them directly with Bitcoin or Ethereum.
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