Is Coinbase Undervalued Given ETF Role?

Coinbase is in line to manage custody for 9 out of 12 ETFs.

Capturing even a moderate percentage of the ETF custody market would turbocharge returns.

Coinbase has enjoyed a turnaround in fortunes recently, as its liquidity returns to the crypto markets and its share price soars. But given what may be about to happen, is still undervalued even now?

This article does not constitute financial advice. The figures and topics included below are speculative, and subject to a high degree of uncertainty.

ETF Fees

The central thesis around Coinbase's valuation going forwards revolves around their role as the main custodian for ETF products.

Coinbase is set to be the custodian for three-quarters of ETFs currently going through the application process. They will charge an ongoing fee for holding the coins securely. Therefore, it's a fairly straightforward matter to calculate what their revenues could be, given a particular fee and dominance in the spot BTC ETF space.

The figure of 10 basis points per month originally comes from Coinbase's early communications about its Custody product for institutional users, along with a $100,000 set-up fee. It is highly likely that lower fees have been negotiated by ETF providers, since 10 basis points per month adds up to 1.2% per year, before any fees of their own are charged. For reference, Ark's suggested fee is 80 bps, meaning end users would be charged at least 2% for BTC exposure via the ETF, which seems excessive (though not impossible).

Additionally, the figure of $1 trillion AUM relies on the assumption of $100k BTC and Coinbase capturing 50% of the entire bitcoin market. That, too, seems optimistic at this point—though in time, it's quite possible.

For the sake of this back-of-napkin analysis, we'll go with more conservative figures of a total 50 basis points annual fee, $100,000 BTC, and Coinbase capturing 20% of the bitcoin market via various ETFs. That does not seem unreasonable in the early stages, and would equate to 0.5% of $400 billion, or $2 billion in annual revenues from ETFs alone.

That's not in the same ballpark as Tesla, and certainly nowhere close to tech giants like Microsoft or Google, who measure annual revenues in the twelve figure range ($100-300 billion) and have market caps in the trillions of dollars. But it's certainly nothing to be looked down on, especially since crypto is still a fast-growing industry. P/E ratios for high-growth tech companies may be 50x or more, giving a total valuation for Coinbase of at least $100 billion (not taking into account costs, or other earnings). That would translate to a share price at least four times its current amount, comfortably pushing the all-time highs of its IPO week at $430.


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