Coinbase: Blockchain is Taking Off—Can the "Water Sellers" Really Cash In Easily?

If the expectation of interest rate cuts, the cyclical halving of Bitcoin supply, the damage to the credibility of the US dollar, and the regulatory friendliness of the Trump administration have supported the rise of cryptocurrencies from 2022 to the present.

As of June 23, the cryptocurrency market size has reached $3.3 trillion, nearly tripling since 2023. Among them, the most well-known and largest by market capitalization, contributing over 60%, Bitcoin, has risen from less than $30,000 per coin in mid-2023 to over $100,000 today.

What does $3.3 trillion mean? It is equivalent to 3% of global GDP. If the entire crypto asset is regarded as a national economy or a company called Crypto, then:

The current crypto assets are equivalent to the economic level of an upper-middle developed country, surpassing France to rank 7th globally;

It is also a company that surpasses Apple ($3 trillion), becoming the third-largest market capitalization company in the world. Ahead are Microsoft and Nvidia, around $3.6 trillion, and at the current trend, Crypto becoming the global leader is just around the corner.

Therefore, from the perspective of global asset allocation, crypto assets are becoming increasingly difficult to ignore, and Dolphin Research has decided to start tracking them.

Considering that regulation is still the biggest influencing factor at present, and we are currently in the middle ground from strict to somewhat relaxed, we prioritize researching leading companies with good business models and high compliance attributes.

The crypto asset series starts with $Coinbase(COIN.US), and this article will mainly discuss Coinbase's business model and the core logic of future growth. The next article will focus on stablecoins and calculate the future value of Coinbase and $Circle(CRCL.US).

Below is the detailed analysis

I. The Exchange is Not the End

If "cryptocurrency" is regarded as a listed company target in the stock market or a commodity contract in the commodity market, then Coinbase is like the NYSE or CME, with the most basic function of providing cryptocurrency quotations, matching, settlement, and other exchange-like functions.

However, unlike traditional exchanges, Coinbase has also taken on the role of a "broker"—able to directly face investors and provide services such as trading, lending, custody, staking, and withdrawal.

With the improvement of infrastructure such as digital wallets and merchant ecosystems, Coinbase quickly advanced payment scenarios mainly based on BTC. In 2019, it even launched the Coinbase Card in cooperation with Visa, supporting users to swipe cards offline/online to buy physical goods. However, a significant reason for the slow promotion of payment scenarios is the high volatility of cryptocurrency values. Therefore, once stablecoins emerge and gain official recognition, Coinbase's payment scenarios are expected to be more vigorously promoted.

In addition to trading and payments, Coinbase is also applying for a stock token trading platform. Once approved by the SEC, it means that stocks can also be indirectly invested in on Coinbase.

At this point, Coinbase's future business map has a clearer blueprint, namely accelerating the on-chain of real assets, striving to create an on-chain comprehensive financial scenario platform, rather than just a pure cryptocurrency exchange.

Dolphin Research believes that payments and investments are key operations to expand the application scenarios of cryptocurrencies, and the extension of scenarios means the expansion of the entire cryptocurrency market, which will also allow Coinbase, the "water seller," to earn more.

In the cryptocurrency market, the existence of trading platforms like Coinbase not only shortens the entire industry chain vertically but also quickly crosses multiple demand scenarios horizontally, partly due to insufficient past regulation and convenient business expansion. For a leader like Coinbase, which is relatively top-notch in terms of scale and compliance, more regulatory penetration in the future will only help it eliminate potential competitors.

Therefore, we can naturally think that Coinbase should be able to obtain more profit distribution.

This is indeed the case, but due to the high volatility of the cryptocurrency market, Coinbase's performance is not stable. However, excluding special periods (such as listing, acquisitions, etc., which disturb short-term profit margins), the profitability (measured by profit margin) in normal periods is still generally distributed in the 25%~65% range. Although the range is large, it can basically be benchmarked against mature traditional financial institutions.

Looking at the situation in 2024, Coinbase's profit margin is close to that of low-discount/commission-free brokers like Robinhood, but lower than pure exchanges, indicating that it has not fully reflected the additional profit space brought by exchange and industry chain advantages.

In the future, as the virtual currency market continues to grow with more universal recognition of crypto assets, as long as Coinbase's competitive position remains stable, its profit margin ceiling will gradually open up. In the end state, Dolphin Research believes it can reach a more advantageous profitability level compared to traditional financial institutions.

II. Compliance Advantage Opens Up Imagination Beyond "Trading"

So what kind of competitive environment is Coinbase facing? Dolphin Research will sort out and discuss around Coinbase's basic business and business model.

Looking directly at the chart below, from the major categories of revenue contribution, Coinbase mainly has three sources of revenue: trading revenue, subscription revenue, and others.

Among them, trading revenue is easily affected by trading conditions, but it is currently the main revenue driver for Coinbase, still accounting for 50%. Subscription revenue and others (including custody settlement, staking, stablecoins, data/cloud, and company investment income, etc.) act more like a lubricant, as they are relatively stable in growth and can slightly smooth out the volatility of trading revenue.

But an obvious trend is: as scenarios expand, competition intensifies, and the structure of incremental capital sources changes, Coinbase's future dependence on trading revenue will become increasingly lower.

1. Trading Thresholds Will Gradually Lower

Compared with peers, Coinbase's product advantage is compliance and security, but the disadvantage is high retail transaction fees and lack of derivative trading varieties. However, in the past 1-2 years, Coinbase has been quickly catching up with its peers on these two shortcomings.

Source: CoinDesk

Currently, Coinbase operates three exchanges: the spot trading Coinbase Exchange, the Coinbase International Exchange (CIE) for professional individuals and institutions outside the US, and the Coinbase Derivatives Exchange (CDE) transformed through the acquisition of FairX.

The above three exchanges cover the vast majority of the nearly 300 cryptocurrencies in the market. In the US spot trading market, Coinbase's product coverage is absolutely dominant (compliance thresholds block peers from launching long-tail coins on a large scale). However, if placed globally and including derivative trading, the range of trading varieties covered by Coinbase is not at the forefront, with a noticeable gap compared to Binance and Bybit.

Besides the range of trading varieties, the biggest difference in trading for Coinbase is also the trading cost. Like traditional securities trading, Coinbase's trading fees are based on trading size and a certain (tiered) rate. For example, the following chart shows the fee details for Taker (quick order taker) traders, with Maker (order placer) traders generally having lower fees than Takers:

For ordinary retail investors, the different trading methods (simple trading, advanced trading, Coinbase one trading) have different trading costs. User trading cost = "trading rate + official hidden spread":

1) Retail trading costs can be as low as 0.05% and as high as 2.5% (at the end of 2022, the trading rate for retail transactions over $200 was reduced from 1.49% to a maximum of 0.6%).

2) For institutional users using Prime or Exchange VIP tiers, the rate quotes are in the range of 0.03%-0.18%.

If looking directly at the comprehensive rate reflected in the final financial report, the trading rates (including spread) for retail and institutional investors are 1.49% and 0.03%, respectively. This fee level is not advantageous compared to peers (especially exchange peers), mainly for retail charges.

Taking Binance as an example, the highest tier rate for retail spot trading is 0.1%, only 1/6 of Coinbase's (even after Coinbase's price reduction in 2023), and if using BNB (Binance Coin) to pay fees, this rate can be further discounted by 75%.

As shown below, other platforms where cryptocurrencies can be traded, those with exchange attributes are cheaper than Coinbase, while other platforms, mainly payment institutions, are more expensive, and discount brokers also have lower trading fees than Coinbase.

In August 2022, Coinbase already had a fee reduction, which is when Advanced Trade was launched. For users with a trading volume of less than 10K in the past 30 days, the trading cost (Taker 0.6%, Maker 0.4%, basically no hidden spread) is less than half of Simple Trade (1.49% + about 0.5% spread).

Few trading varieties (mainly derivatives) and high trading costs can easily affect retail investors' trading enthusiasm. Although Coinbase has the most crypto assets globally (AUC accounts for 12%), in terms of trading volume, Coinbase only accounts for 5%. This is just spot trading; if derivatives trading is included, Coinbase's total trading volume ranks outside the TOP10.

Only in the US, due to compliance issues, can Coinbase dominate the market, with spot trading volume accounting for more than 50% of the US total.

Why does Coinbase have a high asset volume but not a large trading volume?

The problem lies in the turnover rate, which is significantly lower than peers, not reflecting the high-risk, high-volatility characteristics of crypto assets. But the turnover rate is just a surface phenomenon, and the underlying cause is the different capital structure (user attributes), which is essentially brought about by product characteristics/advantages and disadvantages.

A common trading characteristic is that for current cryptocurrencies, the proportion of retail investors with long-term asset allocation purposes is increasing, and these users naturally trade infrequently. Among institutions, high-frequency trading for volatility gains is still the majority, but as mainstream funds accelerate entry, the overall institutional trading frequency will decrease in the future.

On Coinbase, due to the few trading varieties and higher trading costs, it is not very attractive to high-frequency trading retail investors, but its compliance and security attract high-net-worth retail investors with long-term allocation and mainstream funds with strict compliance requirements for investment custody, both of which belong to low-frequency trading groups.

Of course, Coinbase is also very aware of its disadvantages in trading and is striving to catch up with its peers.

Regarding the issue of few trading varieties, Coinbase has accelerated the launch speed of new coin trading and announced the acquisition of Deribit (the world's largest cryptocurrency options and futures trading platform) in early May to make up for its shortcomings in derivative trading varieties and related institutional clients. (Dolphin Research will discuss Deribit in detail after the Q2 financial report is consolidated with Deribit)

Regarding the issue of high trading costs, this is actually related to trading volume. In the short term, Coinbase's trading fees remain high, not only because of the additional compliance costs and other technical fees (such as the development cost of Base) but also possibly because of low trading volume, making it reluctant to "cut a knife" and lower prices significantly.

But from a longer-term perspective, Dolphin Research believes that Coinbase's"price reduction" action will continue soon.

(1) Compliance Relaxation, Internal Clearing, and Increased External Competition

Future competition will not be limited to industry competition within crypto asset exchanges, with increasing threats from external competition from traditional financial institutions.

Currently, in industry competition, Coinbase's main advantage is "compliance", especially in the US market. The key to Coinbase being the only listed cryptocurrency exchange is that it is also the first to obtain the right to operate across the US.

But the downside of "compliance" is that it does not have an advantage in trading asset varieties (cryptocurrency types, derivative types). However, starting in 2025, under the active "platform" of the Trump administration, cryptocurrencies are gradually being recognized by more mainstream officials.

The main way of "recognition" is to include it in the "friendly regulation" category with non-suppressive purposes, with the US "Market Structure Act" and "Stablecoin Act" being the main drivers.

The "Market Structure Act" passed by the House of Representatives grants the CFTC exclusive jurisdiction over spot cryptocurrencies. If it continues to pass Senate votes and presidential signatures to take effect, it represents the end of the jurisdictional dispute between the SEC and CFTC.

The benefit of being regulated by the CFTC rather than the SEC is higher regulatory convenience:

1) No need to apply for additional licenses (ATS+BD); 2) Reduced clearing costs; 3) New token listings do not require individual information disclosure;

Under the jurisdiction of the CFTC, cryptocurrency exchanges doing derivatives only need to register on the brokerage side, and for spot trading, they may not even need to register with the CFTC, saving high compliance costs (legal, audit, etc.) and not needing to modify existing systems to connect to NMS-level clearing pipelines.

Regulatory recognition of crypto assets is naturally a good thing, and as more funds flow into the cryptocurrency market, leading companies like Coinbase, which have done well in compliance, will directly benefit, while small long-tail platforms will continue to clear out.

But at the same time, official recognition will also encourage traditional financial institutions to boldly accelerate transformation, especially platforms that have made breakthroughs through business innovation, which will be more responsive to industry frontier changes.

For retail users, such as brokers like Robinhood or payment wallets like Block. These platforms have supported cryptocurrency buying and selling for many years and have subsequently expanded "investment scenarios" and quickly expanded into "merchant payments" and other fields. However, due to compliance and security requirements, traditional financial institutions mainly focus on leading cryptocurrencies like BTC and ETH, with "fewer trading varieties" being their most obvious disadvantage compared to the Coinbase platform.

But as cryptocurrencies are further widely recognized, it is reasonable to imagine that traditional financial institutions will be more motivated to expand the range of cryptocurrencies, and these platforms, which already have user and scenario advantages, will engage in more direct competition with Coinbase.

(2) More Capital Inflows Shift to Institutions

Another impact of regulatory recognition is the change in capital inflow methods. In the past, institutions participating in the cryptocurrency market mainly relied on quantitative trading for volatility gains, and mainstream institutions were limited in allocation scale due to compliance issues. But as regulatory restrictions open up, the participation of mainstream institutions will further increase in the future.

For new retail investors, the way to allocate cryptocurrencies may not necessarily require "personally getting involved". From the perspective of capital safety and convenience, it can be done through investment institution funds.

Therefore, the market share of pure retail trading will further shrink, and with competition not decreasing but increasing, fee reductions will also become an inevitable path for Coinbase.

2. Future Added Value Comes from Expanding On-Chain Scenarios

As of 1Q25, Coinbase's retail trading revenue (trading fees + spread) accounted for 92% of trading revenue and 57% of total revenue. At the same time, the marginal profit brought by trading is also very high, so if fee reductions do not immediately bring significant increases in trading volume, the impact of fee reductions on Coinbase's overall performance will be very significant.

But since it is an irreversible trend, this means that developing non-trading revenue is crucial both now and in the future.

Currently, Coinbase's non-trading revenue mainly refers to subscription revenue, including custody, staking, stablecoins, and lending and other comprehensive financial services. The demand for these functions, except for the expansion of payment scenarios, mainly relies on retail users, while other scenario demands mainly come from users with relatively large capital scales, so the service targets are mainly institutional clients.

Therefore, lowering the capital entry threshold with lower trading fees and expanding added value through comprehensive financial services is the reason why Coinbase is more willing to lower fees to the end—the reason for lowering institutional trading rates (to align with peers).

Below, let's take a closer look at the relatively large proportion of subscription business and the sub-businesses that can expand revenue scale in sync with institutional entry in the future:

(1) Institutional Custody: The Easiest Value-Added Service to Develop

Fund custody is generally derived from trading business, mainly targeting institutional clients, providing services such as cold storage of cryptocurrencies, 24*7 withdrawal processes, insurance, audits, and compliance reconciliation reports, with a comprehensive custody fee of about 0.1%. (No longer disclosed separately from the first quarter of 2025, the following is Dolphin Research's estimated value)

Since the rate is basically stable, the growth of custody revenue is mainly driven by the expansion of institutional capital scale. For institutions, the compliance advantage that Coinbase has is their primary consideration when choosing a platform, so for Coinbase, as long as the future regulatory trend is continuously relaxed, this revenue growth can continue.

But in the long run, there will also be an external competition problem. When more compliant traditional financial institutions with cross-market assets "lower the dimension to strike," how can Coinbase attract more mainstream funds?

(2) Staking Income: Medium to Long-Term Growth Has a Ceiling

Before partnering with Circle in 2022, the largest source of Coinbase's non-trading business was crypto asset staking, which once accounted for nearly 13% of total revenue.

Crypto asset staking income is similar to users investing in mining projects with crypto assets (becoming validators of mainstream PoS public chains) to earn income, with Coinbase taking a cut of the custody service fee. This money is received by Coinbase from the front end, keeping 25% for itself and giving the rest to users.

Staking yields can vary greatly between different coins, usually related to the stability of the coin's value, inflation rate (proportion of supply increase), and the congestion of competition to become a validator (total staking volume).

The staking yield of leading cryptocurrencies is generally low, mainly because their supply is fixed or decreasing, but due to the relative stability of their value, the competition for validators is "too crowded." Since becoming a validator requires more "collateral" (staked assets), the single-coin staking yield will be diluted.

As shown below, the staking yield of leading ETH Ethereum is 3.4%~4.5%, but the yield of small coin DOT Polkadot is 12%~15%.

In the short term, staking income basically expands with the expansion of staked asset scale. But in the medium to long term, with relatively limited supply, the block rate of high-quality cryptocurrencies will trend lower, while inferior/niche cryptocurrencies, even if the block rate is high, may not have high value or fluctuate, and the actual staking incentive converted into USD value may not be high. Therefore, this trend will limit the long-term growth space of staking business income.

It seems that (1)-(2) look at Coinbase's subscription business, in the short to medium term, with the expansion of the cryptocurrency market cake and stable competitive advantages (security, compliance, official platform), growth is not a concern, but in the long term, if traditional institutions accelerate their entry, what is the reason for Coinbase to still be regarded as a "preferred" by mainstream institutions?

The answer is (3)stablecoin business. On the one hand, it enlarges the cryptocurrency cake, and with official recognition, the speed of on-chain real assets accelerates, and funds no longer flow into the cryptocurrency market due to speculative demand, but rather more stable payments and value storage. On the other hand, Coinbase's excess advantage comes from its special position in the USDC industry chain.

Therefore, the stablecoin business, which accounts for 15% of revenue, is the main artery of Coinbase's future growth and is also the key to determining whether Coinbase's valuation is already full. Currently, Coinbase's comprehensive share in the stablecoin business has reached 55%, but the actual USDC holdings on the platform only account for 17%, clearly showing that Coinbase has "privileges."

But the problem is that Coinbase's special position in stablecoins is partly due to deep binding with Circle. However, the interests of both parties are not entirely consistent. Coinbase may provide similar distribution convenience for another stablecoin, USDT, with a larger market scale based on user demand, and after Circle goes public, it will also have a demand for revenue growth, trying to gain a larger share.

These business differences, given Coinbase's small equity investment in Circle (the early Centre alliance with equal shares was dissolved in 2023, and USDC issuance rights were consolidated to Circle), it is difficult to ensure that the expansion of differences will not affect the cooperation between the two parties:

Like the introduction of Binance, a competitor to Coinbase, into the ecosystem at the end of last year, although Binance's share is very low and almost negligible, it actually weakens the competitive advantage that Coinbase has due to USDC.

In addition, Circle is also grabbing USDC balances (through rebates from its Mint wallet, incentivizing market makers and local payment companies to keep funds in Mint rather than exchange wallets), expanding the demand scenarios that must connect with issuers (such as cross-chain bridges, Tokenized T-Bill, traditional clearing) to increase the total revenue share.

The 2023 agreement is set for a term of 7 years, meaning that before 2030, the profit sharing between the two parties may not change significantly,making the USDC cake bigger is certainly a top priority (after a sixfold surge, Circle's scarcity is beginning to be questioned), but what about after seven years?

With a trillion-dollar market scale expectation, how much can USDC capture? In the USDC ecosystem, between Coinbase and Circle, one has the scenario end, and the other holds the issuance end, who will ultimately have more say? In other words, who has more value space in the future, Coinbase or Circle, after the current surge? In the next article, Dolphin Research will focus on stablecoins.

<End Here>

Risk Disclosure and Statement of this Article:Dolphin Research Disclaimer and General Disclosure