Original Article Title: Understanding the risk of Coinbase after Circle's successful IPO

Original Article Author: Kevin Li, Artemis

Original Article Translation: Odaily

Editor's Note: Recently, the strong performance of Circle after its IPO has sparked enthusiasm among investors who missed the opportunity. Many investors who missed out are actively seeking alternatives to Circle, with Coinbase receiving the highest amount of attention. After all, due to its close relationship with USDC, market participants widely believe that the market's future expectations for Circle and USDC could also benefit Coinbase's stock price.

According to institutional data platform Artemis, many investors have recently suggested longing Coinbase while shorting Circle. However, fundamental analyst Kevin Li believes that one should not long Coinbase solely based on a bullish view on Circle. This is because USDC-related revenue accounts for only a small share of Coinbase's total revenue. Although Coinbase is a vast ecosystem covering a compliant exchange, USDC, and on-chain products, each of its businesses is currently facing competitive pressures, presenting a less optimistic outlook. Investors need to carefully evaluate its pricing.

Odaily has compiled Kevin Li's comprehensive fundamental analysis of Coinbase below. Enjoy~

Summary

· Limited Upside in Stablecoin Revenue: Circle's IPO highlighted the potential of stablecoins, but Coinbase holds a minimal share in the USDC market economy. Under the revenue-sharing agreement, Coinbase is estimated to receive 60% of USDC's total revenue, but can only retain a small portion as about 43% is distributed as revenue to users. Therefore, Coinbase effectively receives only 34% of the stablecoin's total revenue.

· Regulatory Moat Gradually Diminishing: Coinbase has historically benefited from crypto regulatory uncertainty, leveraging its costly compliance infrastructure as a competitive moat. However, as regulations become more friendly and transparent, and with increased vigor from competitors, Coinbase's competitive edge will gradually erode.

· Exchange Business Under Pressure: Coinbase's exchange fee has decreased from 2.5% to 1.4%, and its market share has dropped from over 58% to approximately 38%. This is mainly due to fee compression and increasing competition from ETFs, decentralized exchanges (DEX), and Traditional Finance (TradFi) platforms like Robinhood. Coinbase is expanding its subscription services (Coinbase One), staking, USDC interest income, and derivatives business to offset the impact of soft spot trading volume on revenue. The proportion of trading revenue to total revenue has decreased from over 90% in the previous period to around 55% in this period.

· Strong Momentum for Base: Coinbase's Ethereum Layer 2 platform, Base, has shown rapid growth in both transaction volume and profitability. It currently leads in transaction volume and active addresses among all Ethereum Layer 2 solutions but still lags behind Solana in overall user activity and adoption momentum.

· Strong Momentum for Derivatives: Coinbase's derivatives trading volume has surged to over $300 billion per month, but its monetization and long-term growth are still constrained by aggressive liquidity incentives and intense competition from ETF-style cryptocurrency options.

· Attractive Valuation Outlook: Comprehensive analysis shows that Coinbase's valuation is approximately $1,085.92 billion, but the market correctly reflects the structural risks of its exchange moat and long-term profitability.

The Ecosystem Giant Path of Coinbase

To understand the challenges Coinbase is currently facing and why it cannot completely replace Circle, it is necessary to look back at its origins. Coinbase started as a cryptocurrency exchange, emerging at a time when it was still challenging for ordinary users to buy Bitcoin. With its user-friendly interface, Coinbase quickly gained widespread adoption, and its early proactive compliance measures gave it a significant advantage, allowing it to expand its business in both retail and institutional markets.

Built on trust, convenience, and legal clarity, Coinbase quickly outgrew its exchange roots and acquired a loyal user base. As a result, Coinbase shifted its focus to expanding other revenue opportunities, launching the premium subscription service Coinbase One, and introducing staking products that allow users to earn rewards through their assets.

Over time, the percentage of Coinbase transaction revenue has decreased as a share of total revenue. Source: Coinbase Quarterly Report, Artemis

As Coinbase's brand and influence continue to expand, Coinbase and Circle have jointly launched USDC, aimed to be a compliant stablecoin alternative to USDT and BUSD. Coinbase's platform integration and reputation have accelerated the adoption of USDC. The highest USDC yield on Coinbase reaches around 5%, and interest earned through USDC reserves has further boosted Coinbase's revenue.

To enhance its ecosystem, Coinbase launched Ethereum Layer 2 — Base in 2024. With this chain, Coinbase now controls a full-stack infrastructure: an exchange, stablecoin, and blockchain, forming a vertically integrated crypto ecosystem.

The exchange business and the brand it has built have always been the engine behind Coinbase's vast ecosystem. The subsequent product launches are not just new features but also ways to convert existing core users and the trust established by the exchange into profitability.

Coinbase's core business model follows a simple equation:

· Revenue = User Count × ARPU (Average Revenue Per User)

The company's strategy has always focused on expanding both ends of this equation: expanding its user base through strong distribution channels and a good regulatory reputation and increasing ARPU by introducing new value-added on-chain products in its ecosystem. Therefore, its business core is to acquire users through the exchange and increase profitability through a layered product stack.

Coinbase's user growth has remained relatively stable, while ARPU (driven by transaction fees + product line additions) has increased over time. Data Source: Coinbase Quarterly Report, Artemis, Data Ai

Coinbase Is Not Simply an Agent for Circle or USDC

While Coinbase's ecosystem strategy is attractive, it also complicates the investment thesis. Coinbase's business scope is broad, meaning it cannot be seen as a mere agent for USDC or Circle. Currently, revenue related to USDC accounts for only 15% of Coinbase's total revenue, far less than its exchange business transaction fees. However, with increasing competition from TradFi platforms like ETFs, decentralized exchanges (DEXs), and Robinhood, this core revenue source of Coinbase is facing growing pressure.

Therefore, buying Coinbase as a bullish bet on Circle or USDC is not a wise investment choice. To address intense competition in the traditional business, Coinbase is attempting to break free from the shackles of its trading business by building a broader, more sustainable business model. Currently, Coinbase's business mainly covers four key areas:

· Cryptocurrency Exchange Business: This is Coinbase's core business, with revenue primarily coming from trading fees.

· Subscriptions and Blockchain Rewards: This includes products like Coinbase One and additional services related to institutional staking/custody for exchange businesses.

· USDC and Interest Income: This revenue source includes interest income from the USDC reserve and interest income generated from cash held on Coinbase's balance sheet.

· Base: Transaction fee revenue from the Ethereum Layer 2 chain.

Breakdown of Coinbase's Revenue Streams evolving over time, with growing contributions from new business lines. Source: Coinbase Quarterly Report, Artemis

The Renaissance of USDC: Rising Transaction Volume, but Diminishing Advantage

For investors following the Circle IPO closely, the rationale for a bullish Coinbase centers on its stablecoin business. The adoption of USDC is increasing: out of 30 million active stablecoin addresses, over 8 million are using USDC, weekly transaction counts have surpassed 300 million, and this upward trend shows no signs of slowing down.

Stablecoin Active Addresses broken down by token. Source: Artemis

Coinbase earns revenue from interest accrued on US Treasury bonds backing USDC and shares this with Circle. As the market cap of USDC continues to rise, Coinbase’s stablecoin-related revenue has grown to around $1 billion annually, accounting for approximately 20% of Coinbase's total revenue.

Coinbase's Stablecoin Revenue and Revenue Share. Source: Coinbase Quarterly Report, Artemis

However, this figure masks the actual profit retained by Coinbase, as around half of the stablecoin-related revenue is returned to users in the form of staking rewards. Coinbase sees this return as a user retention marketing strategy, but with competitors like Robinhood also starting to offer yield to users, Coinbase's appeal will diminish. Therefore, Coinbase's actual net stablecoin revenue is close to $171 million per quarter.

Coinbase Stablecoin Revenue Distribution and Coinbase Marketing Cost Structure. Source: Coinbase Q1 2025 Financial Report

Furthermore, USDC has long positioned itself as a regulatory-compliant stablecoin closely tied to the dollar ecosystem. Many believe the US may take regulatory action on USDT similar to what BUSD has faced, which is an asymmetric benefit for USDC. Despite the expected regulatory pressure on USDT, it still maintains a dominant position in stablecoins, accounting for about 75% of the USD stablecoin transactions.

USDC has seen a slow recovery following the Silicon Valley bank collapse scandal, with poor adoption in regions like Canada, Bermuda, and Puerto Rico. Meanwhile, Cantor Fitzgerald holds a 5% stake in Tether (Odaily Note: Cantor Fitzgerald is a large comprehensive financial services company in the US, one of the 24 "Primary Dealers" authorized by the Federal Reserve to participate directly in the issuance and trading of US Treasuries), managing its $134 billion in assets under the leadership of Howard Lutnick, indicating that the regulatory risk of USDT is also decreasing, weakening USDC's compliance advantage.

Comparison of USDC and USDT Stablecoin Trading Volumes in the Americas. Source: Artemis

In conclusion, Coinbase shares an economic interest with Circle, but it only gains a small portion of the upside from USDC, as Tether still dominates the stablecoin market. The potential market share growth of USDC remains limited, which also restricts Coinbase's risk exposure. Although Circle's stock price shows a parabolic rise, this largely reflects expectations of its future growth in the payment sector.

Due to Coinbase's contribution to the growth of USDC mainly through its exchange platform promotion, its driving force in the next phase of USDC's rise is limited. If you are bullish on Circle, directly investing in Circle would be better than investing in Coinbase.

Stablecoin Market Share. Source: Artemis

Next, we will explore the increasing pressure faced by Coinbase's other business lines (including its core exchange and on-chain infrastructure) to analyze why investing in Coinbase now requires caution.

Coinbase Exchange Business: ETF, Intensified DEX Competition, and Erosion of Coinbase's Moat

The exchange business has always been supply-side-driven, meaning users will choose exchanges that list the assets they need. When compliance is no longer an issue, competitiveness relies more on which exchange can offer the latest hype or high-return tokens rather than brand loyalty. Emerging or trending tokens (especially in speculative or meme coins) often trigger a surge in user activity, and listing popular assets can significantly boost an exchange's trading volume and active users.

There are typically three different types of tokens in the market:

· Blue-chip assets: high liquidity, trustworthy, and usually considered "safe" (e.g., BTC, ETH, SOL).

· VC coins: backed by reliable teams or having some degree of regulatory compliance (e.g., ADA, XRP, LINK).

· Meme coins: high risk, high reward, often driving participation surge (e.g., FLOKI, APE, TURBO).

U.S. Retail and Institutional Users Shift to ETFs

Prior to this cycle, Coinbase has been popular in the U.S. market with its extensive asset listings and diverse trading pairs. However, the exchange landscape has now undergone a significant transformation. Firstly, the rise of cryptocurrency ETFs has created a regulated and institutionally friendly entry point, accelerating mainstream adoption and allowing traditional capital to enter the space without relying on platforms like Coinbase. Institutions favor cryptocurrency ETFs, with the asset under management of Bitcoin ETF surpassing $100 billion in one year. In particular, BlackRock's IBIT ETF exceeded the assets under management of its gold ETF in less than 12 months.

BlackRock's Bitcoin ETF's asset under management has quickly surpassed that of its long-held gold ETF. Source: BlackRock

ETFs have expanded the investment channel for blue-chip assets such as BTC and ETH, while also weakening a key advantage of Coinbase — as the primary compliant platform for U.S. cryptocurrency investment. Growth opportunities that Coinbase once exclusively enjoyed are now being shared, or even directly replaced, by ETF tools, with an increasing number of U.S. retail investors entering the cryptocurrency market through ETFs rather than Coinbase. Although Coinbase will earn custody fees from some ETFs, these revenues are negligible compared to the prior high trading fees.

Bitcoin ETF's asset under management over time. Source: The Block

Missing Out on the Solana Meme Coin Craze

On the other hand, the explosive growth of meme coins has sparked a new wave of retail speculative frenzy. Tools like Pump.fun, Raydium, and others have made token issuance incredibly simple, leading to a nearly 30x increase in the number of tokens since the last cycle.

The number of independent crypto tokens has increased from less than 1 million in the last cycle to over 30 million in this cycle. Source: Dune, @cgrogan

Due to strict compliance standards, Coinbase has been slow in listing small or meme tokens. In contrast, the popularity of DEX has soared, providing almost instant liquidity for almost all tokens through permissionless, AMM-based systems. This gives DEX a clear advantage in speed and flexibility, making DEX often the only viable option for users seeking early, high-risk, high-reward opportunities (especially in the meme coin space).

Coinbase's disadvantage lies in its limited integration with the Solana ecosystem (now a hub for meme coin activity). As a result, Coinbase largely missed out on the Solana meme coin craze, while DEX platforms like Raydium and Jupiter seized the related trading volume and user engagement.

This period saw a doubling of spot trading volume from DEX to CEX. Source: The Block

Loss of Compliance Advantage

In addition to the rise of ETFs and meme coins, the Trump administration also sent a more crypto-friendly signal aimed at increasing regulatory transparency and ending the industry's harsh suppression. For example, SEC Chairman Paul Atkins, appointed by Trump, swiftly took action to reverse the stringent enforcement actions against platforms like Coinbase and Kraken during Gary Gensler's era.

As a result, traditional financial platforms with strong retail channels like Robinhood have also entered the crypto market. This shift is evident in the data: by the fourth quarter of 2024, Robinhood's retail revenue as a percentage of Coinbase's revenue rose from 32% to 76%, highlighting the decline in Coinbase's market share. While regulatory clarity is beneficial to the entire crypto industry, it also lowers the barrier to entry.

Previously, strict compliance policies favored well-funded companies like Coinbase, but under the new, more lenient regulatory regime, small exchanges and traditional financial platforms can compete more effectively.

Robinhood's retail trading volume has significantly outpaced Coinbase. Source: Coinbase Quarterly Report, Artemis

The intensifying competitiveness of the entire cryptocurrency market should put greater pressure on Coinbase to lower its high fees, or else it risks losing market share. In fact, Coinbase's share of trading volume on USD-supporting exchanges has already decreased from a peak of 60% to around 50% today, plummeting to a low of 32% during the meme coin frenzy.

With the launch of ETFs and the rise of meme coins, Coinbase's share of the USD-supporting exchange market has declined. Source: The Block

Importantly, Coinbase's transaction fee rate has also dropped significantly, from a peak of 2.5% to around 1.4%. If it weren't for the recent derivatives launch, this decrease would have been even greater. It is worth noting that right after the FTX collapse, Coinbase's transaction fee rate skyrocketed by the end of 2022, when Coinbase once enjoyed an almost monopolistic position in the U.S. market. This trend peaked in the fourth quarter of 2023, just before the launch of the Bitcoin ETF, marking a shift towards a more competitive and institutional phase in cryptocurrency trading.

Coinbase's retail transaction fee rate dropped from a peak of 2.5% to 1.4%. Source: Coinbase Quarterly Report, Artemis

Coinbase's New Liquidity Businesses: Derivatives and Base

The competitive landscape of Coinbase has undergone a significant transformation in this cycle. One end of Coinbase's core business model, "from exchange to on-chain economy," is now in jeopardy. Despite facing intense competition, three liquidity businesses could become its core pillars: the derivatives market and Base.

Derivatives Market: Futures Without Expectations?

Derivatives remain the most lucrative segment in cryptocurrency trading. In 2024, Coinbase launched a series of limited international derivative products which were quickly adopted. Coinbase noted that despite robust trading volume growth in the first quarter of 2025, derivatives are still in their early stages and could be a key to attracting institutional users for liquidity. However, due to ongoing marketing efforts, the impact of derivatives on revenue has been limited so far, as rebates and liquidity incentives have offset institutional trading revenue.

Following Trump's win in the presidential election, Coinbase's derivative trading volume saw a significant increase. Source: Coingecko

In 2024, Coinbase's primary goal for launching derivatives was to better monetize existing users and attract new ones. However, apart from a brief surge in international user growth towards the end of 2024 Meme Season, the growth in users has been marginal. While derivatives contributed to higher trading revenue, they did not significantly drive user growth.

Coinbase's domestic and international active users over time. Source: Data AI

In 2025, Coinbase began offering derivative services to its U.S. users to better monetize its domestic user base. However, this launch coincided with the rapid rise of Bitcoin options tied to ETFs. As most derivatives concentrated on blue-chip assets like BTC and ETH, Coinbase faced direct competition from ETF options, further limiting its growth potential in this area.

In summary, while the derivative business quickly became a significant revenue stream for Coinbase in the short term, it still faces challenges in the long run unless it can overcome restrictions and attract new users in an increasingly crowded and fragmented exchange market.

Base: Coinbase’s Bet on On-Chain Infrastructure

Base is Coinbase's Ethereum Layer 2 scaling platform designed to onboard users into the on-chain economy while diversifying Coinbase's revenue. Unlike other Layer 2 platforms, Base uses ETH as its native currency and has no native token. With Coinbase's brand and support, Base rapidly gained popularity through applications like FriendTech and Farcaster, becoming the highest-volume Ethereum Layer 2 project in its first year.

Figure 18: Base's monthly active addresses and monthly transaction count. Source: Artemis

Coinbase has achieved significant revenue through operating Base's sequencer. According to Dune data, Base's weekly gross profit is around $1 million with a profit margin of approximately 90%. Furthermore, Base accounts for over 75% of the total profit in Ethereum Layer 2, demonstrating its efficiency and market dominance. In addition to sequencer fees, Base onboard users into Coinbase's ecosystem through its wallet and applications, generating revenue through cryptocurrency purchases, swaps, and Base-native applications. Base also supports Coinbase's B2B products such as Cloud, OnchainKit, and SDK. Additionally, through a partnership with Optimism, Coinbase is poised to receive up to 118 million OP tokens over the next six years, tied to Base's growth.

However, Base's core limitation lies in its positioning as a modular Ethereum L2, which has resulted in fragmentation between liquidity, users, and developers. Bridging assets from Ethereum incurs added friction, and limited interoperability between L2s hinders seamless integration. These issues stem from the blockchain's ultimate determinism gap, resulting in slow, costly, and complex cross-chain liquidity transfers. Despite tools like AggLayer and cross-chain bridges, the modular structure still faces challenges.

As a result, while Base has seen rapid development, its adoption (measured by active users and transaction volume) still lags behind more unified, scalable monolithic chains like Solana, where daily active users are three times that of Base and daily transaction volume is seven times that of Base.

Comparison of monthly active addresses and monthly transaction volume between Base and Solana. Source: Artemis

How Much is Coinbase Really Worth?

We will use a sum-of-the-parts valuation approach, breaking it down into the following segments:

· Exchange Business: Including trading revenue, subscriptions and services, and blockchain rewards

· Base Revenue: Revenue generated by Coinbase's Layer 2 network Base

· USDC Revenue: Revenue share generated through Coinbase's partnership with Circle

· Interest Income: Income from cash and USDC reserves generating interest

Exchange Business Valuation: $807 Billion

Fundamentally, Coinbase's exchange business is both cyclical and facing increasing competition. To value it, we have used the average revenue multiple of traditional brokerage firms, reflecting a more stable and mature market structure.

Utilizing this multiple, the valuation of Coinbase's exchange business is: $51.7 billion × 156.1 = $807 billion.

Base Business Valuation: $18.6 Billion

As part of the bullish case for Base, we have used the average Market Cap-to-Revenue ratio observed between Optimism (OP) and Arbitrum (ARB), with a multiple of 270. Applying this formula to Base's annual revenue of $68.70 million, we arrive at an implied market value of: $68.70 million × 270 = $18.5 billion.

Ethereum L2 Comparison Table. Source: Artemis

However, our fundamental argument applies a traditional tech valuation framework. Using a 30x price-to-earnings ratio, assuming a gross margin of around 90%, Base's implied gross profit is about $61.8 million, leading to a more conservative market valuation estimate: $61.8 million × 30 = $1.86 billion.

This comparison highlights the significant valuation gap between a token-based model and a traditional financial framework. Given the speculative nature of current token price-to-earnings ratios, our analysis is based on a more fundamentals-focused traditional financial model.

USDC Business Valuation: $451.8 Billion

With Circle having completed its IPO, valuing Coinbase's USDC-related business is relatively straightforward. Circle is currently valued at around $528.5 billion (as of June 23, 2025), reflecting a 40% share in USDC revenue. As Coinbase occupies the remaining 60% and retains approximately 57% of it as net revenue (after distributing earnings to users), we can estimate the value of Coinbase's USDC-related business as follows:

$528.5 billion × (6/4) × 57% = approximately $451.8 billion

This means that USDC contributes approximately $451.8 billion in value to Coinbase.

Coinbase earns nearly $300 million in interest income annually from its $8 billion cash reserves. We directly include the value of this asset in the aggregated valuation method, resulting in $8 billion.

Thus, under the aggregated valuation method, Coinbase's valuation could be around $1.08592 trillion (aggregated * 80%), indicating that the market may be undervaluing the company. However, this apparent disparity with reality also reflects genuine and substantial risks.

Conclusion: Comprehensive Competition Faced by a Diversified Ecosystem

Coinbase's core trading business is facing sustained pressure from structural factors: ETF-driven disintermediation, DEX fee compression, and slowing user acquisition. Meanwhile, emerging revenue pillars like Base and USDC, while strategically important, are also subject to increasingly fierce market competition. USDC and interest income (key recent growth drivers) are also susceptible to pressure from interest rate declines and yield curve pressures, limiting further profit capture.

In short, Coinbase is evolving into a diverse crypto ecosystem, but every aspect of this model is now facing resistance. While from a purely financial perspective Coinbase may be undervalued, market caution also reflects a rational pricing of its diminishing moat, profit pressures, and competitive vulnerability.

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