Coinbase’s Hidden Gem: Analysts See ‘Amazon-like’ Potential in Layer-2 Network Base

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As a seasoned crypto investor with a keen eye for emerging trends, I find Bitwise’s analysis on Coinbase (NASDAQ: COIN) particularly intriguing. The potential of Base, Coinbase’s Ethereum layer-2 network, has the makings of a game-changer in the crypto space, reminiscent of Amazon’s early days as an online bookseller.

Bitwise Asset Management, a leading cryptocurrency asset manager, has recently published an analysis indicating that Nasdaq-listed cryptocurrency exchange Coinbase (NASDAQ: COIN) could potentially follow in the footsteps of Amazon and achieve a market value nearing $2 trillion.

Based on Bitwise’s examination, Coinbase’s latest financial report contains a significant discovery: the Ethereum layer-2 network, named Base, enables users to transfer funds on Ethereum Virtual Machine (EVM) compatible decentralized apps with minimal fees.

In the first quarter of the year, Coinbase reported generating net revenue of $1.6 billion. This figure represents a significant increase of 72% compared to the previous quarter and an impressive surge of 116% when compared to the same period last year. These results surpassed analyst expectations, which estimated a revenue of $1.36 billion for this quarter.

The company’s blockchain rewards earnings surged by 59% during the comparable timeframe, resulting in a total profit of $1.2 billion and a cash reserve of $7.1 billion. Bitwise’s financial analysts have identified Base as a potentially groundbreaking crypto-native business sector for the firm, contributing to only 1% of its first-quarter revenues.

— Bitwise (@BitwiseInvest) May 8, 2024

As an analyst, I’ve observed that when a particular solution is significantly cheaper, faster, and more convenient for users, the demand for it tends to increase substantially. In this context, Base, a Layer 2 platform, has been experiencing remarkable growth. Specifically, transactions on Base rose by an impressive 74% quarter-over-quarter in Q1 alone. To put that into perspective, Base processed approximately 40% more transactions in the month of April than it did during the entire first quarter. Furthermore, Coinbase’s CEO, Brian Armstrong, has reported a surge in the number of developers utilizing this platform.

Bitwise’s addition of Base could significantly boost Coinbase’s revenue, featuring substantial gross margins. Coinbase acts as a “verifier” in the Layer-2 network, grouping transactions together before transmitting them to the Ethereum primary chain.

In the initial three months of the year, Coinbase acted as the sole processor on the Base network and amassed a fee income of $15.5 million from its users. This fee amounted to around 56% of the total $27.4 million transaction fees paid by Base users during this period. In April alone, these fees contributed approximately $11 million to Coinbase’s earnings.

The analysts added:

Should Base continue expanding, it has the potential to generate profits ranging from $10 million to $20 million or more for Coinbase each month. In the future, if Base emerges as the dominant network for app development within the crypto sphere, Coinbase could find itself in a pivotal role, possessing a significant component of this infrastructure.

Bitwise pointed out a comparison made by some that Coinbase’s expansion beyond cryptocurrency trading might place it in a comparable situation to Amazon. Initially, Amazon focused on selling books online, but currently, more than half of its earnings stem from its cloud computing branch, Amazon Web Services.

As an analyst, I would put it this way: I believe Coinbase has the potential to evolve into a foundational service provider within the cryptocurrency sector.

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2024-05-10 05:04