Friday, Dec 17th 2021

Our call with Coinbase leadership


As active investment managers, we enjoy speaking with the leaders of companies we’re currently researching or invested in, on behalf of our clients. Alongside our qualitative and quantitative research, these conversations may add color to the way a company sees itself and its near- and long-term future.

We recently purchased shares of Coinbase (COIN) for clients in Titan’s Flagship strategy, as a “picks and shovels” bet on the booming crypto economy.

On Thursday, December 16, 2021, Titan Investment Analyst Justin Yoo met with Michael Urciuoli, Coinbase’s Director of Investor Relations to talk through a few of our team’s questions. And we had three key takeaways from this conversation.

  • Coinbase does not equate regulating crypto with a crypto shutdown.
  • Coinbase’s fee compression risks may be overstated.
  • Coinbase has a “70-20-10” framework for product development: 70% of their efforts go into improving its current products, 20% into features they believe may be future growth drivers, and 10% into “moonshots.”

Overall, we came out of this conversation confident in our initial work on Coinbase, which indicated COIN may be worth $500+ per share by the end of 2024, implying a 25%+ average annual price increase.

The two major risks our team wrestled with before initiating this position were regulation and fee compression.

On the regulatory front, COIN believes U.S. officials want to make domestic crypto businesses more competitive globally, while regulating the industry, without harming consumers. In our view, regulators may find this a challenging line to toe. Tracking developments on the regulatory front will be a key part of our ongoing work on COIN.

Some investors also fear that fee compression—aka a steep decline in how much a company can charge users for certain transactions—is a near-term event for COIN. It was clear through our conversation that COIN believes this is likely a longer-term industry dynamic, with meaningful fee compression happening on a 5-10 year horizon, not the immediate term. In other words, the company does not believe fees will compress overnight—far from it.

Additionally, COIN’s leadership noted that the crypto market is already highly transparent and competitive when it comes to fee structures. There are venues that users can find today that will allow them to transact for no fees at all. Given our belief that the industry is in early innings, we agree with COIN’s assessment that fee compression may be years away, as today’s users place higher value on security, education, and access to a growing variety of crypto tokens and services.

Through our initial work on COIN, we also came to the view that trading fees would become a smaller part of the business over time, as the company built out subscription and services offerings.

For instance, COIN enables some users to “stake” their coins, or earn rewards for holding certain cryptocurrencies, and revenues from this service more than doubled from Q2 to Q3. We believe additional offerings such as Coinbase NFT and Coinbase Wallet could be a meaningful part of the business over the long-term.

Lastly, we were struck by COIN’s 70-20-10 rule as it relates to their internal planning process.

The company puts 70% of their efforts into improving its current products, 20% into what they believe may be future growth drivers, and 10% on “moonshots.”

As investors, we think this is a novel framework for understanding how management at a portfolio company thinks about their own time and capital allocation. As employees, investors, and simply as human beings, we believe this framework is a great starting point for thinking about how we choose to allocate our own finite time and energy.

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