The recent parabolic surge in Circle’s stock price has left many investors searching for alternative ways to gain exposure to the stablecoin giant’s success. One name that frequently comes up is Coinbase, given its close business ties to Circle and the USDC stablecoin. However, a deeper look reveals that buying Coinbase stock as a proxy for Circle or USDC might not be the sound investment strategy it appears to be.
Why Coinbase Isn’t a Pure Play on Circle or USDC
While Coinbase and Circle are partners in the USDC stablecoin project, their financial interests are not perfectly aligned. Coinbase’s business is a vast, diversified ecosystem encompassing a cryptocurrency exchange, subscription services, blockchain rewards, the Base L2 network, and its share of USDC revenue.
Crucially, USDC-related income accounts for only about 15-20% of Coinbase’s total revenue. The vast majority of its income still comes from its core exchange transaction fees. Therefore, an investment in Coinbase is a bet on its entire diversified business model, not just its stablecoin segment.
The Mechanics of USDC Revenue for Coinbase
Coinbase earns interest from the U.S. Treasury reserves that back the USDC stablecoin. Through a revenue-sharing agreement with Circle, Coinbase receives approximately 60% of the total interest income generated.
However, this figure is misleading. Coinbase uses a significant portion of this income—about 43%—as a marketing tool, distributing it back to users as yield on their USDC holdings. This strategy helps retain users but drastically reduces the net income Coinbase keeps. After this distribution, Coinbase’s actual net take from USDC is closer to just 34% of the total stablecoin revenue.
This means that for every dollar of growth in USDC’s market cap, Coinbase only captures a fraction of the value, making it a less efficient way to bet on USDC's success than investing directly in Circle.
The Intense Pressure on Coinbase’s Core Exchange Business
Coinbase built its reputation as a compliant, user-friendly gateway into crypto. For a long time, its expensive investment in regulatory compliance acted as a formidable moat, keeping competitors at bay. That moat is now eroding.
The Rise of ETFs and Institutional Competition
The approval of Spot Bitcoin and Ethereum ETFs has fundamentally altered the landscape. These regulated products provide a familiar and easy entry point for traditional institutions and retail investors, many of whom now prefer buying an ETF share over creating a Coinbase account.
While Coinbase acts as the custodian for several major ETFs, the fees from custody are a fraction of the revenue it once earned from direct trading fees. The ETF wave has effectively disintermediated Coinbase for a large segment of new market entrants, particularly those focused on blue-chip assets like BTC and ETH.
Losing Ground to DEXs and the Meme Coin Frenzy
The current market cycle has been dominated by the explosive growth of meme coins, largely on the Solana network. Platforms like Pump.fun and DEXs like Raydium have made token creation and trading permissionless and instantaneous.
Coinbase, with its stricter compliance standards, has been slow to list these smaller, riskier tokens. This caution has caused it to miss out on a massive wave of retail trading volume and user engagement, which has instead flowed to decentralized exchanges. Data shows the ratio of DEX-to-CEX spot trading volume has doubled this cycle.
Eroding Fees and Market Share
Increased competition from every angle—ETFs, DEXs, and TradFi platforms like Robinhood—has forced Coinbase to compete on price. Its average retail transaction fee (take rate) has plummeted from a peak of 2.5% to around 1.4%. Its market share among USD-supported exchanges has also fallen, from over 60% to roughly 50%, with dips as low as 32% during peak meme coin activity.
New Revenue Streams: Promise and Challenges
To counter pressure on its core business, Coinbase is aggressively diversifying. Two of its most important new ventures are its derivatives offering and the Base L2 network.
Derivatives: Volume Growth vs. Profitability
Derivatives are the most lucrative segment of crypto trading. Coinbase’s international derivatives product saw volume soar to over $300 billion per month. However, monetization remains a challenge. The company has relied heavily on aggressive liquidity incentives and rebates to attract users, which significantly eats into profits.
The recent rollout of derivatives to U.S. users faces a new hurdle: fierce competition from ETF-based Bitcoin options, which offer a traditional and familiar way for investors to gain leveraged exposure.
Base: A Strong Contender in the L2 Race
Base, Coinbase’s Ethereum Layer 2 network, has been a remarkable success. It quickly became the leading L2 in terms of transaction volume and active addresses, driven by popular apps like FriendTech and seamless integration with the Coinbase ecosystem.
The network is highly profitable, with sequencer fees generating an estimated $1 million per week in gross profit at a 90% margin. Base also serves as a powerful funnel, onboarding users into Coinbase’s suite of on-chain products and services.
Despite its success, Base’s growth is constrained by the inherent limitations of the modular Ethereum L2 model, which can lead to fragmented liquidity and complex user experiences. In terms of raw user adoption and activity, it still trails monolithic chains like Solana, which boasts three times the daily active users and seven times the daily transaction volume.
Coinbase Valuation: A Sum-of-the-Parts Analysis
A detailed valuation model breaks down Coinbase’s value based on its different business units:
- Exchange Business: Valued at approximately $80.7 billion, based on a revenue multiple comparable to traditional brokerage firms.
- Base L2 Network: Valued at $1.86 billion using a traditional tech PE ratio, a conservative figure compared to the highly speculative valuations seen in the token-based model of other L2s.
- USDC Revenue Share: Valued at roughly $45.18 billion, extrapolated from Circle’s market cap and Coinbase’s share of the net revenue.
- Interest on Cash Reserves: The value of its cash holdings, generating significant interest income, is added directly at $8 billion.
This sum-of-the-parts analysis suggests a potential valuation of around $108.6 billion for Coinbase. This implies the market might be undervaluing the company. However, this potential discount also rationally prices in the significant structural risks and competitive pressures facing every part of its business.
Frequently Asked Questions
Is Coinbase stock a good way to invest in USDC?
Not directly. While Coinbase shares in the revenue from USDC, it only nets about 34% of the total interest income after distributing yield to users. This makes it a less direct and efficient exposure to USDC's growth than investing in Circle itself.
What is the biggest threat to Coinbase's business model?
Competition. Coinbase faces intense pressure from all sides: ETFs are capturing new institutional flows, DEXs are winning the retail meme coin trade, and TradFi platforms like Robinhood are competing on price and ease of use, eroding Coinbase's once-strong moat.
How important is Base to Coinbase's future?
Extremely important. Base is a fast-growing, high-margin business that drives user onboarding and engagement with Coinbase's ecosystem. However, it operates in a highly competitive L2 landscape and its growth, while impressive, still lags behind chains like Solana.
Have Coinbase's fees decreased?
Yes. Increased competition has forced Coinbase to lower its take rate significantly. The average retail transaction fee has fallen from a peak of 2.5% to around 1.4%, putting pressure on its core profitability.
Does Coinbase benefit from Bitcoin ETFs?
Indirectly. Coinbase earns custody fees from several major ETFs, which provides a new revenue stream. However, these fees are much lower than the trading fees it earns when users buy Bitcoin directly on its platform, and ETFs also represent a competitive threat by offering an alternative entry point.
What is a key reason to be cautious about Coinbase stock?
The market is correctly pricing in structural risks. While a sum-of-the-parts analysis might suggest the stock is undervalued, this discount reflects real concerns about enduring competition, falling fees, and the challenge of monetizing new products like derivatives. For a deeper dive into advanced market analysis tools that can help you assess such investments, you can explore more strategies here.