Summary Coinbase stands as a leading cryptocurrency exchange, benefiting from robust trading volumes and institutional adoption. COIN's investment thesis centers on its dominant market position, diversified revenue streams, and exposure to digital asset growth. Regulatory clarity and increasing mainstream acceptance of cryptocurrencies are key drivers supporting COIN's forward outlook. Q4 will give updates on the impacts of setbacks in that period, but the long-term strategy remains intact even ahead of those. Coinbase ( COIN ) is a major crypto exchange that I've covered a few times. The stock is down from the highs it saw in 2025. I believe this decline is short-term in nature. The company's long-term focus should serve it and shareholders well. Summary of Previous Thesis When I wrote about COIN last, it was May 2025, and Q2 was still ongoing. Q1 2025 Shareholder Letter I talked about how transaction revenue was volatile, prone to cyclical factors. I also pointed out how COIN had been leveraging their exchange business to form a growing core of subscription-based revenue, thanks in large part to their stablecoin product through their alliance with Circle Internet Group ( CRCL ). Wanting more financial data for 2025, I declined to update my Discounted Cash Flow calculation, giving it a fair value of $366 per share for a 10% discount rate. Because the margin of safety was large for what I felt was a grower, I rated it a Buy. Updates Since Last May Numerous things have happened since I wrote in May, which both drove the stock up and then back down. First was the passage of the GENIUS Act , the first major federal policy on crypto, which specifically provided a framework for stablecoins, one of COIN's key products. Secondly, the crypto market took a big hit starting on Oct. 10. A new tariff announcement by President Trump caused the crypto market to pull down, which in turn forced liquidations of heavily leveraged accounts. General nervousness by the market (crypto and stocks) continued to bring it down. Price of BTC Since May 2025 (Seeking Alpha) Looking at the price of Bitcoin ( BTC-USD ), we can see that the flurry of good news (as the GENIUS Act brought more people and institutions into crypto). This brought BTC to a high of $123K right before Oct. 10. The bearishness that followed brought it back under $100K again, and it has yet to recover fully. COIN Price History Since May 2025 (Seeking Alpha) COIN has a similar story, but its ATH was reached in July at $420, and this coincided more closely with the GENIUS Act. While there's some correlation with BTC, it's also clear that what benefits COIN's earnings is a consideration here. Let's talk a bit about those. Q3 2025 Shareholder Letter While the transaction part of their revenue has grown, the stablecoin product has had the most consistent growth across quarters, with the GENIUS Act supporting an ATH of $354M in revenue from this product. What about the impact on cash flows? Cash Flow Statement (Q3 2025 Form 10Q) A straight look at the cash flow statement shows a surprising change, negative operating cash flow! Nevertheless, we see that the biggest driver here was $2.5B in net changes in operating assets and liabilities. Net Changes in Operating Assets and Liabilities (Q3 2025 Form 10Q) A closer look shows that nearly all of this is a result of growth in their USDC product. An increase in USDC balance follows the spike in adoption. As Circle and Coinbase gain yield from the short-term interest of the real cash behind the USDC, it is considered an operating asset, and gains in this position result in a decline. 1Y USDC Market Cap (coinmarketcap.com) As seen above, the market cap of USDC has grown from about $45B a year ago to $75B more recently. It has sagged less from the bearishness in the broader crypto market. Pegged to USD 1:1, growth purely reflects how the product is gaining adoption. If we adjust for the impact of USDC balances, operating cash flow for the first nine months of 2025 comes to $1,803M. Annualized, this is about $2,404M. Cash Flow Statement (Q3 2025 Form 10Q) COIN did not report meaningful capex in the usual sense for these nine months. I did highlight fiat loan originations in the table above because this is an interesting item. The only thing we might consider capex is the cash portion of the acquisition of Deribit. Q3 2025 Form 10Q This was a $4.3B deal, of which about $3.6B was done in shares of COIN. Fully diluted, COIN's total shares outstanding are now 292M. The reason for this dilutive acquisition is simple. In their Q3 shareholder letter , management cited crypto derivatives as accounting for 80% of crypto trading volume, and Deribit is the largest exchange in crypto derivatives, when measured by trading volume and open interest. Balance Sheet (Q3 2025 Form 10Q) Looking at the balance sheet, we see a very healthy company coming out of the third quarter. Their $8.7B in cash is sufficient to support their $7.3B in total debt, and USDC balances are quickly becoming one of their largest operating assets overall. Outlook and Valuation COIN trades back in a range where I first considered it a Buy again, $240 per share for a market cap of $66B. Let's examine whether or not I still consider it a Buy. First, consider the value proposition. Annualized adjusted OCF is $2,404M. With M&A as the only likely form of capex for their capital-light business, it takes some guess work, but we could imagine that this is a business that produces about $2B in adjusted FCF currently. Based on the fully diluted shares outstanding, that would be $6.85 per share. Let's compare some growth assumptions with Discounted Cash Flow models that utilize this adjusted FCF per share. Author's calculation On the left, I assumed a long-term CAGR of 15% with a similar terminal multiple. On the right, I only raised the CAGR to 20%, while keeping the terminal multiple at 15, mainly to illustrate how a marginal difference in growth can add up. Both use 10% discount rates to compare to market indices, suggesting fair values of $249 and $359, respectively. In general, I think there is plenty of reason to think that long-term growth will occur, given the framework provided by the GENIUS Act. This has created more stability and peace of mind for new businesses to join in, hence the large growth of COIN's USDC balance this year, even in spite of the broader bearishness of crypto since October. While transaction revenue from trading on their exchange fluctuates each quarter, I suspect it should generally grow as well, particularly as they work to become an "everything exchange," something mentioned heavily in Q3 earnings. CEO Brian Armstrong said this in the earnings call : In Q2, we introduced the Everything Exchange, a one-stop shop to trade every asset class. Customers want one venue to trade spot crypto assets, derivatives and options, but also equities, prediction markets, commodities and more. In Q3, we executed on that vision by expanding spot coverage, growing our derivatives offering and laying the groundwork for new asset classes on our platform. This largely explains the acquisition of Deribit and likely hints at acquisitions here and there to come. I think a big source of growth in their stablecoin product still lies ahead, as an alternative to merchant services. CFO Alesia Haas said in the call: But we're also seeing small and medium-sized businesses really come to our platform as we enable them to more efficiently manage their capital and their liquidity through instant settlement via stablecoins, while we're earning rewards now on any idle funds that they hold in USDC. So we've seen great early traction with over 1,000 businesses onboarded , and we have a growing wait list. As stablecoins are very nearly a zero-cost merchant service, I expect room for this to grow beyond the role they occupy as a placeholder of value for crypto trading. It starts with B2B transactions in order to lower costs. It steadily can become more adopted, for more ordinary uses by individuals. The reach of the exchange is growing. The balance of the USDC product is growing. One's revenue is volatile; the other's is stable, but both lines are showing signs of growth. Additionally, Coinbase is finding good opportunities to create revenue. For example, they have been a source of financing for other crypto players by creating crypto-backed credit facilities for them. When I wrote about CleanSpark ( CLSK ) recently, they spoke about a $200M line with them. There are spots where the COIN can leverage its leadership and relationships to produce strong yield. Risk Factors Both valuations assume some growth, and either one can be weakened by setbacks that may be out of COIN's control. The bearishness in Q4 is very likely to have impacted trading volume, and so there could be a hit in full-year results from this. Meanwhile, rate cuts by the Federal Reserve began in September, and two more followed before the end of 2025. Both of these trends will likely make Q4 look weaker. Continued rate cuts into 2026 could make growth flat, even if USDC balances grow, as short-term interest rates are what make the balance an operating asset at all. Cash Flow Statement (Q3 2025 Form 10Q) Additionally, stock-based compensation remains significant, over $600M in the first nine months of 2025. If this continues, there's a dilutive trend that may lower the long-term CAGR of FCF per share by a few percent. While there aren't immediately threatening risk factors, owing to their capital-light model and low use of leverage, COIN is priced for at least a little growth, and so investors depend on that in order to come out ahead over time. Conclusion Everything taken into account, I think setbacks like Q4's bearishness are temporary in nature. Coinbase is not anchoring itself to being a crypto exchange; it works to become a more universal fintech with durable revenue sources. For that reason, I think shareholders can get a fair value for moderate execution but undervaluation for excellent execution. For that reason, I maintain my Buy rating today.
