In celebration of Coinbase’s earnings report today, investors poured a mountain of cash into one of the company’s global competitors.
I’m kidding, of course, but today really is Coinbase’s earnings day, and private investors really did just push $210 million into another exchange.
The company, FalconX, is now worth $3.75 billion. As Bloomberg notes, that’s a 5x valuation jump in less than half a year. FalconX raised a smaller $50 million round in March, notably in part from Coinbase Ventures.
The FalconX news should not surprise. Indian crypto exchange CoinDCX just raised $90 million, reaching a $1 billion valuation in the process. This past weekend, Indonesian cryptocurrency exchange Pintu raised $35 million. Earlier this year, Hong Kong-based crypto exchange FTX raised $900 million at an $18 billion valuation. There are other examples.
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It’s a lot of capital in a global race to fund the next Coinbase, I reckon.
And you can’t fault investors in their hunt. After all, Coinbase has proven to be an incredibly powerful business when crypto interest is high; trading revenues at the U.S. crypto exchange rose to $1.8 billion in the first quarter of 2021, per its most recent 10-Q filing. Coinbase managed to juice its revenue haul for $771.5 million in net income. In per-share terms, Coinbase earned $3.05 per diluted piece of equity.
It was an impressive result. Today, investors are expecting Coinbase to report $1.77 billion to $1.83 billion in revenue, depending on which analyst summary you prefer, and earnings per share of around $2.57. You can somewhat easily puzzle out what sort of net income that EPS figure represents, given the company’s Q1 results.
I’d normally argue that Coinbase’s results today would help set the tone for venture investment in the private sector and valuations for other crypto exchanges. But given the sheer amount of money that has recently flowed into a coterie of startups around the globe hoping to build the Coinbase of their market, the concept seems somewhat moot.
Instead, Coinbase’s earnings and comments about the market will simply help us understand the playground in which other crypto exchanges are currently playing, admittedly from a decidedly U.S.-centric perspective. Coinbase’s last quarter saw it generate some 81% of its revenues from its domestic market, as a data point.
But that doesn’t mean that there’s no fun to be had. We can do some math regarding trading volumes and valuations. Since we have Coinbase’s trading volume data, we can parse other exchanges for their own shared data and see which seem expensive — or cheap. So, let’s do just that. Into the numbers!
Trading volume as revenue proxy
Per its 10-Q filing concerning the quarter ended March 31, 2021, Coinbase reported that it saw trading volume of $334.74 billion, up 1,022% from its Q1 2020 number of $29.83 billion. The company also reported that its transaction — trading — revenues for the period were $1.54 billion. So, Coinbase generated around $0.0046 per dollar of traded crypto on its platform in the period.
It goes without saying, but we’re wandering into the realm of speculative math, which means that everything we’re doing today is directional rather than absolute. Our goal of seeing how other exchanges are valued based on their trading volumes will be useful, but not definitive. We’ll have to wait for more S-1s and similar filings to get to full confidence.
Regardless, with Coinbase’s numbers in hand, let’s collect some other data:
- FTX volume: $10 billion daily, per CoinDesk.
- FalconX volume: $10 billion monthly, per Bloomberg.
And that’s about what we could round up. It’s a bit hard to verify, but FTX’s own page covering global exchange volume notes that it had total trading volume of $12.58 billion yesterday, with just over $10 billion of that volume coming from derivatives products. So that’s close.
Regardless, taking them at face value, FTX is doing around $900 billion in quarterly volume, and FalconX around $30 billion. That puts Coinbase smack-dab between the two of them in terms of quarterly trading volume.
If you are worried that we are comparing Q1 2021 Coinbase data with more recent figures from FTX and FalconX, you have sharp eyes. But recall that investors are expecting Coinbase to post very similar results in revenue terms in the second quarter compared to what it did in the first. That means we’re not too far off when it comes to our comparison.
And, recall, we’re merely doing directional math.
At Coinbase’s transaction revenue per dollar transacted, here’s how the two major and recently funded exchanges would perform:
- FTX quarterly revenue at implied trading volume, Coinbase’s per-traded-dollar revenue: $4.14 billion.
- FalconX quarterly revenue at implied trading volume, Coinbase’s per-traded-dollar revenue: $138 million.
At a valuation of $18 billion, FTX’s valuation appears to be hilariously inexpensive, though it could have a different effective fee structure that would skew its revenue lower. Even at a lower take rate, the company would still be an impressive financial engine. This math helps explain why investors were so willing to pour capital into its business earlier in the year.
And then there’s FalconX, worth $3.75 billion at an implied yearly run rate of around $552 million. That also feels cheap, though less so than the case of FTX.
There are clouds on the horizon. Robinhood is discussing falling trading volumes and revenues in its third quarter. Given that Robinhood has material crypto exposure, the warnings matter. We could see crypto exchange revenue decline in the back half of 2021 compared to the frenzy from the start of the year. If that happens, we could see revenues from trading fall at all the exchanges that we’ve mentioned.
But investors know that that will happen. You cannot possibly invest in a crypto exchange and not understand that there will be peaks and troughs in demand for trading products, and thus revenues, which is probably why Coinbase is only worth $73.5 billion, give or take, today. With its historical growth rate, you could argue it should be worth more. But with investors anticipating seasonality and uneven growth, slightly lower multiples than we might anticipate from a non-exchange software company with similar historical growth and profitability can make sense.
Coinbase reports later today. A lot of folks with recent bets in its industry will be hoping for a good result so that they can defend valuations attached to recent deals, or even pursue markups. But regardless of what Coinbase reports, its earlier, very public success has proved to investors that crypto exchanges can not only generate outsized revenues and profits but also secure attractive valuations when going public. That’s venture capital jet fuel.
More later today when we get Coinbase’s numbers.
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