Reducing Fair Value Estimate for Coinbase

We are reducing our fair value estimate for no-moat-rated Coinbase COIN to $80 from $90. Around $3 of the negative adjustment comes from lower staking and trading revenue projections as we build in more regulatory risk to our base case in light of Coinbase receiving a Wells notice from the SEC. About $7 of the reduction comes from lower interest income projections. Interest income was a significant positive for Coinbase in an otherwise grim 2022 as the company benefits from rising interest rates. Interest income rose $7.6 million in the first quarter of 2022 to $182 million by the fourth quarter, or around 30% of revenue, and helped balance the collapse in Coinbase’s transaction revenue.

Coinbase receives the majority of its interest income through its partnership with Circle on the issuance of the stablecoin USDC. USDC is a cryptocurrency pegged to the U.S. dollar and backed by reserves that clients give to Coinbase and Circle in exchange for newly created USDC. Coinbase and Circle generate interest income on these reserves and split it on a pro rata basis. A portion of these reserves were held at Silicon Valley Bank when the bank failed, causing a crisis in confidence in USDC, driving it below the $1 per coin peg. This lasted from the initial failure of Silicon Valley Bank until the announcement of the depositor rescue plan. While the crisis only lasted a few days and none of the deposits that back USDC were lost, it appears that the event has done some lasting damage to USDC. After remittances of USDC were reenabled, the amount of outstanding USDC has steadily fallen as clients return USDC to reclaim their contributed capital, with circulation falling to under $33 billion on March 30 from $43 billion at the start of the month. The reduced amount of USDC will lead to reduced interest income for Coinbase, and it is unclear if or when USDC will recover, costing Coinbase a reliable source of income in a difficult cryptocurrency market.