Coinbase’s business model is similar to that of many traditional financial institutions, which make money via trading fees and by offering services. However, Coinbase differs slightly from other financial institutions in that essentially all of its services are related to crypto assets and the digital currency industry.
In many ways, the cryptocurrency economy can actually be much more insular than traditional financial networks. While in the past, businesses like major banks and payment processors have always needed to rely on several different services to keep business flowing, Coinbase appears to have a business model based on incorporating crypto assets into many of those traditional services.
Since it started being publicly traded on the NASDAQ exchange, Coinbase has routinely made headlines: total revenue will greatly exceed expectations in one fiscal year and severely underperform in the next. These extremes arguably highlight the crypto economy’s general volatility but do not necessarily indicate a fundamental problem with Coinbase’s business model.
Most investors are aware that massive amounts of money move through cryptocurrency exchanges, but many might not be aware of the more specific offerings of the Coinbase platform and business model. Reputable cryptocurrency exchange platforms often have multiple revenue streams. However, Coinbase is, first and foremost, a cryptocurrency exchange, so the majority of its business model relies on the transaction revenue generated from trade commissions.
When Coinbase’s retail and institutional customers buy or sell a crypto asset on the platform, they are charged a transaction fee in the amount of a small percentage of the total value of the transaction. But how else does Coinbase make money? Let’s take a closer look at the Coinbase business model and how it works within the crypto economy.
How Coinbase makes money with trading fees
While increasingly more stockbrokers have eliminated commission fees for all but the most complex trades, most cryptocurrency exchanges still charge a commission on even basic transactions. Unlike a traditional stock trade commission, which is usually a fixed amount, most digital currency exchanges (including Coinbase) charge a percentage fee based on the value of the order.
Depending on the current market and the type of order, Coinbase will either charge a maker fee or a taker fee. Either way, Coinbase will charge a commission between 0.05% and 0.60%, with the exact commission rate determined by whether Coinbase charges maker or taker fees on the order and the transaction value.
Realistically, the vast majority of trades will be on the higher end of that scale since Coinbase charges a minimum of 0.40% up to the advertised maximum of 0.60% on all orders under $10,000. To be eligible for the lowest advertised commission rate of 0.05%, you would need to place an order for at least $400,000,000.
Fees on Coinbase vs Coinbase Pro
The Coinbase business model is often highlighted as a model of convenience. In an effort to cater to more serious and active traders, Coinbase also offers another platform referred to as Coinbase Pro.
While the user interface and design of the main Coinbase website are incredibly polished, Coinbase Pro is a no-frills order book. Traders comfortable with the more professional and rugged feel of Coinbase Pro are compensated in the form of significantly reduced fees compared to the main site.
Serious traders would benefit from moving up to Coinbase Pro because the transaction expenses of the basic Coinbase platform can add up significantly with active trading.
Cryptocurrency staking rewards are much like traditional stocks with a dividend reinvestment plan (DRIP). One fundamental difference is that with traditional stocks, investors will take their cash dividend and buy more stock in a conventional DRIP. In contrast, most cryptocurrency staking programs directly reward investors with more cryptocurrency. So if you’re moving from trading traditional stocks to trading crypto, this difference is certainly worth discussing with your financial planner or tax professional.
As cryptocurrencies offering staking rewards became more common, many crypto exchanges began offering users the ability to stake assets held on their respective platforms. In 2019, Coinbase announced that it would start staking the cryptocurrency Tezos on behalf of its users and provide a roughly 5% APY return on those users’ Tezos assets.
Staking via a major exchange such as Coinbase can provide a lot more security and peace of mind in crypto trading than trying to manage everything on your own. However, most exchanges that offer such services, including Coinbase, tend to provide a slightly lower APY than what a user could reasonably expect if they managed the staking themselves. The difference between the actual interest income and the fixed-rate interest income distributed to customers appears to be the crypto asset equivalent of a custodial fee revenue stream.
Coinbase also likely chooses to stake the user assets via channels that would benefit them, such as company-managed validator accounts. Controlling these staked assets will often give the company significant input on any major or fundamental changes to the cryptocurrencies in which the platform has a staked interest.
The Coinbase debit card
Coinbase offers a debit card in the form of a physical Visa debit card. The benefits and costs of this card vary from country to country.
The Coinbase debit card is available in every major U.S. state except Hawaii. The Coinbase card offers much of the same functionality as a traditional debit card, but instead of spending money from your bank account, the Coinbase debit card allows you to easily spend the cryptocurrency assets held in your account on the Coinbase platform.
Coinbase customers can utilize the card without paying any transaction fees; however, doing so requires a bit of monitoring and flexibility from the customer (which is explained in detail below). The card offered by Coinbase is specifically a debit card; therefore, users are not provided a line of credit. Coinbase card users are strictly limited to spending cash and cash equivalents in their connected Coinbase account.
Despite the card not offering a line of credit, there are several limits on potential spending. ATM withdrawals are limited to $1,000 per day, and users have a total spending limit of $5,000 every 24 hours.
However, these daily limits shouldn’t be present of an issue for everyday spending, and unlike traditional debit cards, the Coinbase card offers users up to 4% back in the form of cryptocurrency rewards. This would already be a competitive rate on a credit card, but to see it on a debit card is almost unheard of.
How Coinbase makes money from the Coinbase card
The Coinbase card is linked to a customer’s Coinbase wallet. When there is not enough cash to cover a purchase, Coinbase will automatically sell enough cryptocurrency in the wallet to cover the cost of the transaction. Coinbase then makes money on the sale of that cryptocurrency through its normal transaction fees. Basically, Coinbase loses money on cards used by well-disciplined cardholders: some users will save and possibly even make extra money.
On the other hand, despite the rewards that some users earn, Coinbase’s revenue potentially increases with a high transaction volume and associated transaction fees. Theoretically, widespread active use of the card leads to increases in sale orders, which in turn increases cryptocurrency trading volume, thus benefiting Coinbase and the overall crypto economy.
Payment processing with Coinbase Commerce
Payment processing is another traditional financial industry that Coinbase has been experimenting with to expand the crypto economy. As of now, there aren’t that many payment processors that will allow customers to pay via crypto assets.
When a retailer accepts payments through the Coinbase Commerce system, Coinbase charges a 1% transaction fee. This isn’t very different from the interchange fees associated with more commonly used forms of payment, but there are several ways the cryptocurrency exchange platform can compensate for that seemingly negligible difference. For instance, Coinbase Commerce users will likely still need to pay transaction fees associated with converting and/or selling assets on a cryptocurrency exchange platform.
Coinbase claims its Commerce system can easily be incorporated into most major online sales platforms. Even if potential users need advanced levels of functionality, the Coinbase API should be flexible enough to meet most needs.
Personal loans via Coinbase’s lending program
Through its lending program, Coinbase offers retail investors the opportunity to take out personal loans without a credit check by using their crypto assets as collateral. While the personal loan system currently only accounts for a small portion of Coinbase’s revenue, as digital currency becomes more commonplace, the ability to collateralize digital assets could easily become a much more significant portion of the Coinbase revenue model.
Since different states have different requirements to meet regulatory compliance, Coinbase’s personal loan offer is only available in about half of the states in the U.S. As the program expands, interest payments will likely become a larger part of Coinbase’s business model and total revenue.
While the company predominantly makes money from transaction fees, the more predictable income from expected interest payments may also help stabilize future revenue forecasts.
- Coinbase makes money through several different methods, but the core of Coinbase’s business model is the service revenue it generates in the form of trading fees and commissions that Coinbase users pay.
- There are two versions of the Coinbase trading platform: Coinbase and Coinbase Pro. The main site is incredibly polished and easy to navigate, but it also comes with higher fees.
- Coinbase Pro is a streamlined order book that supports all of the same digital assets as the primary Coinbase site. Coinbase Pro can be much more difficult for newer users to navigate, but Coinbase Pro fees are significantly lower even for otherwise identical trades.
- Coinbase also offers a debit card, which may lead to more transaction fees depending on how a user manages their account. Coinbase operates globally, so the costs and benefits associated with the debit card will likely vary from country to country.
- Through its lending program, Coinbase offers personal loans that require no credit check; Coinbase users simply provide their crypto assets as collateral for a loan.
- Investors should keep in mind that crypto assets can be extremely volatile; Coinbase’s revenues will often be representative of the crypto economy overall.
If you are a traditional stock investor considering purchasing shares in Coinbase or any other cryptocurrency exchange platform, we can help you find the right brokerage for your investing goals. If you already own crypto assets and are looking for new opportunities in crypto markets, or if you want to begin investing in digital currencies, use our comparison tool to help you decide which cryptocurrency trading platform has the right features and business model to meet your financial needs.
View Article Sources
- Fee Collection – Coinbase
- What countries and US states are supported for Coinbase and cash balances? – Coinbase
- Borrow – Coinbase
- Introducing Staking Rewards on Coinbase – Coinbase
- Coinbase card – Coinbase
- Exchange fees – Coinbase
- Coinbase misses revenue estimates as retail investors head for the door – Reuters
- For merchants – Coinbase