Coinbase (NASDAQ: COIN) is one of the first companies that comes to mind in cryptocurrency. Overall, Wall Street analysts are bullish on the crypto exchange stock, putting an average price target on the firm of $247.

This implies an upside of 51% from current levels. So, is there an opportunity in the stock? Let’s first dive into where Coinbase is getting its revenues from.

Coinbase: Retail Crypto Exchange With Ancillary Businesses

Coinbase has two main sources of revenue: transactions and its subscriptions and services. The company’s transaction revenue comes from fees it collects when cryptocurrencies are bought and sold on its platform. Most of this revenue comes from retail traders as opposed to institutional ones.

The second revenue source is its subscription and services revenue. Revenue in this source comes primarily from two streams: stablecoin revenue and blockchain rewards. Stablecoins are cryptocurrencies whose values are pegged to other types of currency, such as the U.S. dollar. This is so users can enjoy various features of crypto, like not having to trust a traditional financial institution to facilitate payments, without having to hold a volatile asset like Bitcoin (BTC).

Coinbase co-founded a stablecoin called USD Coin (USDC), which is exchanged at a one-to-one rate with the U.S. dollar. The company brings in revenue by collecting interest on the dollar reserves that back USD Coin.

The other big revenue source is blockchain rewards, also called staking. Coinbase provides users the opportunity to validate blockchain transactions on its platform. The validation process provides mathematical proof that a transaction is legitimate.

Providing that proof requires complex computation, so the blockchain rewards the user who provides it with more cryptocurrency. Coinbase brings in revenue by taking a portion of that reward.

These two revenue streams have seen massive growth over the past year. Stablecoin revenue increased by 59%, and blockchain rewards increased by 111%. Consumer transaction, stablecoin, and blockchain reward revenues made up 46%, 17%, and 13% of total revenues, respectively.

Retail Demand Is the Long-Term Driver of Coinbase

The company’s revenues have spiked big time in the last few quarters but are still working to get back to the levels they saw in 2021 and 2022. Achieving this is difficult. Half of the firm's revenues depend on crypto trading volume and its overall value. These have shown to be extremely volatile over time.

So, a long-term investment in Coinbase is an investment in the idea that cryptocurrency will grow in popularity and value over time. Particularly, popularity needs to continue growing among retail traders. In 2019, institutional and retail trading volumes at Coinbase were not too far apart. Now, institutional volume surpasses retail many times over.

Last quarter, it was $189 billion, over five times higher than consumer trading volume. Yet, consumer transaction revenue of $664 million was over ten times higher than institutional trading revenue. This is because Coinbase charges massively lower fees for institutional investors. So much so that the revenue stream barely makes a dent in Coinbase’s overall top line.

Retail Interest in Crypto Feels Highly Penetrated Already

When it comes to this thesis, I am not sold. Evidence shows that retail interest in Bitcoin is waning. According to The Crypto Times, the number of Bitcoin transactions worth less than $10,000 dropped to a three-year low in July. This measure is a proxy for retail interest because retail traders tend to make smaller purchases.

Another piece of data shows that cryptocurrency has penetrated deeply. It may signal limited growth potential for trading. According to CoinCodex, the total trading volume for crypto so far in 2024 is nearly $96 trillion.

The Chicago Board Options Exchange is a leading provider of trading data on U.S. stocks. The company’s data says that so far in 2024, the total volume of U.S. stocks traded this year is $101 trillion. This means the amount of trading volume in crypto this year is very close to the entire U.S. stock market. To me, it sounds like most retail traders who are going to get into crypto have already gotten in.

However, I am interested to see how Coinbase can continue to grow the stablecoin part of its business. A different value proposition is offered here. People can hold on to an asset that is not going to fluctuate wildly, while also maintaining the privacy benefits of cryptocurrency. With privacy top of mind for many these days, this seems like an area where the company could flourish.