For a while, I’ve owned crypto beta in the form of Bitcoin, Ethereum, and more recently, Coinbase stock. Coinbase reported earnings this week for the second time since going public. Once again, it blew away expectations. After a modest move higher on the news, the stock trades around $260, representing a market cap of approximately $55 billion. In the last two quarters, the company generated about $2 billion of earnings, effectively the same amount of free cash flow. Coinbase exited the quarter with around $5 billion in cash and crypto assets on its balance sheet. My back-of-the-envelope math yields a current run rate of $4 billion of annual cash earnings on a net market cap of $50B, putting the stock at a 12.5x multiple.

Great stock pickers say that only a few issues matter in a stock thesis. For Coinbase, the biggest is the stability of its revenue. Coinbase’s revenues today are almost entirely trading commissions, which in turn are a function of crypto asset prices, commission rates, and volumes. Asset prices are extremely volatile, but owning the space comes with an assumption that prices will rise over time – all good there. Commissions have been high and should get competed down – a known risk. Volumes seem to be the disconnect. Despite the selloff in crypto assets in Q2 volumes rose 25% over Q1. The Street, however, projects revenues and earnings to fall on the order of 50% next year, even after Coinbase crushed its full 2021 calendar year estimates in just the first half of the year.

Another key issue will be what Coinbase does with its cash. To put it in perspective, in the last six months the business generated as much cash as a16z raised for their latest crypto venture fund. Coinbase is not a VC, but I imagine their opportunities to reinvest capital in the thriving crypto ecosystem across DeFi and NFTs with positive expectancy are abundant.

The regulatory environment may be the third key driver of the stock. Perhaps more than anyone else in the crypto ecosystem, Coinbase has a voice at the table and is vociferously encouraging regulators to create rules that promote continued innovation and entrepreneurship in the space.

When I put those KPIs together Coinbase feels like a heck of an asymmetric bet. Full disclaimer, I’m not a stock picker by training, this is not Investment advice, and there’s a lot I don’t know about the inside view of Coinbase, crypto, and blockchain technologies. From my outsider’s perspective as a student of markets, I like the idea of owning the largest toll collector in a rapidly growing ecosystem for just 13x cash, especially alongside negative forward expectations based on known unknowns. I also appreciate the tendency of markets to underestimate hypergrowth. Coinbase’s revenues are up an insane 10x from just a year ago, as are the prices of many crypto tokens. It’s just hard for markets to discount that kind of business momentum.

In a world of frothy asset prices, Coinbase is my favorite beta.