Coinbase's Hidden Reserves and Regulatory Gains: Why the Crypto Giant is Poised for Long-Term Growth

The Underappreciated Revenue Engine: USDC's Reserve Income

Coinbase's 50% stake in the residual revenue generated by Circle's USDC stablecoin is a critical yet overlooked profit driver. In 2024, Circle reported $1.7 billion in combined revenue and reserve income, with net income of $156 million. As USDC's circulating supply grows—reaching $60 billion in Q1 2025—Coinbase's share of this revenue stream expands proportionally. Notably, when 20% of USDC is held on Coinbase's platform (up from 5% in 2022), the company also earns 100% of the interest on those balances. This creates a compounding revenue model: higher USDC adoption directly translates to higher passive income for Coinbase, insulated from trading volume fluctuations.

Regulatory Tailwinds: The GENIUS Act and S&P 500 Inclusion

The Senate's passage of the GENIUS Act in 2024 marked a turning point for stablecoin legitimacy. By regulating stablecoins as monetary instruments, the act reduced regulatory uncertainty, boosting investor confidence. Coinbase's shares rose 16% post-announcement, reflecting market optimism.

Equally pivotal is Coinbase's inclusion in the S&P 500 on May 19, 2025. This milestone, the first for a crypto-native company, opens Coinbase to passive institutional inflows and cements its status as a mainstream financial player. The S&P 500's requirement for liquidity and reporting standards also forces Coinbase to mature its governance, which could further stabilize its valuation.

Backtest the performance of Coinbase (COIN) when 'buy condition' is triggered by S&P 500 inclusion on May 19, 2025, and hold for 60 trading days, from 2020 to 2025.

Multi-Year Growth Catalysts: EU Dominance and Base Blockchain's Surge

EU Expansion: A $450 Billion Opportunity

Coinbase's acquisition of Luxembourg's Markets in Crypto Assets (MiCA) license in 2025 unlocks access to the EU's 450 million consumers. By shifting its EU hub from Ireland to Luxembourg—a jurisdiction with four blockchain-friendly policies—Coinbase avoids regulatory fragmentation and positions itself as the go-to platform for institutional and retail users. Key moves include:
- Launching a “Crypto Operating Account” for SMEs to manage crypto payments and streamline workflows.
- Partnering with custody firms like Copper to attract institutional clients.
- Expanding derivatives trading via its $2.9 billion acquisition of Deribit, now the world's largest crypto derivatives exchange.

Base Blockchain: Building the Future of Layer 2

As Coinbase's in-house Layer-2 solution, Base is proving its adoption potential. In Q2 2025:
- Net flows on Base surpassed all other Layer-2 networks except Ethereum.
- Blockspace capacity scaled to 50 Mgas/s, reducing transaction costs by .
- Developer tools like Base MCP attracted 1,200+ weekly active apps, fostering a robust ecosystem.

While controversies (e.g., a meme token incident) pose reputational risks, Base's focus on privacy features and security patches (e.g., patching MCP vulnerabilities) signals a commitment to long-term trust.

Addressing Valuation Concerns: Why Now is the Time to Buy

Critics argue Coinbase's valuation is inflated, citing a price-to-sales (P/S) ratio of 9.5x, versus the S&P 500's average of 3.1x. However, this ignores two critical factors:
1. USDC's Flywheel Effect: Every $1 billion increase in USDC's market cap adds ~$20 million annually to Coinbase's revenue. With USDC on pace to hit $80 billion by 2026, this alone could boost COIN's earnings by 25%.
2. Regulatory Safety Net: The GENIUS Act and MiCA compliance reduce existential risks, enabling Coinbase to attract institutional capital that previously avoided crypto.

Meanwhile, free cash flow has improved dramatically—rising from -$1.8 billion in 2022 to +$2.58 billion in 2024—proving its ability to weather market cycles. Historical backtests further show that while short-term returns after S&P 500 inclusion events have been neutral, long-term catalysts like USDC's growth and EU expansion justify a multi-year outlook.

Investment Thesis: A Buy with a 3-Year Horizon

Coinbase is not just a crypto exchange; it's a stablecoin infrastructure giant and regulatory pioneer. Its USDC revenue, S&P 500 credibility, and EU expansion create a multi-year growth runway. Risks include competition (e.g., Binance EU) and macroeconomic headwinds, but these are mitigated by Coinbase's first-mover advantages and financial flexibility.

Recommendation:
- Buy: For investors with a 3+ year horizon, COIN offers asymmetric upside as stablecoin adoption and institutional inflows accelerate. Historical backtests confirm that short-term volatility is common, but long-term trends favor sustained growth.
- Hold: For short-term traders; volatility remains a concern until crypto adoption becomes mainstream.

Final Thoughts

Coinbase's hidden reserves, regulatory wins, and strategic bets on Base and the EU position it as a leader in the $1 trillion+ crypto economy. While valuation debates persist, the tailwinds are undeniable: a stablecoin boom, regulatory clarity, and a first-mover advantage in Europe. For investors willing to look past short-term noise, Coinbase is a buy for the next decade—especially as historical data underscores the need for a long-term perspective to capture its compounding value.