Coinbase is a secure online platform for buying, selling, transferring and storing digital currencies, such as Bitcoin, Ethereum and Litecoin. It is one of the easiest places to start and store your crypto portfolio and is possibly the most popular exchange in the world for trading Bitcoin.
Founded in 2012, Coinbase soon secured its position as the leading mainstream cryptocurrency exchange in the United States and is a fully regulated and licensed cryptocurrency exchange supporting all US states except Hawaii.
Currently offering over 25 cryptocurrencies for investment, trading and staking, Coinbase is expected to expand its offering in the future. With the company’s current position and potential future growth, is Coinbase a good investment? And should investors buy Coinbase stock?
Fundamentals of Coinbase stock
When Coinbase (NASDAQ: COIN) went public via IPO on April 14 2021, its share price fell by 31% and was down 47% from its all-time-high. COIN now has a $48 billion market cap and price-to-earnings ratio of 98. But its Q1 numbers for 2021 were incredible, achieving revenues of $1.8 billion, beating its sales for the entire year in 2020.
The volatile nature of the cryptocurrency market has led many investors to question the long-term potential of Coinbase stock. Fluctuating prices of cryptocurrencies, in particular Bitcoin, can make some investors cautious when it comes to investing in a cryptocurrency exchange.
The Bitcoin price surged above $59k on May 10, only to briefly plunge below $31k on May 19, crashing close to 50%. It’s since recovered, (as is the volatile nature of Bitcoin), to steady around $38k, for now.
Warnings of stricter regulations coming in China caused major players to take profits, causing the price to plummet and creating margin calls for traders steeped in leverage.
While you’d think this would all be bad news for Coinbase, it’s not as dismal as it might seem. Going public gave Coinbase a much bigger platform and way for retail investors to get a piece of the cryptocurrency action. This means it has many more supporters cheering for its success.
And many of its shareholders are keen to follow the crypto volatility via owning a stake in Coinbase, rather than in crypto coins directly. It’s like stock investors opting for an exchange-traded fund (ETF) over individual stock ownership.
Meanwhile, the volatility in the cryptocurrencies themselves tends to increase trading levels on the site which leads to a rise in Coinbase revenues.
What is the bull case for Coinbase?
At the time of the Q1 earnings call on May 13, Coinbase was seeing excellent trading volume, and the ensuing crypto crash appears to have compounded that as trading volumes were phenomenal.
Stock analyst Gil Luria of D.A. Davidson is bullish on Coinbase’s future. In response to the crypto crash, he said:
“The level of volatility is what really drives results for Coinbase—people buying and selling Bitcoin… not Bitcoin going up or down. I think people may have missed that today and that’s why Coinbase continues to trade in sympathy with Bitcoin, as opposed to in-line with the volatility of crypto, which is far more important to Coinbase’s results”.
Furthermore, Coinbase is diversifying its revenue streams by building new products and services. Its Q1 results included $56 million of revenue generated from subscription and services and this is an area it’s concentrating on growing. It also plans to increase the speed it adds new assets to the platform.
Dogecoin (DOGE) is one that’s long been requested, and became available on Coinbase on June 3 2021. Dogecoin offers a light-hearted alternative to traditional cryptocurrencies such as Bitcoin. Also unlike Bitcoin which is designed to be scarce, Dogecoin is abundant with 10,000 new coins mined every minute and with no maximum supply.
What is the bear case for Coinbase?
The long-term outlook for Coinbase, as a successful business, is no doubt tied to the success of cryptocurrency in general. If the crypto markets are destroyed, then Coinbase will go out of business, but at this stage that scenario seems highly unlikely.
As cryptocurrencies continue to grow in popularity and become more widely available with alternatives to Bitcoin on offer, competition for Coinbase will also grow.
Other exchanges are now looking to go public too, which could potentially reduce investor interest in Coinbase.
One major exchange potentially looking to list is Kraken, which also enjoyed fantastic trading volumes and revenues in Q1. Although at this time it doesn’t look like it will happen until next year. Kraken is the fourth-largest cryptocurrency exchange by trading volume, boasting over 6 million clients.
Diginex’s (NASDAQ: EQOS) crypto-exchange Equos caters to institutional investors rather than retail investors. Diginex was the first cryptocurrency exchange to go public, ahead of Coinbase. It launched via SPAC, 8i Enterprises Acquisition Corp in October 2020.
However, a recent short selling note accusing Diginex of a long history of financial manipulation and accounting frauds sent its share price spiralling and make its chances of success dubious. And so far, Diginex hasn’t produced anything like the successful numbers Coinbase and Kraken are announcing.
As time goes on it’s likely that the larger exchanges will swallow up the smaller players. They’re in a much stronger position to provide liquidity, compete at minimising the bid-ask spreads, fight cybercrime, keep up to date with the latest technology and give reassurance to users.
There’s also speculation they may compete on fees, but Coinbase does not see a feeless future in crypto trading anytime soon.
Should I invest in Coinbase stock?
As cryptocurrencies grow in strength, so does investor confidence, and the sentiment towards cryptocurrencies is positive. Once a thing of mystery, cryptocurrencies are now becoming more widely known and accepted.
The natural volatility of the crypto market has a direct impact on exchange platforms such as Coinbase and their share prices will likely follow the same trends as Bitcoin. Tighter regulations around cryptocurrencies could lead to a fall in share prices, but will likely be short-term.
If cryptocurrency crashes become a regular occurrence, it’s sure to scare investors away. That won’t do much good for Coinbase, but their revenue performance so far this year seems to be noteworthy and it’s certainly a stock to watch.