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Coinbase Stock Is A Great Bet, But Rife With Risks

By Investing.com (Haris Anwar/Investing.com)CryptocurrencyApr 15, 2021 09:30AM ET
www.investing.com/analysis/coinbase-stock-is-a-great-bet-but-rife-with-risks-200573101
Coinbase Stock Is A Great Bet, But Rife With Risks
By Investing.com (Haris Anwar/Investing.com)   |  Apr 15, 2021 09:30AM ET
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Coinbase Global (NASDAQ:COIN) is a great investment if you believe in a marketplace ruled by digital currencies. Co-founded by Brian Armstrong in 2012, it’s the largest cryptocurrency exchange in the US and the first major cryptocurrency-focused company to go public.

The exchange will be used to set the market to trade digital currencies. This could shape a future in which financial intermediaries are diminished and transactions take place predominantly on the blockchain.

This month the total value of the cryptocurrency market passed $2 trillion, as both retail and institutional investors flocked to buy this asset class. Bitcoin, the original and biggest crypto coin, is valued at more than $1 trillion after a more than 800% surge in the past year.

Riding on this investment wave, Coinbase profitability soared. The San-Francisco-based exchange said it expected its first-quarter earnings to be between $730 million and $800 million—more than double what it earned in all of 2020—on revenue of $1.8 billion.

Coinbase.
Coinbase.

Trading volume totalled $335 billion in Q1, and the company now has 56 million verified users on its platform. Assets on the platform rose to $223 billion, with institutional users representing 11.3% of the total crypto market share.

Profitable From Day One

This impressive financial profile ranks Coinbase among the few technology companies that were profitable from their first day of trading. And the future looks promising, too. If its value surpasses $100 billion, as it is widely expected, it will be among the 100 largest companies in the US and the world by market value.

That size almost guarantees it a spot in most broad market index funds. The fact that Coinbase is already profitable also makes it eligible for the S&P 500 Index, the most widely followed index by large institutional investors.

If Coinbase maintains the pace of first-quarter revenue and earnings, according to Bloomberg writer Nir Kaissar, it will have increased revenue five times and earnings 10 times this year compared with 2020. And that may be just the beginning because interest in cryptocurrencies is widely expected to grow, he says.

Extreme Volatility

This optimism is well justified and makes the Coinbase a very attractive stock to own. That said, investors shouldn’t downplay the risks associated with investing in cryptocurrencies.

The biggest one is extreme volatility. Coinbase revenue is built almost entirely on the performance of Bitcoin and Ethereum, which are prone to sudden boom-and-bust cycles. Bitcoin has already experienced two crashes of more than 80% in its short history. Another such crash will mean reduced profitability for Coinbase, which generates most of its revenue from trading fees.

For these reasons, Coinbase didn’t outline any specific earnings or revenue guidance for the remainder of the year in its listing prospectus, saying that the cryptocurrency market has had well-defined price cycles that can last anywhere from two to four years, and because of that, its goals are drawn to last across those periods rather than for a single quarter.

Another risk is competition, which some analysts say is bound to come driving the trading fees lower. New Constructs wrote in a report last week that competition from companies like Kraken, Gemini and Binance will eat into Coinbase’s fee revenue. If that happens, according to its analysis, Coinbase should be valued at $18.9 billion, or 81% below its expected market cap.

“As the cryptocurrency market matures and more firms inevitably pursue Coinbase’s high margins, the firm’s competitive position will inevitably deteriorate,” New Constructs wrote in a note cited by CNBC.com. Competitors “will likely offer lower or zero trading fees as a strategy to take market share.”

Global regulation is another area that could impact the business model of Coinbase and affect its share price. At her confirmation hearing in January, Treasury Secretary Janet Yellen told law-makers that many cryptocurrencies are used “mainly for illicit financing, and I think we really need to examine ways in which we can curtail their use.”

Her written testimony, however, says the government needs to “look closely at how to encourage their use for legitimate activities,” but it’s very possible governments around the world will come up with new laws to regulate cryptocurrencies.

Bottom Line

Coinbase has a solid appeal for investors who want to have some exposure to cryptocurrency in their portfolio. But investors should be ready for a bumpy ride, given the volatile nature of this market.

Coinbase Stock Is A Great Bet, But Rife With Risks
 

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Coinbase Stock Is A Great Bet, But Rife With Risks

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Comments (14)
Patryk Sl
Patryk Sl Apr 18, 2021 1:54AM ET
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Who would buy website-exchange stock for 300$..... and 66b market cap.
Darryl Allen
Darryl Allen Apr 16, 2021 6:08PM ET
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I can't use crypto to pay my taxes, my mortgage, or my groceries. It has no value.
Tom Jones
Tom Jones Apr 16, 2021 6:08PM ET
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Ridiculous statement. You can’t use gold bars to pay any of the items you mentioned, either. So gold has no value?
Michael Samorzewski
Michael Samorzewski Apr 16, 2021 7:37AM ET
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How can extreme volatility be bad for Coinbase. I always thought revenues from trading fees rise when attached to volatility?
Tom Jones
Tom Jones Apr 16, 2021 7:37AM ET
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Volatility isnt the real problem, it’s more that if cryptos crash (like they all did tonight), retail will not want to be involved snd trsdung volumes will decrease. Also, competition will cause trading commissions to race towards zero just like they did for online brokers.
Nyeche Ehoro
Nyeche Ehoro Apr 15, 2021 4:23PM ET
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nice one
Amir Alvi
Amir Alvi Apr 15, 2021 3:32PM ET
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Nice writing.
FATME sahraie
FATME sahraie Apr 15, 2021 2:48PM ET
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hi,dear I'm iranian how to get money from your please
Alejandro Lacovara
Alejandro Lacovara Apr 15, 2021 12:55PM ET
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Cambiaría el tÍtulo de la Nota... esta ACCIÒN está en NASDAQ esta acción!!! no cualquiera está en NASDAQ...
Aẞ Kãålâ
Aẞ Kãålâ Apr 15, 2021 12:41PM ET
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Nice
Wania Shah
Wania Shah Apr 15, 2021 12:41PM ET
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I don't know about this type of trade u can guide me
Casey Connor
Casey Connor Apr 15, 2021 12:32PM ET
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Thanks for the obvious statement
Aẞ Kãålâ
Aẞ Kãålâ Apr 15, 2021 12:32PM ET
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nice
How Rudo
How Rudo Apr 15, 2021 9:53AM ET
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No risks in the usual bubbly stock market high flyers.  There are very safe based on fundamentals. haha
Aleksander Dashi
Aleksander Dashi Apr 15, 2021 5:30AM ET
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good article. thanks
Oscar Romero
CashDrop Apr 15, 2021 4:06AM ET
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Going to lock in now that it's below its IPO, this ship is going to the moon Harris.
Ben Vivian
Ben Vivian Apr 15, 2021 4:06AM ET
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It looks like it’s hit a triple bottom on the hourly, so there is good strong support between $330-337. I agree, I believe now at the short sellers have had their field day with this I believe it is only up from here!
Md Inzamam
Md Inzamam Apr 15, 2021 3:45AM ET
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reza paknejad
reza paknejad Apr 15, 2021 3:45AM ET
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hi, how are you?
 
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