Coinbase: Stock of the Week

Why you should avoid this crypto stock right now – even if you believe in the blockchain.

Andrew Willis 29 January, 2024 | 4:40AM
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Key Takeaways for Coinbase Stock:

  • Trading volume at Coinbase (COIN) has doubled its 2023 lows leading up to the recent Bitcoin spot ETF approvals from the U.S. SEC, but that doesn’t mean the trend will last – especially with crypto given historical volatility.
  • Fans of crypto’s unregulated nature have to contend with its compatibility with traditional business valuations and the expectations of investors. The market may realize it’s gone too far in responding to recent positive developments around Coinbase stock.
  • Although Coinbase stock could correct based on its intrinsic value, the market could also respond strongly again to future positive developments around regulation and new revenue streams such as stablecoins. 

 

 

Andrew Willis: Easier access to Bitcoin for Americans with the ETF approvals in the U.S. proved great for crypto prices, but as seen since the announcement, the news began to get priced in pretty quickly.

What about crypto-adjacent companies? Just the attention around Bitcoin should mean more volume going forward for exchanges like Coinbase… How much of the rally can Coinbase stock keep, since starting its climb in October ahead of the big ETF announcement?

The best answer may be that the future of crypto volumes is likely to be as volatile as the ETF announcement was. The communications chaos we witnessed, especially on X or Twitter, seemed appropriate for crypto. And that may be fine for Bitcoin holders and ‘hodlers’ alike.

Current Crypto Market Strength Can’t be Extrapolated for Coinbase Stock

It’s not great, however, for the exchanges. Untimed and uncontrolled activity, historically between long periods of lower prices and volume. What are exchanges supposed to do with such irregular revenue? We saw layoffs and heavy cost-cutting at Coinbase after the lows of last year… and now we’re back to twice the volume and higher revenue that’s likely to push the company into profitability far sooner than expected, according to equity analyst Michael Miller.

So there’s good news for Coinbase, but with the history of the market, the risk/reward dynamic doesn’t put the share price near a buy right now. There are also the company’s own regulatory issues which have not gone away - although, on the other side of the coin, those could be the next positive catalysts.

For Morningstar, I’m Andrew Willis.

 

bulls Coinbase Bulls Say

  • Coinbase has established itself as the leading U.S. cryptocurrency exchange and established a strong reputation for security in an industry filled with risk for traders.
  • Cryptocurrency prices increased sharply at the end of 2023, leading to much higher trading volume and revenue for Coinbase.
  • There is a global market for cryptocurrency. Regulatory approval from international regulators will allow Coinbase to expand its operations and increase its footprint globally.

bears Coinbase Bears Say

  • Cryptocurrency markets have historically been deeply cyclical with long periods of low prices and depressed trading volume. This adds considerable volatility to Coinbase’s revenue flow.
  • The regulatory landscape and long-term viability for cryptocurrency remains unclear, with regulators becoming more aggressive in the aftermath of the high-profile fraud and failure of FTX.
  • The SEC has accused Coinbase of acting as a unregistered securities exchange, creating major regulatory and legal uncertainty for the firm.

 

Editor's Note: All images are courtesy of Unsplash.com and AP Images. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Coinbase Global Inc Ordinary Shares - Class A162.41 USD-6.28Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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