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Many choose not to invest in cryptocurrency directly, but they may want to get exposure through the stock market. One of the standout options is through Coinbase stock, but is it a good investment?
What Is Coinbase?
Coinbase is a centralized cryptocurrency platform primarily known for its exchange, where users can buy and sell crypto. It serves retail investors and traders as well as major financial institutions.
Not limited to its crypto exchange, users can also make use of interest-earning products, derivatives, credit cards, lending services and the newly launched NFT marketplace. For institutional customers, Coinbase offers crypto custody that stores, secures and provides insurance for large quantities of crypto assets.
How Does Coinbase Make Money?
According to page 10 of their recent shareholder letter, Coinbase makes most of its revenue from cryptocurrency transactions made on behalf of its users. The remainder of its revenue is driven by what it describes as “subscription and services.” Blockchain rewards and fees from custodial accounts are the main contributors.
Is Coinbase a Good Stock Buy?
Coinbase stock’s bull case is based on the continued adoption of blockchain technology and cryptocurrency. One of the key metrics to analyze is customer acquisition, which looks promising so far. Coinbase gained 13 million users in the first quarter of 2022. The total is now more than 89 million.
There are some negatives, however. It has a first-mover advantage within the space, which has built brand equity, but it’s operating in an increasingly competitive environment. As of June 2022, there were 498 cryptocurrency exchanges, suggesting market saturation.
The Bull Case and the Bear Case for Coinbase
Several positives and negatives affect the Coinbase stock price. Here are some of the main points of consideration.
The Bull Case for Coinbase
Coinbase is backed with investments by reputable funds within financial services, such as Cathie Wood’s Ark Invest and Andreesen Horowitz’s a16z. Another good sign is its focus on new product development.
Coinbase also improves business customer experience by introducing Coinbase Intelligence. This includes “Know Your Transaction” initiatives designed to analyze millions of transactions to assess risk. This compliance angle is more important than ever, as many crypto institutions have begun facing liquidity issues in this bear market.
For the retail market, Coinbase intends to launch a subscription service to its platform eventually, where users will have zero fees. It will be called Coinbase One and is rumored to cost about $30 per month.
Finally, Coinbase acquired a crypto infrastructure company, Bison Trails, in 2021, which is a part of its effort to build “Coinbase Cloud.” This signals the company’s intent to grab a slice of the pie that is cloud services, which have been highly profitable for tech leader Amazon Web Services.
The Bear Case for Coinbase
An analyst from Atlantic Equities recently downgraded Coinbase stock and believes its fair value is just $35 per share. The analyst cited poor macroeconomic conditions, crypto losing key support levels and potential difficulties Coinbase may face in attracting top talent. Statistics support this argument, as the month-on-month data shows fewer people visiting the site.
In an adverse market, Coinbase has seen declining revenues. This has affected profitability significantly, and the stock’s price has plummeted in recent months. Coinbase already has significant volatility as a cryptocurrency-related business, and a prolonged bear market in crypto can damage financials.
Additionally, Coinbase has already had to take extreme measures, laying off 18% of its full-time workers as of June 2022.
Is Coinbase Stock Expected To Go Up?
Price predictions for Coinbase vary dramatically. It’s in a category known as a growth stock, which means it has high reward potential but carries equally high risk.
Some well-known investors, such as James Chanos, predict the price of Coinbase stock will continue to fall in the year ahead based on increased competition and shrinking revenue.
Another point to consider about Coinbase stock is the price of Bitcoin. As most trading revenue comes from this asset, it is crucial to the company’s success. A professor of finance at Sussex University, Carol Alexander, expects the Bitcoin price to drop to $10,000 in 2022. Such an event could heavily impact demand.
On the other hand, Cathie Wood’s Ark Invest fund takes another view. During this crypto downturn, the fund has purchased an additional $29 million worth of Coinbase stock. The fund targets high-growth stocks that possess innovative qualities.
What Is the Projection for Coinbase Stock in Five Years?
The economic landscape and the crypto markets could change drastically in the next five years. As such, it is tough to forecast where Coinbase will be. Average analyst estimates for the end of 2026 are $128.91 per share.
Crypto trading volume has fallen off a cliff recently, dropping by more than 50% from its 2021 peaks. Although the short-term environment doesn’t look to be in Coinbase’s favor, it has shown resilience throughout its history. Considering this, Coinbase has a good chance of bouncing back once bull markets resume.
Information is accurate as of July 18, 2022.
Editorial Note: This content is not provided by Coinbase. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by Coinbase.