Why Coinbase’s Moon Mission Could Come Crashing Back to Earth

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Down nearly 30% since getting publicly listed about three months ago, Coinbase Global (NASDAQ:COIN) quickly became one of the most disappointing IPOs of the year. The much-anticipated offering was a victim of poor timing, as the price of cryptocurrencies like Bitcoin (CRYPTO:BTC) lost nearly half of their value in the face of regulatory crackdowns. It’s safe to say that Coinbase had botched its moonshot mission, that is, the hopes of the stock appreciating rapidly within a very short period of time.

All is well when we look at Coinbase’s past financials — but they say nothing about the significant risks it is facing again. So let’s examine why Coinbase stock is more likely to fall back down to earth rather than ascend and recover to its highs

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Fundamentals don’t look so good 

Unfortunately, investors just aren’t so eager about trading in bear markets. Slangs primarily used in the used in the  describe their emotions perfectly. Fear, uncertainty, and doubt (FUD) cause many to simply hold on for dear life (HODL), that is, refusing to sell no matter what happens, with their coins while the flow of new capital dries up. All of this is very bad news for brokerage exchanges like Coinbase. In the first quarter of 2021, Coinbase recognized $1.8 billion in revenue by facilitating over $335 billion in cryptocurrency trading volume, which is almost twice the amount it saw for the entirety of 2020. 

However, cryptocurrency trading volume plunged over 40% month over month in June. Factors like China banning crypto mining and skyrocketing power costs to process digital currency transactions led to unprecedented liquidations. In July, crypto trading levels have plunged further to about $65.8 billion a day — essentially unchanged from July 2019. 

The business model isn’t so viable either

Coinbase doesn’t really have many distinguishing features from the 381 other exchanges out there. Usually, brokerages can solicit more customers by lowering fees, skipping know-your-customer verification for privacy reasons (and operate as a crypto-to-crypto only exchange), or offering a greater selection of coins, especially initial coin offerings. That’s not really the case with Coinbase. The exchanges still charge a number of deposit, withdrawal, buy/sell, and blockchain transaction fees (in addition to network fees). Customers also have to go through a lengthy ID verification process in order to purchase crypto with fiat money.  

What’s more, the company only provides market information for 50 currencies and has an even smaller subset for trading. It’s not a suitable place to invest in more than 10,900 other popular cryptos and altcoins out there. As a side note, Binance US offers more competitive pricing for cryptocurrency purchases. There are a lot of options out there for investors who just want to buy Bitcoin or Ethereum for the sole purpose of sending them into another exchange to buy a wider selection of coins.

Valuation is a major problem 

Even after the sell-off, Coinbase stock is incredibly overvalued compared to the other crypto stocks. The company currently has a market cap of $63.5 billion. That’s huge, considering it may not surpass the $4 billion revenue benchmark this year. In addition, crypto bubbles could deflate for a prolonged period of time just as they inflated, so I’m anticipating both Coinbase’s sales and earnings will decline in 2022 compared to 2021. Overall, due to a continued crypto bear market, lack of innovative features, and overvaluation, Coinbase stock is one I would avoid for the time being. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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