Perhaps no other topic in finance has received more attention in 2021 than crypto-currencies. These digital assets have the potential to disrupt not only the concept of money itself, the hope of Bitcoin (CRYPTO: BTC), but also a whole range of industries and profit pools. This burgeoning revolution is also attracting top talent from around the world, a positive indicator for its prospects.
In order to gain broad exposure to the entire industry, the crypto exchange Coinbase (NASDAQ: COIN) immediately comes to mind as a pick-and-excavator investment idea. However, cryptocurrencies are a nascent asset class, with the development of real-world uses only in its early stages and speculation fueling much of the activity today.
So, Is Coinbase a safe bet invest in? Let’s find out.
Image source: Coinbase.
Building the crypto-economy
Coinbase generates most of its revenue (88% last quarter) from transaction fees. As you might expect, the performance of this activity is highly dependent on the volatility of the crypto markets. Additionally, as crypto values rise, clients are more inclined to trade, and vice versa. This dilemma makes it extremely difficult to forecast financial results for the next quarter (or next year).
The bright spot for Coinbase, however, is that its platform’s assets now total $ 255 billion. And while third-quarter monthly transaction users were down from the previous quarter at 7.4 million, they’re up 252% year-over-year. These users also tend to increase their engagement over time. Coinbase now has 73 million verified users. And while the road to widespread crypto adoption has turned out to be a bumpy one, the company is carrying a stellar adjustment. EBITDA (earnings before interest, taxes, depreciation and amortization) margin of 50%.
Coinbase is already an important partner for institutional clients who want to access the crypto market. With the introduction of Coinbase Cloud, a tool for developers to build apps and services on Coinbase’s infrastructure, this company has the potential to be the Amazon Crypto web services.
Owning shares in Coinbase is essentially a gamble on the growth of the entire crypto ecosystem. Investors do not need to speculate on which specific tokens will rise in value; Coinbase is expected to benefit as the entire industry grows and becomes more mainstream, a change that could take years or decades.
A volatile stock
Due to the fluctuating nature of Coinbase’s main income base (transaction fees), the stock has been quite volatile since its public debut in April. For example, stocks fell 30% from April 14 to October 1, only to climb 56% in the following weeks to November 9. Since that date, when the company financial results published in the third quarter, the stock fell about 30%. In fact, Coinbase shares have closely followed Bitcoin’s price movement, which has recently fallen.
I don’t know why that is. I’m guessing the market is assuming that Coinbase’s success is directly related to Bitcoin’s, but that’s a false assumption. Of the $ 327 billion in trading volume on Coinbase’s platform during the third quarter, 19% came from Bitcoin, a figure that has declined over the past three quarters. Ethereum accounted for 22%, with other crypto assets making up the remaining balance.
This is clear proof that Coinbase’s outlook is not tied to any particular cryptocurrency, a fact the market should soon understand. In addition, over time, the company is expected to expand its subscription and service segment to provide a stable and more reliable source of revenue.
Proceed with caution
Investing in the stock market is always a risky business. As investors, we do our best to make accurate predictions about the future with all the available information we have. The stocks of companies that operate in more predictable, proven, and slower-moving industries are naturally safer than others.
Having said that, I think Coinbase is a good long-term investment for investors with two conditions. You not only need to firmly believe that cryptocurrency adoption is set to increase in the years to come, but you also need to have a well-diversified portfolio to help you weather the inevitable volatility that Coinbase will bring.
I tick both boxes, and that is why I am a shareholder today.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of the board of directors of The Motley Fool. Neil patel owns Bitcoin, Coinbase Global, Inc. and Ethereum. The Motley Fool owns and recommends Amazon, Bitcoin, and Ethereum. The Motley Fool recommends Coinbase Global, Inc. and recommends the following options: $ 1,920 long calls in January 2022 on Amazon and $ 1,940 short calls in January 2022 on Amazon. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.