I figured it wouldn’t take long before I was tagged to write about Coinbase (NASDAQ:COIN) stock. Just so we’re all clear, Coinbase is a fully regulated and licensed cryptocurrency exchange.
According to the company’s website, Coinbase is “building the cryptoeconomy – a fair, accessible, efficient, and transparent financial system enabled by crytpo.”
Coinbase is down about 45% from the closing high of approximately $342 the stock achieved shortly after its direct listing last month.
The conventional wisdom is that as Bitcoin (CCC:BTC) goes, so will go COIN stock.
I can’t deny there’s been some correlation, but I believe as time goes on investors will chalk this up to recency bias. Right now when Bitcoin sneezes, there are a lot of assets that catch a cold.
In time, the broader narrative of Coinbase will be a vaccine of sorts against the specific volatility of Bitcoin.
Buying Into the Gamification of Crypto
With that said, my initial thesis on Coinbase is that it can be, and probably is, a sound investment. But as much as investors can like the narrative behind COIN stock, they shouldn’t lose their head over it.
Coinbase is like Robinhood for the cryptoeconomy in that it welcomes investors who have never invested in cryptocurrency. The platform simplifies complex topics like blockchain and how different cryptocurrencies relate to it.
According to the numbers the company is putting out, it seems to be working. By any conventional metric, the company’s first-quarter showed exceptional year-over-year growth. Revenue was up nine times the prior year.
Net income had a similar gain. In fact, COIN earned more in that single quarter than it did in all of 2020.
But what’s behind this sudden surge in revenue? It’s fair to say that COIN stock is still highly correlated with Bitcoin. As I said above, I think Coinbase will be able to trade without as much sensitivity to Bitcoin in time.
It also seems as if Coinbase users are buying Bitcoin disproportionately to other cryptocurrencies, for now, but at least when you buy Coinbase you’re buying into an asset that has a fundamental and intrinsic value that can be measured.
Plus, investors are getting exposure to not just Bitcoin but to a wide range of other coins. Simply put, COIN is helping investors navigate a transition from traditional payment processing to digital payments.
As Coinbase expands it could help investors jump into other assets rooted in blockchain. A good example today would be the emergence of NFTs.
Should You Buy COIN Stock?
Coinbase has first-mover advantage that will be tough for upstarts to overcome. Nevertheless, if the cryptoeconomy is becoming a reality then the company will have competition. In fact, JPMorgan Chase (NYSE:JPM) is planning to launch an actively managed Bitcoin fund of its own.
Once again, I like Coinbase, but it does seem to be in a position where even if it wins it loses. If the cryptoeconomy becomes a reality there will be more competition that, at the very least, will drive down the company’s margins.
If cryptocurrency doesn’t gain the expected traction, the exchange will have a much larger problem.
Either way, Coinbase is a stable company that is an exchange for what still amounts to a speculative investment. Your decision on whether to invest in Coinbase comes down to your belief in the growth of cryptocurrency.
But how much you invest in COIN should be treated just as you would Bitcoin or Ethereum (CCC:ETH). That means don’t invest more than you can afford to lose. Because while Coinbase may be a great idea, it looks really overvalued at the present time.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.