After reading the miserable Q3 financials for Coinbase (NASDAQ:COIN) released on Nov. 9, one quickly realizes that COIN stock doesn’t reflect the results. The stock has already discounted the results.
For example, Coinbase reported its Q3 net revenue fell from $2.033 billion in Q2 to just $1.234 billion in Q3. That represents a drop of 39.3%. But COIN stock has risen from $225.28 on Sept. 29, where it was at a low, to $342.98 as of the close of Nov. 12, or up 52%.
In other words, the stock has long since reflected the expected drop in crypto trading activity. It is now reacting to an upswing in crypto prices during late Q3 and early Q4.
Cause and Effect
Ethereum (CCC:ETH-USD) is now up from $2,900 on Sept. 29 to $4,600 as of Nov. 15. That represents a spike of 58.6% in Ethereum’s price.
Moreover, during the same point in time Bitcoin (CCC:BTC-USD) was up 52.4% from $42,000 on Sept. 29 to $64,000 on Nov. 15.
But, as you may have suspected, it’s actually the other way around, in terms of cause and effect. COIN stock rose 52% despite reporting terrible financials. This is due to the huge gains in Bitcoin and Ethereum.
In fact, Coinbase pretty much makes this correlation quite clear in its financial reports. On page 9 of its shareholder letter, Coinbase reports that Bitcoin and Ethereum represented 41% of its Q3 trading volume. And together they represent 42% of total Q3 revenue.
And it doesn’t matter that the trading volume for these two cryptos was down dramatically during the quarter. COIN stock is not going to react to that information. It’s old news. The market didn’t know the exact details. It could clearly see that Bitcoin and Ethereum both peaked in May and didn’t reach a bottom until the end of Q3. COIN stock was already down as a result.
But since then the market assumes that with the higher trading prices of Bitcoin and Ethereum, Coinbase’s Q4 numbers will be significantly higher.
What This Means For Coinbase
So, going forward, you can basically consider COIN stock as as pseudo crypto index fund or tracking stock for crypto prices. As crypto prices go, so will COIN stock.
In fact, Coinbase has a chart on page 10 of its shareholder letter that shows an interesting correlation. The chart shows that the direction in crypto asset volatility is directly related to the direction of crypto trading volumes.
And that is a good thing for Coinbase. The reason is the rise in cryptocurrencies is probably just beginning. Decentralized exchanges, decentralized finance (DeFi) apps, smart contracts and non-fungible tokens (NFTs) are only just beginning to take off.
Coinbase realizes this too. For example, in its shareholder letter management talked about the percentage of people “staking” their crypto assets at Coinbase. This allows crypto owners to earn higher yields on their crypto assets than they would ever own at a bank or even a mutual fund.
This comes through its DeFi staking functions. It is going to inevitably lead to more and more investors buying cryptos at Coinbase, using its wallet features to earn staking yields.
What to Do With COIN Stock
This clearly leads to a very simple conclusion. The best time to buy COIN stock is only when cryptos assets are at a low. Crypto volatility is just that — ups and downs in crypto prices.
And there will be plenty of opportunities for the next downturn to happen. Crypto prices are highly likely to take a dip after this recent rise — with one proviso.
That proviso is that I suspect that cryptos will probably keep rising through the early part of next year. But come early spring, if their normal trading pattern takes hold, cryptos will probably have another bout of profit-taking again.
But I could be wrong about this and a downturn could occur again before next spring. As a result, the best time to acquire COIN stock will be while it is trading lower.
On the date of publication, Mark R. Hake did not own any security mentioned in this article, directly or indirectly. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide, which you can review here.
