- Coinbase (COIN) stock had a very strong 2021 based on fundamental improvement.
- Changing landscape makes Q1 ‘22 appear less optimistic.
- Federal Reserve monetary policy will continue to take its toll on Coinbase throughout 2022.
Despite a strong showing in 2021, now is not the time to invest in Coinbase (NASDAQ:COIN) stock. The all-time high levels of crypto assets in the fourth quarter aren’t sticking around as quantitative measures by the Fed imply longer-lasting effects on crypto and Coinbase.
That’s why it’s best to start with the outlook and work backward in discussing Coinbase. Because investors who view it from the perspective of 2021 successes might be tempted to invest when things are worsening.
| COIN | Coinbase | $165.56 |
Toughening Outlook on COIN Stock
2021 was a banner year for cryptocurrency. That was a boon to Coinbase, a cryptocurrency trading platform. I’ll get into the numbers behind Coinbase’s rise in a minute, but the most important thing to note is that 2022 is turning into something quite different from 2021. That has far-reaching implications for Coinbase.
Let’s start with the near-term implications first, though. When Coinbase released fourth-quarter and full-year earnings results in late February, it noted several troublesome factors.
Importantly, 2022 began with a decline in crypto volatility and crypto asset prices. Both of those things are negative factors from Coinbase. The higher volatility, the better for the company. Coinbase makes money from the transactions that users undertake on its platform after all. The more volatility there is, the more transactions occur. As a result, Coinbase sees more transaction fees in periods when crypto is volatile.
The same goes for declining crypto prices. The lower crypto prices are, the less attractive the asset class. The less attractive the asset class, the fewer transactions are bound to occur within it. As a result, Coinbase sees decreasing transaction fees. And that’s its bread and butter.
That leads curious investors to want to understand why. The answer is tightening quantitative policy.
The Fed
The days of easy money policy that characterized 2021 are gone. The Fed increased rates to 0.25% on March 16. It’s important to remember that the Fed maintained interest rates at near 0% for all of 2021.
The easy lending policies that characterized 2021 are a thing of the past. As soon as that rate hike was announced, Coinbase became much less attractive. That’s true for the entire crypto market as well. Coinbase mentioned in its earnings report that market capitalization was down 20% through late February on the back of tightening fiscal policy.
The tighter the policy, the more expensive money becomes. That means investors are inherently going to become less risk-tolerant. The problem I see for Coinbase is that the Fed is already on course to raise the Fed funds rate seven times this year. Some have suggested that it may need to do more than 0.25% incremental hikes. Both cases bode poorly for the company because they spell increasingly tightening monetary policy. That means less speculation which equates to less capital flowing through Coinbase and the company garnering less and less transaction fees.
All of this is what it is. Coinbase enjoyed a banner 2021. Net income reached $3.624 billion on $7.355 billion in sales. That was a massive increase over a 2020 in which the company posted $322 million in net income on $1.141 billion in sales.
The Takeaway
Coinbase has given vague guidance on what to expect throughout 2022. It gave a wide range of between 5 million-15 million annual average monthly transacting users. That might or might not exceed the 8.4 million that the platform saw in all of 2021.
But the company was clear that average transaction revenue per user would revert to pre-2021 levels. That’s part and parcel of Fed monetary policy and a big reason why Coinbase is too risky right now.
Rising tides raise all ships. That’s absolutely true of Coinbase’s place in the cryptocurrency landscape that existed in 2021.
Times have changed and Coinbase is not nearly as attractive right now as it was then. With Fed policy still largely unknown for the remainder of 2022 it’s wise to stay on the sidelines of COIN stock.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
