Once arguably the hottest sector, cryptocurrencies are now struggling, posing serious problems for popular exchange and wallet service Coinbase (NASDAQ:COIN). Most recently, Atlantic Equities analyst Simon Clinch downgraded COIN stock to “neutral” from “overweight” with a $54 price target. Previously, the target was $95. In response, COIN is down nearly 5% in early afternoon trading.
Primarily, Clinch explained the downgrade in a research note as reflecting “incremental concerns over the company’s ability to attract talent longer-term, as well as competitive concerns regarding the spread of misinformation over the company’s financial strength and consumer asset protections.”
Further, the analyst has a dim view on COIN stock due to fundamental challenges. In particular, “volumes and crypto prices have failed to stabilise as hoped; risks of further crypto collapses are rising; crypto prices are testing or violating key support levels; macro is deteriorating at the same time as crypto prices for the first time; and the spread of misinformation may be having more than just a sentiment impact on Coinbase’s business.”
Finally, Clinch added the kiss of death, noting that a prolonged crypto winter could see Coinbase’s net revenue estimates fall more than 70% in fiscal years 2023 and 2024. Currently, Clinch has cut net revenue estimates by 10% for FY 2022 and by more than 50% in FY 2023 and FY 2024.
COIN Stock and Permanent Demand Destruction
Despite the negative outlook for COIN stock, it’s also possible that Clinch could be optimistic about the underlying company and crypto exchanges as a whole. Essentially, one of the longstanding risks against crypto is the potential for permanent demand destruction.
Unlike participating in the equities market, cryptos tend to be a zero-sum game: In order for you to win, someone else must lose. Your winnings (minus certain administrative costs) are equal to that of the amount lost on the other side of the trade. Of course, intense and sustained demand for cryptos obfuscates this reality.
However, the harshness of zero-sum games comes into clearer focus during crypto winters. The concept of permanent demand destruction then adds another threat.
When investors acquire shares of strong publicly traded companies, multiple parties may benefit, from the stakeholders to the supply contractors to the employees to the businesses that those employees frequent. In contrast, cryptos by themselves don’t hire people nor build businesses nor pay dividends. Instead, when people trade virtual currencies, wealth transfers from one pair of hands to another.
However, this wealth transfer consumes a significant amount of energy. That energy expended represents permanent demand destruction, invariably hurting investments like COIN stock once the euphoria fades and the what-have-I-done reality sets in.
Crypto Crash Hurts Coinbase
While the above scenario admittedly paints an extremely negative view of COIN stock, it’s not without merit. Most recently, the implosion of the recently rebranded Terra Classic (LUNC-USD) confirms that total loss is no fantasy. It can and sometimes does happen.
Further, a report from the New York Times issued a warning that loss of confidence in stablecoins could wreck the entire crypto market. In other words, permanent demand destruction contributes to confidence loss because of the realization that cryptos are not necessarily tied to trusted and regulated infrastructures.
Ultimately, COIN stock must ride out this present wave of negativity and hope to be resilient enough to emerge stronger on the other side. The problem is, analysts are increasingly worried whether there will be another side.
On the date of publication, Josh Enomoto 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.