Since its founding, Coinbase Global Inc. (COIN, Financial) has become one of the world's most well-known and widely used cryptocurrency exchanges. The platform has attracted millions of users and has facilitated billions of dollars in transactions.
However, the stock lost more than 70% of its market value in 2022 as the company, along with popular digital assets, came under pressure as investors' focus shifted from risky to more recession-proof assets. Coinbase, however, has made a strong comeback in 2023 with its market value already surging more than 50% amid the improving sentiment toward risky assets like cryptocurrencies. Cooling inflation has also played a massive role in boosting investor confidence toward stocks and digital assets.
Coinbase will benefit from the continued adoption of crypto assets
Cryptocurrencies are digital or virtual currencies that are secured using cryptography. They are decentralized systems that allow for the creation of secure, anonymous transactions without the need for a central authority. The history of cryptocurrency is complex and varied. Created in 2009, bitcoin was the first and most popular cryptocurrency. Since then, a number of other cryptocurrencies have been developed, with varying degrees of success. Some have become extremely popular, while others have failed to gain widespread adoption. In recent years, the use of cryptocurrency has become more mainstream, with a growing number of merchants and businesses accepting it as a form of payment. However, the value of cryptocurrencies can be highly volatile, and there have been instances of fraud.
The prices of cryptocurrencies are influenced by a wide range of factors, including market demand, regulatory developments and technological advances. In general, the prices tend to be affected by investor sentiment and can fluctuate dramatically over short periods of time. This can make investing in cryptocurrencies risky, as the value of an investment can quickly go up or down. This is one of the main characteristics of cryptocurrencies that have kept institutional investors on the sidelines despite their understanding that they could become a mainstream asset class in the coming years.
As one of the leading crypto exchanges in the world, Coinbase will grow along with the continued adoption of crypto assets. It will likely take many decades for cryptocurrencies to be fully established as a mode of payment and a store of value, so Coinbase is positioning itself to become a winner of this journey by offering 360-degree solutions to cater to the demand for crypto products. From just a crypto exchange, the company has expanded to offer cards, digital wallets, credit solutions, cloud staking and custodian services, and this wide array of products and services offered will help it attract new users in the coming years.
Moving in the right direction, but short-term challenges persist
In recent years, Coinbase has made a number of strategic acquisitions and partnerships, as well as introduced several new products and services, including Coinbase Pro, a professional trading platform, and Coinbase Earn, which allows users to earn cryptocurrencies by completing educational tasks. Overall, the company has been a successful and influential player in the cryptocurrency industry, helping to drive mainstream adoption. Although the long-term outlook for the company is promising, Coinbase will have to deal with short-term headwinds that could impact its market value negatively in the next few quarters.
Coinbase sees some hope in the matter of regulation after bipartisan U.S. senators introduced the Digital Commodities Consumer Protection Act in August of 2022. If passed, the company believes the legislation could be a potential step forward in crypto policy progress. While there are some conflicts and issues that still need to be resolved, other major economies are taking significant regulatory steps as they embrace cryptocurrencies. The text of the European Union's Markets in Crypto Assets (MiCA) framework, for example, was finalized in October 2022. This is expected to be implemented across the EU's 27 member states in 2024. Further, the Indian government, as part of the upcoming G20 summit in New Delhi, is planning to work on the development of an international crypto regulatory framework.
Digital assets, despite their rising popularity, have been heavily criticized due to the massive volatility associated with these assets. Cryptocurrencies came under massive pressure following the FTX fallout, causing Coinbase's stock to crash along with crypto prices. The high correlation observed between bitcoin prices and Coinbase stock does not work in favor of investors as this results in heightened volatility.
Earnings volatility is not helping Coinbase win investors' trust
Coinbase is focused on improving its subscription business to build stable recurring revenue streams, but for now, its fortunes are closely tied to crypto trading volumes. Because of macroeconomic challenges faced by the global economy, investors and traders are looking for safe-haven assets, reducing the demand for cryptocurrencies across the board. This unfavorable development reflected negatively on the company's earnings.
For the third quarter of 2022, the company reported weaker-than-expected results. The loss per share was $2.43 compared to a loss of $2.40 per share in the prior-year period, while revenue of $590 million declined more than 50% year over year. As per company filings, during the quarter, daily average crypto market capitalization declined 30% sequentially, including 35% and 32% declines in the average price of Bitcoin and Ethereum, respectively. As a result, retail trading volume reached its lowest point since 2020 and retail transaction revenue came in at $346.1 million, down from $1.02 billion.
The earnings report also highlighted that crypto trading activity has significantly declined in the U.S., which is the most important market for Coinbase. In September, the global monthly crypto spot market volume fell 18% compared to January 2022 and U.S.-enabled exchanges saw volumes decline more than 50%. The company recorded a trading volume of $47 billion. Despite all this negativity, Coinbase reported better-than-expected user numbers. The platform’s monthly active users totaled 8.5 million.
Takeaway
Coinbase is not for every investor.
For the investment thesis to fully play out, investors will have to remain patient for many years as the company's fortunes are tied to cryptocurrency adoption. Cryptocurrencies, as an asset class, will have to face increased regulatory scrutiny before seeing any meaningful support from institutional investors.
As such, Coinbase is positioning itself as a leading crypto marketplace and infrastructure solutions provider. It will be a winner regardless of which individual token dominates the crypto market in the long run because of its diversified offering of products and services.
