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Many choose not to invest directly in cryptocurrencies, but may want exposure through an exchange. One of the most prominent options is Coinbase stock, but is it a good investment?
What is Coinbase?
Coinbase is a centralized cryptocurrency platform primarily known for its exchange, where users can buy and sell cryptocurrencies. It serves small investors and traders, as well as large financial institutions.
Not limited to its crypto exchange, users can also use interest-earning products, derivatives, credit cards, lending services and the newly launched NFT market. For institutional clients, Coinbase offers crypto custody that stores, secures and provides insurance for large amounts of crypto assets.
How does Coinbase make money?
According to page 10 of their recent letter to shareholders, Coinbase derives most of its revenue from cryptocurrency transactions made on behalf of its users. The rest of the revenue comes from what it describes as “subscriptions and services.” Blockchain rewards and fees from custodial accounts are the main contributors.
Is Coinbase a good stock to buy?
The bullish case for Coinbase stock is based on the continued adoption of blockchain technology and cryptocurrency. One of the key metrics to analyze is customer acquisition, which looks promising so far. Coinbase gained 13 million users in the first quarter of 2022. The total is now more than 89 million.
However, there are some negative sides. It has the advantage of a first mover within the space, having built brand equity, but operating in an increasingly competitive environment. As of June 2022, there were 498 cryptocurrency exchanges, indicating market saturation.
The Bull Case and the Bear Case for Coinbase
Several positives and negatives affect Coinbase’s share price. Here are some of the main points to consider.
The Bull Case for Coinbase
Coinbase is backed by investments from renowned financial services funds, such as Cathie Wood’s Ark Invest and Andreesen Horowitz’s a16z. Another good sign is the focus on new product development.
Coinbase is also improving the business user experience with the introduction of Coinbase Intelligence. These include “Know Your Transaction” initiatives designed to analyze millions of transactions to assess risk. This compliance angle is more important than ever, as many crypto institutions have started to face liquidity problems in this bear market.
For the retail market, Coinbase intends to eventually launch a subscription service on its platform, where users will have zero fees. It will be called Coinbase One and is rumored to cost around $30 per month.
Finally, Coinbase acquired a crypto infrastructure company, Bison Trails, in 2021 as part of its efforts to build the “Coinbase Cloud”. This signals the company’s intention to grab a piece of the cloud services pie, which has been very profitable for technology leader Amazon Web Services.
The Bear Case for Coinbase
An analyst at Atlantic Equities recently downgraded Coinbase shares and believes their fair value is only $35 per share. The analyst cited poor macroeconomic conditions, the crypto’s loss of key support levels and potential difficulties Coinbase could face in attracting top talent. Statistics support this argument as month after month data shows that fewer people are visiting the site.
In an unfavorable market, Coinbase saw a decline in revenue. This has had a significant impact on profitability, and the share price has fallen sharply in recent months. Coinbase already has significant volatility as a cryptocurrency business, and a long-term cryptocurrency market can damage finances.
In addition, Coinbase has already had to take extreme measures, laying off 18% of its full-time workers as of June 2022.
Is Coinbase stock expected to rise?
Price predictions for Coinbase vary dramatically. It falls into a category known as a growth stock, meaning it has high reward potential but carries equally high risk.
Some well-known investors, such as James Chanos, predict that Coinbase’s stock price will continue to fall in the coming year based on increased competition and declining revenue.
Another thing to consider about Coinbase stock is the price of Bitcoin. Since the majority of trading income comes from these assets, they are critical to the company’s success. University of Sussex finance professor Carol Alexander expects the price of Bitcoin to fall to $10,000 in 2022. Such an event could have a strong impact on demand.
On the other hand, Cathie Wood’s Ark Invest fund has a different view. During this crypto crisis, the fund bought an additional $29 million worth of Coinbase shares. The fund targets high-growth stocks that possess innovative qualities.
What is the projection for Coinbase stock in five years?
The economic landscape and crypto markets could change drastically in the next five years. As such, it is difficult to forecast where Coinbase will be. The average analyst estimate for the end of 2026 is $128.91 per share.
Crypto trading volume has recently fallen off a cliff, down more than 50% from its 2021 highs. While the short-term environment does not appear to favor Coinbase, it has shown resilience throughout its history. That being said, Coinbase has a good chance of recovering once the bull markets resume.
The information is correct as of July 18, 2022.
Editorial Note: This content is not provided by Coinbase. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are solely those of the author and have not been reviewed, approved or otherwise endorsed by Coinbase.