Is Coinbase Stock A Buy As Cryptocurrency Price Drops?
Coinbase is not only facing macroeconomic challenges, but also the threat of competition.
To evaluate the possibility of a reversal in Coinbase stock, an investor needs to understand the reasons behind the recent decline in stock price.
Coinbase may have to take bold decisions to come out of this challenging period, but that is not a bad thing for investors focused on the long term.
Crypto prices continue to plummet, wiping all the gains in recent history. Because Bitcoin was the best performing asset class in 2020, coming into 2022, many investors assumed crypto prices will hold ground despite the challenges facing the global economy. As we now know, these investors have already been proven wrong. I could never make up my mind to invest in cryptos and other digital assets although I always believed – and still do – that cryptocurrencies will have a bright future in the long run although these digital assets might not survive in this shape and form. This is why I always thought it made more sense to invest in Coinbase Global, Inc. (COIN) to get indirect exposure to the crypto industry without having to bear token-specific risk. COIN stock got off to a good start after debuting on Nasdaq and this did not help me at the time, but with stock prices down substantially YTD, the time seems right for me to consider investing in Coinbase stock once again.
Why Has Coinbase Stock Been Dropping?
Coinbase stock is down 80% this year, mirroring the price of Bitcoin which is down 58% in 2022. Many analysts believe the situation will only get worse from here. The sell-off is being driven by a few factors. First, this year, investors have been reducing their exposure to growth stocks and other high-risk bets as the U.S. Federal Reserve takes aggressive action to curb inflation. Bitcoin might have been thought of as “digital gold” or a “hedge” against inflation, but investors are currently treating cryptocurrencies as high-risk stocks that are not yet profitable. With the Fed raising rates faster than expected to combat rising inflation, investors are avoiding risky assets such as cryptocurrency.
Prices of digital assets and the volume of transactions made on Coinbase's platform have a significant impact on the company's overall revenue. This means that if cryptocurrency prices and trading volume continue to fall, Coinbase will naturally see a loss in revenue, which in turn will spook investors. This is exactly what is happening today. The company's quarterly results have already reflected this downturn. In the most recent quarter, Q1 2022, the company reported weaker than anticipated financial results, with net revenue declining 27% from a year ago. Additionally, retail monthly transacting customers fell almost 20% QoQ to 9.2 million, and overall trade volume fell dramatically from $547 billion in Q4 2021 to $309 billion in Q1 2022.
Exhibit 1: Key business metrics
Q1 shareholder letter
Many analysts are downgrading the stock, which could be an indication that things could get considerably worse when the company reports results for the second quarter. Recently, Coinbase's rating was lowered by Goldman Sachs (GS) analysts from neutral to sell. As the crypto winter continues to have a negative impact on crypto exchanges including Coinbase, analyst Will Nance downgraded COIN shares, lowering the price target to $45 from $70 earlier this year. The analyst predicts the ongoing panic selling will result in further deterioration of Coinbase's revenue, leading to a decline of 73% in the second half of this year and 61% in 2022. J.P. Morgan (JPM) also downgraded Coinbase from overweight to neutral earlier this month, and Finance brokerage Redburn Partners downgraded Coinbase from buy to neutral. These negative analyst actions have cast doubt over Coinbase’s future and created uncertainty among investors.
Exhibit 2: Coinbase stock price vs. average analyst target price
The company's bonds have also been under pressure with its senior unsecured bonds maturing in 2031 among the worst performers in the U.S. high-yield market. Moody’s Corporation (MCO) lowered Coinbase's guaranteed senior unsecured notes from Ba1 to Ba2 and its corporate family rating from Ba2 to Ba3. These grades denote "junk" status.
Coinbase announced a significant restructuring earlier this month in response to inactivity in crypto trading and rising inflation. The company announced that it would lay off 1,100 employees, or roughly 18% of its workforce, to deal with rising operating expenses, which reached a record $1.7 billion in the first quarter. The company stated that it over-hired during the cryptocurrency boom and there’s reason to believe that this is just the beginning and that there would be more layoffs to bring Coinbase's costs in line with decreased sales.
Another reason behind the decline in Coinbase stock is rival crypto exchange Binance announcing a reduction in certain trading fees for customers. Binance announced that users will be able to make spot Bitcoin trades for U.S. dollars and stablecoins tether, USD Coin, and Binance USD without paying spot trading fees. Binance is the world's largest crypto exchange by trading volume and its recent move amid a prolonged bearish period for cryptocurrencies poses a significant threat to Coinbase.
All the reasons discussed in this segment of the analysis played a role in the massive decline in Coinbase's market value this year.
What Is Coinbase's Long-Term Outlook?
Bitcoin is regarded as one of the most cutting-edge technologies in the investment world today. Bitcoin's strong recovery from significant sell-offs in the past has made it the world's most valuable cryptocurrency, prompting leading analysts to label it as an inflation hedge. Although Bitcoin has so far not been effective as an inflation hedge, its long-term track record and the cult-like follower base suggest investors should not rule out the possibility of a stellar recovery from Bitcoin even in the short run. According to Coinbase, there are multi-year cycles that affect Bitcoin prices that span between two and four years. And, given the likelihood that investors will prefer cash-flow-yielding assets over cryptocurrencies amid rising interest rates, the going could be tough for the company in the short term. Coinbase will need to significantly reduce its cost base as retail trading activity declines to put breaks on the cash burn. To lure more customers, Coinbase has decided to combine Coinbase and Coinbase Pro onto a single platform, which may help users switch easily and take advantage of lower pricing. This is a good start but we believe Coinbase will have to scale back more, give up short-term profits, and position the company as a more efficient business to be prepared for the lucrative long-term growth opportunity available for the company.
Coinbase initially relied heavily on trading volumes and fees to generate revenue. As zero-fee trading grabs users' attention, Coinbase has begun to diversify its revenue streams. The zero-fee trading concept was pioneered by Robinhood Markets, Inc. (HOOD) which made inroads into the retail investing world a few years ago. This resulted in major stock brokerages switching to commission-free online trading. Recently, many other cryptocurrency exchanges, including FTX US, have announced plans to implement zero-commission trading. Furthermore, Binance US has also announced to lower certain trading fees. With this shift, Coinbase is currently testing Coinbase One, a subscription service for customers that would provide them with zero-fee trading for up to $10,000 in transactions per month.
In the world of cryptocurrencies, Coinbase is an industry leader. The business has established a strong reputation for security, compliance, and transparency, which are likely to make Coinbase one of the preferred platforms to trade and invest on as Bitcoin and other cryptocurrencies recover. The company aims to make cryptocurrency a new financial system. The market may appear to indicate that investors are losing interest in digital assets, yet institutional adoption of cryptocurrencies has recently increased significantly. Furthermore, the company has made substantial investments to establish itself in the new digital asset and NFT markets. In Q1, Coinbase added many new assets and payment rails. Although these investments and the market downturn caused Coinbase to post a loss in Q1, the company was highly profitable in 2021, when cryptocurrencies surged, with a net income of approximately $3.6 billion. The possibility of extraordinary profits during good times suggests that the company's prospects should improve gradually as the crypto cycle enters another growth phase.
Coinbase's long-term outlook remains promising but the company might have to go through a lot of pain in the short run to get to a stage where it will be able to capitalize on the expected adoption of crypto and digital assets.
Is COIN Stock A Good Choice As Cryptocurrency Prices Drop?
Coinbase generates a majority of net revenue from transactions in Bitcoin and Ethereum. In 2022, the value of the global cryptocurrency market has fallen by around $1 trillion, and Bitcoin and Ethereum are now trading well below their previous highs. Investors’ concerns about persistent inflation have played a big role in the equity and cryptocurrency market downturn. More interest rate hikes would make the markets more volatile and uncertain in the coming months. If the demand for these digital assets keeps falling, Coinbase will significantly suffer.
Exhibit 3: Crypto asset volatility and Coinbase trading volume
Q1 shareholder letter
Going by the uncertainty expressed by analysts, the company CEO, and investors, we believe investors looking for short-term opportunities should steer clear of COIN stock for the time being. CEO Brian Armstrong warned investors that things could get significantly worse before they get better. Although the dip may appear to be a good time to buy the stock for trading purposes, blindly betting on Coinbase stock could lead to substantial losses given that it is challenging to predict when the cryptocurrency market will recover.