Coinbase, one of the largest cryptocurrency exchanges globally, went public in June 2021 at a reference price of $250. On its first day of trading, Coinbase stock opened at $381 and touched a high of $429. Shares of the crypto giant are currently trading 78% below all-time highs, valuing the company at $18.7 billion by market cap.
Similar to several other tech stocks, Coinbase has derived outsized gains in 2023. It has returned 126% year-to-date and 24% in the past month. Let’s see how high can Coinbase stock rise and what are the key drivers of the company.
Coinbase Stock is Tied to the Prices of Bitcoin
Investors should expect Coinbase stock to move in line with the prices of Bitcoin and other major cryptocurrencies as it generates a majority of sales by trading fees which in turn depend on trading volumes.
In a bull run, trading volumes are significantly higher, allowing Coinbase and its peers to report outsized profits. Likewise, in a bear market, trading volumes nosedive resulting in significant losses for Coinbase and other trading platforms.
For example, Coinbase increased sales from $533.7 million in 2019 to $7.84 billion in 2021. While it reported an operating loss of $35.6 million, its operating income grew to $3.07 billion in 2021. As Bitcoin prices fell off a cliff in 2022, Coinbase’s sales declined to $3.19 billion in 2022, while its operating losses were close to $2.7 billion last year.
In addition to Bitcoin prices, Coinbase’s share price will also depend on the outcome of its lawsuit with the SEC or the Securities and Exchange Commission. SEC is a U.S.-based regulatory body that charged Coinbase with operating its trading platform as an unregistered national securities exchange, broker, and clearing agency. Additionally, it claimed Coinbase failed to register the offer and sale of its crypto asset staking-as-a-service program.
Alternatively, Coinbase has challenged these claims and maintained that none of the digital assets that trade on its platform can be classified as a security. Coinbase further stated the SEC lacks jurisdictional power with respect to the digital assets the trading platform buys or sells on its platform.
Is Coinbase Stock a Buy or a Sell Right Now?
In case you are bullish on the long-term prospects of Bitcoin, it makes sense to invest in Coinbase stock right now. Despite the recent rally, BTC prices are still down about 60% from all-time highs, allowing you to buy the dip.
According to the stock-to-flow or S2F valuation model, Bitcoin prices may surge over $400,000 in the next two years. The S2F ratio has traditionally been used to value precious metals such as gold, where the stock is the total supply that exists for a commodity, and flow is defined as the additional new supply which is added. The total BTC supply is capped at 21 million, and the number of BTC you can mine is reduced by 50% every four years. This halving event occurs acts as a catalyst for Bitcoin.
Another major driver for Bitcoin and Coinbase will be the potential launch of spot Bitcoin ETFs or exchange-traded funds. Last month, the world’s largest asset manager BlackRock (BLK) applied to list a spot Bitcoin ETF in the U.S. Invesco, another leading asset manager, also reapplied to launch a spot Bitcoin ETF. The two companies have around $12 trillion in total assets under management and are now looking to change the narrative surrounding digital assets.
According to Valerii Brizhatiuk, the co-founder at Swisstronik, “Coinbase stock price can be predicted based on two tracks: first is the rise in the crypto market, and implications such as a lot of new products are created, tokens are used as a mean of payments, huge companies and banks are making their first steps in web3. The second is the tightening regulatory framework, the first cannot exist without the last. Rules that are proposed by SEC and other regulators are creating a safe basement for upcoming investments coming from trade-fin companies.”
Coinbase is Diversifying its Revenue Base
While Coinbase generates a majority of sales from transactions, it is diversifying its revenue base in recent quarters. In Q1 of 2023, Coinbase reported transaction revenue of $375 million, a decline of 58% year over year. But its subscription sales more than doubled to $362 million in Q1. Subscription sales include revenue from Bitcoin rewards, custodian fees, and interest income.
It suggests transaction sales account for 50.8% of total revenue in Q1, compared to 87% in the prior-year period. A diversifying revenue base shields Coinbase from massive fluctuations in crypto prices.
The Final Takeaway
In a nutshell, Coinbase stock should benefit if cryptocurrencies like Bitcoin and Ethereum see major gains and media attention. However, Wall Street analysts don't believe this will happen in the near term.
Out of the 22 analysts covering COIN stock, seven recommend a “strong buy”, one recommends a “moderate-buy”, seven recommend a “hold”, two recommend a “moderate sell,” and five recommend a “strong sell”. The average price target estimate for COIN stock is $62.50, which is 20% lower than the current trading price.
On July 5th, Piper Sandler downgraded Coinbase to “Neutral” from “Overweight.”
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