As a long-term investment, cryptocurrency platform Coinbase (COIN) offers an intriguing proposition. Fundamentally, when cryptos first sprouted onto the scene, very few people knew about blockchain assets. And even when they did, accessibility represented a major obstacle. At the time, most folks didn’t know how to acquire blockchain-derived assets.
While Coinbase isn’t the first consumer-friendly crypto platform, it quickly became the benchmark for the industry. Via bank account and credit card connections, lay investors could easily pick up units of their favorite digital assets much like they would buy blue-chip stocks via an online brokerage account. Coinbase ushered in a new era of accessibility for cryptos, an accomplishment that deserves respect.
However, COIN stock as its own investment presents a very mixed picture. For example, since the start of the year, shares skyrocketed just over 182%. In the trailing one-year period, COIN overcame earlier hiccups to generate a return of almost 51%. So far, so good. Unfortunately, since making its public market debut in April 2021 – during a bullish frenzy for cryptos – shares fell more than 72%.
So, which COIN stock will show up for the rest of the year?
COIN Stock Faces an Alignment Dilemma
Setting aside the day-to-day price swings and observing the broader picture, my concern for COIN stock is that investors could face disappointment over the next several months. With the Federal Reserve once again raising the short-term federal funds rate by 25 basis points, investors of risk-on assets must contend with a hawkish monetary policy.
To be sure, the market value of various cryptos has been surprisingly resilient. Some of this positive sentiment centers on speculation that the Fed will soon back off its monetary tightening program in fear of sparking a recession. However, the central bank left the door open for more tightening, not less.
Indeed, during the Fed’s meeting in June when it ultimately decided to forego a rate hike, some officials pushed for raising borrowing costs. Though some recent data indicates that consumer price trends are fading, the central bank is well off from achieving its main inflation target.
Unfortunately, this framework implies that – contrary to the wishes of crypto advocates – the Fed may end up raising rates to combat stubbornly elevated inflation. If so, individual cryptos could stumble, which would likely drag down COIN stock because of the underlying platform’s alignment dilemma.
When comparing Coinbase’s quarterly revenue trend to the average price of crypto benchmark Bitcoin, you’re visually left with an undeniably strong correlation. In fact, the correlation coefficient of the BTC price to Coinbase sales stands at 93.3%. Essentially, wherever crypto sentiment goes, so too goes the digital asset platform’s top line.
In fairness, sentiment for COIN stock is a bit different than the revenue trajectory of the underlying business. However, the problem is that if cryptos sustain a few rotten quarters, it’s likely that Coinbase will also print poor performances in its financial statements.
Plus, there’s no realistic way out of this tough relationship. Unlike the equities sector, which offers a mix of strategies such as targeting capital gains or passive income via dividends, with cryptos, it’s largely about the greater fool theory, to put impolitely. You buy blockchain assets hoping that somebody else will buy it from you at a higher price.
That’s great when things are moving along at a rapid rate. But when circumstances go sour, the business likewise suffers.
Correlation is Causation in This Case
In statistics, one of the first lessons you learn is that correlation does not necessarily equate to causation. Meaning, just because two data points appear related doesn’t necessarily mean that they are. However, when it comes to Coinbase sales and the relationship to crypto pricing, it’s a lock: correlation is causation.
Without an easy way to short the market, both investors and traders who use the Coinbase platform (usually) must resort to long-side transactions; that is, market participants must buy low and sell high. Even for those who are bearish on virtual currencies, they can only exercise (with few exceptions) their pessimism by selling their holdings and waiting to buy back in at a lower price.
Of course, this setup presumes that the bears already have crypto holdings to begin with.
Stated differently, unlike equities brokerage accounts which allow for options trading, if the blockchain ecosystem tumbles, there’s no readily accessible way for average Coinbase users to actively short the market. For clarity, high rollers can short virtual currencies via Coinbase. However, the privilege is only accessible to an elite few.
Therefore, given that the transactions are long side only for regular retail investors, a collapse of crypto sentiment – such as might happen under a hawkish monetary policy – could likewise fold COIN stock.
As such, I would be careful about betting heavily that Coinbase shares will move higher from here. It all depends on crypto sentiment and that doesn’t look encouraging given the Fed’s latest actions.
On the date of publication, Josh Enomoto had a position in: ^BTCUSDT . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
