What's Behind the Buzz Around Coinbase Stocks Among Investors?
Despite a 50% drop in Coinbase's stock value over the past year, investors such as ARK Invest continue to show interest in the exchange.
1. Reputation and a strong foothold in the market.
Coinbase has gained a reputation as a highly secure company that strictly follows compliance obligations. By building strong ties with regulatory agencies worldwide, especially in the US, the exchange remains dedicated to fulfilling all regulatory requirements.
The exchange's growing presence in other countries and the increasing adoption of cryptocurrencies are likely to drive up its user base, which currently stands at around 110 million users as well as its overall revenue. Investors see this as a promising outlook for Coinbase's stock.
2. Diversification.
Coinbase has diversified its revenue streams with sources such as commissions, subscriptions, staking, and lending. This means that during crises or unfavorable market events, the exchange has more options to maintain its income at a certain level. However, it is worth noting that in 2022, despite diversification, Coinbase suffered significant losses.
3. Development of additional projects.
Coinbase aggressively invests in cryptocurrency projects, notably Circle's stablecoin USDC, which the exchange actively advocates. Recently, they announced the development of their own L2 solution, BASE, built on the Ethereum blockchain. Although the current test network includes centralized elements, the exchange is committed to decentralization after the launch of the main network, with an array of decentralized applications on the horizon. Coinbase's CEO briefly commented on the network's financial monitoring capabilities without delving into technical details:
I think that the centralized actors are the ones that are probably going to have the most responsibility to avoid money laundering issues and having transaction monitoring programs and things like that.
Investors acknowledge the vast potential of cryptocurrencies but may view investing in crypto companies' stocks as an alternative to direct Bitcoin investment due to high volatility and unclear local regulations. Meanwhile, others may be guided by the position of major players such as ARK Invest.
The thoughts of a leading investor
ARK Invest is a widely known fund that bets on modern technologies, with a particular focus on the dynamic cryptocurrency industry. The fund's founder, Cathie Wood, is an ardent advocate of cryptocurrencies and blockchain technology.
ARK Invest purchased Coinbase shares during the company's NASDAQ listing in April 2021. The fund has continued its active acquisition of Coinbase shares notwithstanding the bear market. The reasons for such dedication include the exchange's significant user base, leading position in the US, and potential for global expansion.
The fund also commented on Coinbase's new BASE project, noting that the exchange has the potential to increase decentralized networks usage. The fund highlighted Coinbase's commitment to honest, transparent, and regulated financial instruments on an open blockchain.
While it will not derive transaction revenue from Base at launch, Coinbase is likely to benefit financially if its Wallet serves as a trusted on-ramp and access point to applications on the network as it scales, – ARK’s Newsletter #355
Threats looming over Coinbase's future
Although there are numerous positive factors, risks still exist that could potentially decrease the value of Coinbase's stocks and harm investors.
1. Excessive cryptocurrency regulation in the US.
As cryptocurrency popularity rises, regulatory bodies also take notice. Excessive control can negatively impact all exchanges, let alone if regulators focus directly on Coinbase. There is a high likelihood that this will undermine trust in the company and reduce its earnings. Even ARK Invest reduced its Coinbase positions when rumors of an SEC investigation into the exchange surfaced.
2. Rivalry and decentralization.
Many companies are emerging with the ability to buy cryptocurrency or DeFi products, taking away market share from Coinbase. In the end, the exchange may lose a significant portion of its revenue.
3. Volatility.
During periods of cryptocurrency price declines, many exchanges reduce staff and experience a general decrease in revenue. Coinbase is no exception, which greatly affects the value of its stocks and the financial condition of the platform.
Bottom line
Coinbase remains an attractive investment due to its presence in the US market, large user base, and wide range of services. However, as financial results have shown (a net loss of $557 million in Q4 2022), the exchange is still facing challenges in a declining market. Therefore, the future of the platform depends on its ability to adapt to new regulations and quickly changing cryptocurrency trends.
