3 things about Coinbase Global that smart investors know
Coin base (COIN -5.50%), one of the world’s largest cryptocurrency exchanges, went public through a direct listing in April last year. It closed at $328.28 on the first day. Coinbase initially dazzled the bulls as Bitcoin (BTC -3.00%), Ether (ETH -5.22%)and other cryptocurrencies rose to record highs.
But over the past year, the crypto market collapsed as rising interest rates pushed investors toward more conservative investments. The failures of a number of smaller cryptocurrencies and exchanges further tarnished the fledgling industry’s reputation, spooking the bulls and incurring the wrath of financial regulators.
Now, Coinbase is trading at around $40 per share.
Image source: Getty Images.
In June, Coinbase’s CEO warned investors that a “crypto winter” could soon begin. It has also laid off nearly a fifth of its workforce, but it remains unprofitable. All of these issues have made Coinbase a tough stock to own as the bear market drags on. But today I want to focus on three lesser known facts about Coinbase – and how they could shape the future.
1. Coinbase relies on institutional investors
Many retail investors – driven by social media recommendations, commission-free trading platforms and stimulus checks – bought cryptocurrencies for the first time in 2020 and 2021. However, larger institutional investors actually played a much bigger role in driving cryptocurrency prices to record highs. tops last year.
Last December, Ark Invest’s Cathie Wood claimed that Bitcoin’s price could top $500,000 if all institutional investors allocated just 5% of their portfolios to the top cryptocurrency. That’s why Wood bought Coinbase for several of Ark’s exchange-traded funds (ETFs). As of this writing, Coinbase still accounts for 3.2% of Wood’s flagship Ark Innovation ETF (SHEET -4.90%)4.6% of Ark Next Generation ETF (ARKW -4.85%)and 5.4% of Ark Fintech Innovation ETF (ARKF -5.00%). All three ETFs have fallen by more than 60% in the past 12 months.
Wood was likely interested in Coinbase because most of its trading volume comes from institutional investors rather than retail investors. This difference separates Coinbase from retail-oriented platforms such as Robin Hood and Blockits cash app. But as the table below illustrates, both institutional and retail investors fled as crypto prices plunged.
|
Metric |
Q3 2021 |
Q4 2021 |
Q1 2022 |
Q2 2022 |
Q3 2022 |
|---|---|---|---|---|---|
|
Institutional trading volume |
234 billion dollars |
371 billion dollars |
235 billion dollars |
171 billion dollars |
133 billion dollars |
|
Retail volume |
93 billion dollars |
177 billion dollars |
74 billion dollars |
46 billion dollars |
26 billion dollars |
|
Total trading volume |
327 billion dollars |
547 billion dollars |
309 billion dollars |
217 billion dollars |
159 billion dollars |
Data source: Coinbase.
2. Bitcoin becomes a bigger part of business
Bitcoin’s price hit a record high of $67,567 last November, but many investors still dismissed it as an old cryptocurrency that couldn’t keep up with the newer players. Bitcoin’s price has fallen to around $18,000 today, but it survived the industry-wide washout that crushed many smaller cryptocurrencies and tokens over the past year.
As a result, we’ve seen Bitcoin become a much bigger part of Coinbase’s business again. Bitcoin accounted for 31% of Coinbase’s total trading volume in the third quarter of 2022, compared to 19% a year earlier. Ether’s share also rose from 22% to 33%. Meanwhile, Coinbase’s trading volume from “other cryptoassets” fell from 59% to 36%.
Coinbase’s loss of trading volume from more speculative altcoins could limit growth in the short term, but it could also stabilize long-term returns if Bitcoin and Ether emerge as the most resilient cryptocurrencies.
3. The company has a growing debt problem
At the end of 2021, Coinbase had $7.1 billion in cash and equivalents. It also generated $3.6 billion in net income for the full year. At the time, it didn’t seem like the $3.4 billion in long-term debt it had issued would cause any major problems.
But by the end of the third quarter of 2022, Coinbase’s cash and equivalents had fallen to $5.0 billion — and it had a net loss of $2.1 billion in the first nine months of the year. Also, the long-term notes due in 2031 have now fallen to around 50 cents on the dollar, suggesting that Coinbase only has a 50/50 chance of surviving another nine years.
These notes have a coupon rate of 3.625% and were issued last September along with another 3.375% tranche due in 2028. It also issued a new 0.50% tranche last May. These mature in 2026.
These bond sales all happened last year before the crypto market crashed and interest rates skyrocketed – so any new funding (if it can be secured at all) will come at a much higher price. Coinbase won’t go bankrupt anytime soon, and it should be able to cover the first $1.4 billion tranche of debt due in 2026. But if the crypto winter turns into a multi-year ice age, there’s still a good chance that its debt will overwhelm its assets by the end of the decade.
Just buy Bitcoin instead
Coinbase’s operations are messy, capital-intensive, and likely to be closely scrutinized by regulators following the recent FTX debacle. If you still believe in the crypto market’s long-term potential, it makes more sense to buy a Bitcoin or two rather than Coinbase’s slumping stock.
Leo Sun has no position in any of the aforementioned shares. The Motley Fool has positions in and recommends Bitcoin, Block, Coinbase Global and Ethereum. The Motley Fool has a disclosure policy.
