We’re Buying: Coinbase (NASDAQ:COIN)

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As we’ve said previously, 2021 so far really has been the year of crypto. Back in 2020, we would have looked to invest in a BTC or other crypto exchange traded fund, which up until last year was available through trading212. However, these funds were shut down to UK investors while the government decide how they are going to regulate these kinds of products.

With that in mind, in the UK if you want some exposure to the crypto market, you need to do so through buying the currencies themselves. Whilst this is essentially the same thing, the fees are typically higher.

But what if there was a secret third way to get some exposure to crypto? Enter Coinbase.

As always, the following is not financial advice, read our disclaimer

What is Coinbase

For those of you unfamiliar, coin base is America’s largest crypto currency exchange and second largest in the world by volume (second to Binance). The company went public with its blockbuster IPO back in April to great fanfare. At the time, market analysts had put an estimate per share on the stock of around $250. However, shortly after it went live, it sky rocketed to $429 before settling around $328. Since then, it has declined a little as it settles into a stable price. That was until late May when the crypto market crashed….

“Tesla has suspended vehicle purchases using Bitcoin. We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel”


-Elon Musk via his twitter account (Maybe…..)

Starting May 12th, Elon sent out the above tweet and later, other crypto-centric tweets which sent Bitcoin into a tailspin. This was further exacerbated when China began to release (already well known) information around the regulating of cryptocurrency in China. Note though, that we’re not even sure that the tweet about Tesla suspending purchases with bitcoin ACTUALLY came from Elon. For one, are you telling us that one of Crypto’s biggest supporters and possibly the biggest name in electricity right now JUST learned that Bitcoin uses……electricity? And that some electricity comes from the burning of fossil fuels? Something tells us that there’s more to do with this than meets the eye.

But whatever forces are at play, the bottom line is, the market crashed an average of 40% and this has a big effect on Coinbase….. or at least it should. Let us explain.

You see, in theory, when the entire crypto market is in a downturn, less people want to buy cryptocurrencies and deposit cash, in turn reducing Coinbase’s revenue through transaction fees. As the Chart below shows, on May 12th, the price crashed from around $300 to around $225, a reduction of around 25% where it met a fair bit of resistance, rebounding to around $245.

We think a drop of 25% isn’t too bad when you consider that the entire market dropped 40%, big tech like Apple and Amazon are suffering daily drops whilst investors cycle to value stocks and on top of those two things, it’s a new IPO stock which are volatile and susceptible to drops like this. In addition, it now seems (though we’ve only got a couple weeks worth of data, so tread with caution) that it has settled into a new natural price point. It feels like the bleeding has stopped, for both the crypto market and Coinbase and we think this presents an opportunity.

Other reasons we like Coinbase

Ok so putting the crash aside, we need to research and ask the question – ‘is this a good stock to buy?’. If we think back to the beginning of the article, analysts put a price prediction on Coinbase of $250, so we’re now trading well below that meaning it should be a fair price.

But lets dive deeper – Coinbase’s Q1 results showed a 845% increases in sales compared to this time last year, with earnings increasing 2350%. These are massive figures and while the EPS was $0.02 short of what wall street predicted, few companies can post earnings growth quite like this, even the companies of the NASDAQ.

With every crash there has been a new high, so we think that Coinbase could further increase its earnings potential further and with its plan to increase its market share to more than 11% of the global Crypto trading volume, it makes for a very compelling offering. Especially for long term investors like us.

Reasons to be cautious

One thing to consider for Coinbase’s future is its pricing. Currency transacting really is a race to the bottom when it comes to fees (I mean, who wants to pay fees on withdrawing money?) and Coinbase isn’t cheap. So far, they’ve been able to charge a premium by having innovative products and easy to use services but this can only last so long.

On top of that, there is the ever-present threat from financial giants (think Paypal) of taking big chunks of Coinbase’s market share. They have the deep pockets to do it and with further integration of cryptocurrencies into people’s every day lives, we can see adoption of crypto transactions by big financial companies as a realistic future.

Takeaway

With all that said though, we think there is some huge potential in the future of crypto currency and we think Coinbase will be along for the ride. Make no mistake though, Coinbase is still very much a speculative and risky trade. No one can predict the price movements of relatively stable companies, let alone a new company that relies entirely on the adoption of a brand new technology. We’re adding it to out Invest portfolio but only at a 1.5% stake.

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