The Coinbase Gamble: A High-Risk, High-Reward Crypto Play for Bold Investors

Stocks to buy

In 2023, Coinbase (NASDAQ:COIN) surpassed expectations as its share price skyrocketed roughly 300%, making this stock quite the standout in the digital asset market. This will have important implications for COIN investors.

That said, even with its recent increase tied to France’s regulatory clearance, COIN stock still rests 55% below its 2021 peak.  Coinbase and Bitcoin (BTC-USD) are closely correlated, with Coinbase’s value largely tied to transaction fees, which are linked to the performance of the crypto sector. With a weighting of nearly half the sector, where Bitcoin is headed tends to drive a significant amount of the sentiment around this space, and therefore Coinbase’s valuation.

That said, there are other catalysts and headwinds to consider when it comes to this stock. Let’s dive into the bull and bear case around Coinbase in 2024.

JPMorgan Downgrades COIN

JPMorgan’s (NYSE:JPM) recent downgrade of Coinbase had a widespread effect on the company, with shares of COIN stock dropping roughly 5% on the news. On a year-to-date basis, Coinbase has been slumping in a big way, losing more than 30% of its value over this short time frame. Much of the negative sentiment around this stock, tied to the downgrade, relates to underwhelming capital flows into Bitcoin via spot ETFs.

The recent spot ETF approvals should have led to an expanded interest in the digital property and boosted Coinbase’s sales diversification. However, a well-known pattern of “buy the rumor, sell the information” has ensued, resulting in a 20% drop in Bitcoin prices following the ETF approval. Fast forward to 2024, Coinbase declined by 25%, which prompted JPMorgan to downgrade the stock with an $80 target price and an underweight rating.

Now, some suggest that Coinbase’s negative momentum isn’t something to worry about. This is a central player in providing the “rails” for the crypto sector. And if a rally that’s stronger than many think unfolds, perhaps this stock is valued attractively. I have to say, the company’s financials are difficult to digest, and many in the market may take this view. Analysts just don’t seem that convinced that a “rip your face off rally” is set to be unleashed in the crypto sector.

Debate with the SEC

On January 10, interesting and significant developments came out of the SEC approval of eleven Bitcoin ETFs. The SEC charged Coinbase for trading unlisted securities, which caused a fiery back-and-forth between these two parties. The debate revolved around the Supreme Court’s Howey decision back in 1946, which emphasized the Securities Act of 1933.

Howey’s definition of an investment contract was often cited within the debate over security tokens versus utility tokens. Fundamentally, it further proves that an investment contract involves shelling out capital, expecting to generate income or profit through others’ efforts.

In the case of the SEC vs Coinbase, the SEC sued the platform for operating as a broker, exchange, and clearing agency for specific securities like Solana, Polygon, Cardano, and Near Protocol. Coinbase argued these are commodities much like to BTC and ETH, referencing Beanie Babies and Baseball cards, which are classified as commodities by the SEC.

The Bull Case?

In the last quarter ending September 30, Coinbase shot through Wall Street expectations, with its stock price surging following the release. Crypto asset values surged, leading to a strong performance for Coinbase. Accordingly, investors will be paying close attention to how the overall market performs this year, and where margins come in (particularly for the company’s higher-growth services segment).

Overall, Coinbase needs to attract more users to the platform, bearing in mind the drop from 8.9 million to 7.5 million monthly transacting users during the first nine months of 2023. 

While user growth is a pressing matter, Coinbase also needs to supplement transaction revenue, a significant part of its income is derived from facilitating crypto trades. In Q3, despite the crypto market’s solid performance, translation fees dropped 21%. 

Despite efficiency gains and cost reductions, the company still recorded a net loss. In 2024, as the company is making strides toward breakeven, the only favorable trend for Coinbase is simply positive profits.

Invest with Caution

The approval of Bitcoin ETFs would be a happy ending for Coinbase. However, despite Coinbase’s performance in the previous year and due to crypto’s unpredictable nature, there will always be a risk with altcoins. Regulatory uncertainties and unpredictable trajectories should be a cause for caution for eager investors.

It’s my view that Coinbase could be the best way to play the crypto sector, but it’s still high risk. This is a stock I’d put in the “buyer beware” camp, at least for now.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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