Crypto prices continue to decline, erasing all gains in recent history. With Bitcoin being the best performing asset class in 2020, come 2022, many investors have predicted that crypto prices will hold ground despite the challenges facing the global economy. As we now know, these investors Already proven wrong. Although I have always believed that cryptocurrencies have a bright future in the long run – and still do – I could not make up my mind to invest in cryptos and other digital assets, even though these digital assets will not last in this shape and form. That’s why I’m Coinbase Global, Inc. I always thought it made more sense to invest inNasdaq: Coin) to gain indirect exposure to the crypto industry without bearing token-specific risk. COIN stock got off to a great start after debuting on the Nasdaq and it didn’t help me at the time, but with stock prices down significantly YTD, the time is right to consider investing in Coinbase stock again.
Why is Coinbase stock falling?
Coinbase stock is down 80% this year, mirroring Bitcoin’s 58% drop in 2022. Many analysts believe the situation will only get worse from here. Sales are driven by a few factors. First, this year, investors have reduced their exposure to growth stocks and other high-risk bets as the US Federal Reserve takes aggressive action to curb inflation. Bitcoin is thought of as a “digital gold” or “hedge” against inflation, but investors are currently treating cryptocurrencies as high-risk stocks that are still unprofitable. With the Fed raising rates faster than expected to combat rising inflation, investors are avoiding riskier assets like cryptocurrencies.
The prices of digital assets and the volume of transactions made on the Coinbase platform have a significant impact on the company’s overall revenue. This means that if cryptocurrency prices and trading volume continue to fall, Coinbase will naturally see a loss in revenue, which will tempt investors. This is exactly what is happening today. The company’s quarterly results have already reflected this decline. In the most recent quarter, Q1 2022, the company reported weaker-than-expected financial results, with net income down 27% from a year earlier. Additionally, retail monthly turnover to customers fell nearly 20% QoQ to 9.2 million, and overall business volume fell from $547 billion in Q4 2021 to $309 billion in Q1 2022.
Exhibit 1: Key Business Metrics
Many analysts are downgrading the stock, which could be an indication that things could get significantly worse when the company reports results in the second quarter. Recently, Coinbase’s rating was downgraded by analysts at Goldman Sachs (GS). neutral to sale. As the crypto winter continues to negatively impact crypto exchanges, including Coinbase, analyst Will Nance downgraded COIN shares, lowering his price target to $45 from $70 earlier this year. Analysts predict that ongoing panic selling will lead to a further decline in Coinbase’s revenue, which could lead to a 73% drop in the second half of this year and a 61% drop in 2022. overweight to neutral Earlier this month, and finance brokerage Redburn Partners downgraded Coinbase Buy it to neutral. These negative analyst actions have cast doubt on Coinbase’s future and created uncertainty among investors.
Exhibit 2: Coinbase stock price vs average analyst target price
The company’s bonds are under pressure, with senior unsecured bonds maturing in 2031 among the worst performers in the US high-yield market. Moody’s Corporation (MCO) downgraded Coinbase’s guaranteed senior unsecured notes from Ba1 to Ba2 and its corporate family rating from Ba2 to Ba3. These grades indicate “junk” status.
Coinbase announced a significant restructuring earlier this month in response to inactivity in crypto trading and rising inflation. The company announced it would lay off 1,100 employees, or about 18% of its workforce, to combat rising operating expenses that reached a record $1.7 billion in the first quarter. The company said it has been overhired during the cryptocurrency boom and there is reason to believe this is just the beginning, and more layoffs will follow to bring Coinbase’s costs in line with lower sales.
Another reason behind the drop in Coinbase stock is rival crypto exchange Binance announcing a reduction in some trading fees for customers. Binance announced that users will be able to make spot bitcoin trades for US dollars and stablecoins Tether, USD Coin and Binance USD without paying spot trading fees. Binance is the world’s largest crypto exchange by trading volume, and its latest move amid a prolonged bear period for cryptocurrencies poses a significant threat to Coinbase.
All of the reasons discussed in this section of the analysis have played a role in the massive decline in Coinbase’s market value this year.
What is Coinbase’s Long Term Outlook?
Bitcoin is one of the most advanced technologies in the investment world today. Bitcoin’s strong recovery from significant sell-offs in the past has made it the world’s most valuable cryptocurrency, prompting leading analysts to label it an inflation hedge. While Bitcoin has not been effective as an inflation hedge thus far, its long-term track record and cult-like follower base suggest that investors should not rule out the possibility of a stellar recovery from Bitcoin, even in the short term. According to Coinbase, there are multi-year cycles that affect bitcoin prices that span between two and four years. And, given that investors are likely to prefer cash-flow-yielding assets over cryptocurrencies amid rising interest rates, going for the company could be tough in the short term. Coinbase will need to significantly reduce its cost base as retail activity refuses to put the brakes on cash burn. To attract more customers, Coinbase has decided to integrate Coinbase and Coinbase Pro into a single platform, which will help users switch easily and take advantage of lower prices. This is a good start but we believe Coinbase needs to scale back more, give up short-term gains and position the company as a more efficient business to prepare for the lucrative long-term growth opportunity available to the company.
Coinbase initially relied heavily on trading volumes and fees to generate revenue. As zero-fee trading catches the attention of users, Coinbase has begun diversifying its revenue streams. A zero-fee trading concept by Robinhood Markets, Inc. Pioneered by (HOOD), it entered the retail investment world a few years ago. This led to major stock brokerages switching to commission-free online trading. Recently, many other cryptocurrency exchanges, including FTX US, have announced plans to implement zero-commission trading. Furthermore, Binance US has also announced to reduce some trading fees. Along with this change, Coinbase is currently testing Coinbase One, a subscription service that offers customers zero-fee trading on $10,000 transactions per month.
In the world of cryptocurrencies, Coinbase is the industry leader. The business has established a strong reputation for security, compliance and transparency, which is likely to make Coinbase one of the preferred platforms for trading and investing as Bitcoin and other cryptocurrencies recover. The company aims to make cryptocurrency a new financial system. While the market may seem to indicate that investors are losing interest in digital assets, institutional adoption of cryptocurrencies has increased significantly recently. Furthermore, the company has made substantial investments to establish itself in the new digital asset and NFT markets. In Q1, Coinbase added many new assets and payment channels. Although these investments and the market downturn caused Coinbase to post a loss in Q1, the company was more profitable in 2021, when cryptocurrencies took off, with net income of about $3.6 billion. The possibility of extraordinary profits in good times suggests that the company’s prospects should gradually improve as the crypto cycle enters another growth phase.
Coinbase’s long-term outlook remains promising but the company may have to suffer a lot in the short-term to get to the point where it can capitalize on the expected adoption of crypto and digital assets.
Is COIN STOCK a good choice due to falling cryptocurrency prices?
Coinbase generates most of its net income from transactions in Bitcoin and Ethereum. In 2022, the value of the global cryptocurrency market has fallen by nearly $1 trillion, and Bitcoin and Ethereum are now trading below their previous peaks. Investors’ concerns about persistent inflation played a big role in the decline of the equity and cryptocurrency markets. More interest rate hikes will make markets more volatile and uncertain in the coming months. If demand for these digital assets continues to decline, Coinbase will suffer significantly.
Exhibit 3: Crypto Asset Volatility and Coinbase Trading Volume
Given the uncertainty expressed by analysts, company CEOs and investors, we believe investors looking for short-term opportunities should steer clear of COIN stock for now. CEO Brian Armstrong warned investors that things could get significantly worse before they get better. While the dip may seem like a good time to buy the stock for trading purposes, blindly betting on Coinbase stock can lead to substantial losses, making it challenging to predict when the cryptocurrency market will recover.
We believe investors should consider a few things before thinking about going long in Coinbase. Crypto prices may decline in the short to medium term in view of rate hikes. This will undoubtedly have a negative impact on business activity. With $6.1 billion in cash and cash equivalents at the end of Q1 2022, Coinbase has enough liquidity to continue operating during a downturn. However, Coinbase’s cost base has increased. Further, a further decline in monthly trading users and trading volume is expected for two reasons. An obvious concern is the possibility of recession. Going forward, when the macroeconomic outlook improves, Coinbase will face fierce competition from other digital exchange platforms. Coinbase charges higher fees compared to some of its larger competitors, including Binance, which tempts users to leave the platform. As a result, the company may have to reduce its fees, leading to lower profitability.
Having said all of this, we believe long-term-oriented investors can get into the act slowly by investing in Coinbase stock in phases without going all in at these prices. As cryptos enter the next phase of growth, Coinbase still has a lot to offer investors in the long term with the help of positive regulatory decisions.
Coinbase stock has crashed this year and there is no reason to suggest that the second half of this year will be a stark contrast to this lackluster performance. Investing in COIN stock for short-term gains in our opinion is an extremely high-risk bet and unlikely to pay off amid the macroeconomic and company-specific challenges facing Coinbase. However, with a long-term perspective in mind, we find Coinbase stock attractive at these prices.