Written by Aditya Raghunath at The Motley Fool Canada
Over the past two years, cryptocurrencies have taken investors on a roller coaster ride. Directed by Bitcointhe crypto market hit record highs in November 2021 before pulling back significantly in 2022.
Despite the volatility associated with these digital assets, cryptocurrencies have still come back strong to hit all-time highs after a prolonged bear market. Although you can buy and hold Bitcoin and other cryptos on centralized exchanges, there are several other ways to gain exposure to this highly disruptive asset class.
For example, you may be looking to buy shares of Coinbase (NASDAQ:COIN), one of the world’s leading cryptocurrency exchanges. Valued at a market capitalization of US$17 billion, Coinbase stock is currently trading 81% below all-time highs. Let’s see if Coinbase is the ultimate contrarian bet or a value trap for equity investors right now.
Coinbase stock will remain volatile
The performance of Coinbase stock is closely tied to the performance of cryptocurrencies. Coinbase generates the majority of sales through exchange fees and commissions, which, in turn, are tied to trading volumes. Typically, trading volumes are significantly lower during bear markets and accelerate when crypto prices rise.
Thus, Coinbase managed to increase its sales from US$1.27 billion in 2020 to US$7.83 billion in 2021. Analysts now expect sales to drop 56.7% to 3 .39 billion US dollars in 2022. Comparatively, its net income is expected to decline from adjusted earnings of US$14.5 per share in 2021 to a loss of US$11.68 per share in 2022.
Coinbase announced its second quarter (Q2) results last month and reported revenue of $803 million, down 61% year-over-year. Its net losses rose to $1.1 billion from a profit of $1.6 billion last year.
Total assets on Coinbase also fell to 9.9% in Q2 from 11.2% in Q1, indicating the company is losing market share to peers such as Binance and FTX. Comparatively, Coinbase managed to improve its market share from 4.5% in 2018 to 11.5% in 2021.
Coinbase needs a diverse revenue base
It is imperative that brokerage and exchanges such as Coinbase at least maintain assets on their platform as this can lead to opportunities for revenue generation over time. In the second quarter, about 82% of Coinbase’s revenue came from transaction fees. But the company is now looking to diversify its revenue base by expanding its range of products and services.
It focuses on accelerating revenue from subscriptions and services, which includes custodial fees and even blockchain rewards. In the second quarter, this segment increased its sales by 44% year over year.
Coinbase continues to introduce new features which include Ethereum staking and an enhanced app for retail investors in addition to developer tools.
Coinbase recently revealed that it is also expanding its cloud-based services. Over the years, cloud computing solutions have allowed companies to take advantage of hardware and software platforms without having to build their own infrastructure.
One of Coinbase’s cloud products is called Node, which is available to those operating in the Web3 space. To help drive Coinbase cloud adoption, Node is now available for free, with the option to upgrade to a business account.
Subscription sales for Coinbase were $21.8 million in the second quarter, representing 3% of total sales. But that number is expected to continue to rise in the coming months.
The insane takeaway
Coinbase is a high risk, high reward bet. If you are optimistic about the future of cryptocurrencies, it makes sense to buy and hold COIN stocks in your stock portfolio. Right now, Coinbase stock is also trading at a 50% discount, given consensus price target estimates.
Is the Coinbase Stock post a good bet for cryptocurrency investors? appeared first on The Motley Fool Canada.
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Dumb contributor Aditya Raghunath has positions in Bitcoin and Ethereum. The Motley Fool recommends Bitcoin, Coinbase Global, Inc., and Ethereum. The Motley Fool has a disclosure policy.