Coinbase’s stock market debut a year ago was a resounding success. The price performance of the largest US cryptocurrency trading platform exceeded all expectations. After a day of trading on technology exchange Nasdaq, Coinbase was worth 85 billion dollars, at the time 71 billion euros, more than 30 percent more than thought the day before.
The company had the wind behind it. During the corona crisis, both crypto trading and the value of the most traded crypto currency, bitcoin, soared. Coinbase, which earns a small percentage from every transaction on its platform, doubled its revenue to $1.14 billion in 2020. It made more than $320 million in profit. The bitcoin peaked around the IPO at more than $ 63,000.
The crypto exchange exceeded all expectations last year, with revenue nearly sevenfold to $7.35 billion, and profits tenfold to reach $3.6 billion. Coinbase, which now has 89 million users in more than a hundred countries, benefited from the massive trade in all kinds of cryptos, in addition to bitcoin, including ethereum and tether. That trade continued to grow due to the large fluctuations in value of all those digital currencies.
But the enthusiasm for crypto may continue briskly, Coinbase’s price is just as volatile as that of the cryptocurrencies it trades. Since the IPO, the share has fallen in value by more than 40 percent. Is the relapse temporary or is there more to it?
Owen Lau, an analyst at the American investment bank Oppenheimer, is in the first camp. “Coinbase is an emerging technology company and its stock is a bargain for long-term investors. The price drop is largely caused by the lower bitcoin. It is not a reflection of the company’s expected cash flow and long-term returns.”
The relationship between Coinbase price and bitcoin price is a point of attention, says Lau. “I think they should have some correlation, but not that big. This mainly shows the early stage in which this emerging asset class is still in.” He expects that cohesion will diminish as Coinbase manages to monetize other services beyond trading cryptocurrencies.
What does not contribute to that decoupling is that Coinbase itself has been buying large sums of bitcoin and other cryptocurrencies lately. In August, it was $500 million, and recently another 350 million. The company is doing so because, Coinbase blogged in August, it says it believes in “the crypto economy, in which economic transactions in the future will be based on crypto assets.” Coinbase CEO Brian Armstrong tweeted that same day that he wants to invest 10 percent of all profits in cryptos. He expects this percentage to continue to grow “as the crypto economy matures.”
There are still some risks in that direction, says Teunis Brosens, cryptocurrency specialist at ING. According to him, “rule makers” are putting increasing pressure on crypto companies to better comply with laws and regulations, to protect investors and prevent money laundering. “That will entail a lot of costs and will lead to lower profit margins. Growing up costs money.”
This is not to say that Coinbase remains one of the most popular crypto trading places, according to Brosens. “Crypto is a turbulent industry. Compare it to the 90s, when search engines like Altavista, Lycos and Ilse were big, but only Google remained. Today’s top players can be tomorrow’s losers.”
A version of this article also appeared in NRC in the morning of March 7, 2022