Since debuting on the Nasdaq, Coinbase has been underperforming, causing some uncomfortable conversations about its medium-term prospects.
Coinbase and Cryptocurrency
Since Coinbase first began actively trading bitcoin in 2012, it has grown to be the largest cryptocurrency exchange in the United States. Initially offering just bitcoin trading, the company swiftly took on more cryptocurrencies in keeping with its decentralized criteria.
By May 2013, Coinbase closed series A investment of $5 million. By the end of the year, they would receive a $25 million investment from Andreessen Horowitz. At the time, the market cap of bitcoin (BTC) was $9.08 billion.
The ensuing years saw Coinbase solidify its hold as the leading North American cryptocurrency exchange.
During this time, cryptocurrencies began gaining traction globally. Based on the growing popularity and rapid price raises in 2017, many banks began looking at the possibility of setting up crypto operations.
While banks were scrambling to understand the cryptocurrency phenomena, Coinbase was propelled to the forefront, becoming the number one app on the Apple App store in December 2017.
Following the bitcoin dip, Coinbase maintained modest growth. Even though it faced several hiccups – notably, trading stopped several times in one month in 2020 – it continued to grow users and improve its product offering, culminating in the recent listing on the Nasdaq.
In keeping with their disruptive product, Coinbase shunned the traditional initial public offering (IPO) and instead posted its share straight on the Nasdaq in a direct listing. This made Coinbase the first cryptocurrency exchange to go public, as such garnering much media attention.
This lead exchanges such as Kraken (recently targeted by the IRS), eToro, Robinhood, and BlockFi to hint at possible public offerings soon.
Coinbase launched its listing on the back of three massive trends – hoping to capitalize on them. These included:
- Cryptocurrency popularity – Bitcoin hit an all-time high of $64,000 on the same day, while other cryptos, including ethereum (ETH) and Ripple (XRP), also jumped in value.
- Stock listings – Investors around the world had been eager for more listings, with global markets seeing some of their busiest months ever for companies making public offerings.
- Retail Trading – all while retail investors were entering the market at record pace thanks to companies like Robinhood and Revolut offering low friction mobile investing to millions.
However, the first day of trading saw major COIN investors dump shares, with CEO Brian Armstrong reportedly selling $300 million in shares throughout the day.
Meanwhile, the Intercontinental Exchange sold their $1.2 billion stake in Coinbase during this period too. As a result, COIN prices opened at $381 per share, peaking at over $400 per share, and closed at $328.28.
The story has been tumultuous since, with the price declining on 10 of its first 13 trading sessions.
An Uncertain future
Since its public offering, Coinbase announced strong first-quarter results. Revenues grew to $1.8 billion for the period, a marked improvement in the entirety of 2020, which saw revenues of $1.3 billion for the financial year.
However, analysts remained skeptical about the exchange’s stock future. Dan Dolev, an analyst at Mizuho Bank, predicted a price of $315 and a neutral rating.
Despite the positive earnings and user growth, Coinbase hit an all-time low, which left shares trading just above $239 as bitcoin’s price dipped below $40,000. At the time of writing, the price is at $216, falling sharply as the bitcoin price dives.
This is a continued decline from the first low of $282.07, which coincided with bitcoin’s price dropping below $50,000.
Raising the question, is Coinbase’s growth coupled with cryptocurrency, or can the exchange become more than the sum of its parts?
In addition, some analysts are skeptical on the price outcome for COIN due to pressure from its competitors.
As mentioned above, Bakkt, Robinhood, and eToro are considering public offerings of their own. However, the threat offered by these competitors is more than just competition on the Nasdaq.
Both Bakkt and eToro have diversified portfolio offerings which could heap pressure on Coinbase, especially with their current fee structure.
Furthermore, Robinhood revealed that it might release its IPO filings next week. This competition poses a serious threat to the already beleaguered COIN outlook.
Some positive news
Oppenheimer rated Coinbase’s prospects as an outperform last week. Analyst Owen Lau based his rating on the ability of cryptocurrencies to ease financial issues. These include cross-border payments and access to banking.
They were particularly bullish on COIN, saying that it can rise 50% from its current position, which was at $284.52 when the rating was released.
However, the outlook is yet to improve, with Coinbase’s stock hitting new lows of $238.83 on Tuesday, May 19 – a week after Oppenheimer’s bullish prediction.
In a letter to investors Coinbase revealed plans that may be cause for this sort of positive outlook.
Coinbase announced to investors that they are focused on further expansion in the future. This growth plan is likely to include acquisitions similarly to their recent acquisition of analytics platform Skew.
As well as downstream acquisitions, the exchange plans to improve product offerings with plans to facilitate the buying and selling of non-fungible tokens (NFTs) on their platform.
While Coinbase looks to arrest the fall of its stock price with these plans it again shuns the traditional path.
When they didn’t pursue a traditional IPO through bulge bracket banks and instead listed directly, this was natural for a cryptocurrency exchange. This may go some way towards explaining why Coinbase decided to issue convertible bonds.
These bonds can be converted into stock under certain circumstances. This would then dilute the current stock for existing holders. The exchange says that the cash generated would be used for capital expenditures, among other purposes.
So, will downstream acquisitions and improved product offerings – funded partly through stock dilution – help improve the outlook for COIN?
This is hard to say as volatility increases across the cryptocurrency economy. In addition, the market for NFT’s has begun to cool off after a flying start to the year. However, it is apparent that a number of factors will affect COIN’s outcome.