Cryptocurrency services platform Coinbase (NASDAQ:COIN) presents a complex and nuanced narrative. Longer term, ongoing interest in the underlying blockchain ecosystem benefits the enterprise. However, in the shorter term, rising interest rates and their negative impact on risk-on asset classes negatively affect COIN stock. Therefore, I am temporarily bearish on COIN based on current economic circumstances.
COIN Stock Faces a Reality Check
To be 100% clear, my hesitation toward COIN stock should not be considered an attack on the long-term potential of the broader crypto complex and blockchain-based applications. However, the sector may face a sharp reality check after defying gravity for so long. Ultimately, investors need to be smart about risk-on assets, and they need to be even smarter about business enterprises tied to their ebb and flow.
For starters, cryptos, for the most part, represent purely decentralized assets. Unlike the confines of a stock market exchange which feature opening and closing hours along with a host of regulatory protocols, blockchain-based digital assets trade hands 24/7/365. They care not about special holidays or important religious observations. If you want to trade, you can trade.
However, this decentralization comes at a heavy price. When circumstances go sour in the crypto realm, they go sour in real time. That real time can materialize at any time, whether you’re sitting at your trading desk, taking a nice long shower, or by the capricious whims of circumstance deep in the throes of REM sleep.
Nevertheless, an advantage of this decentralization is that crypto investors can respond whenever they want to, however they wish. Unfortunately, the same cannot be said about COIN stock. COIN shareholders must wait until market open to respond to any deep fluctuations in the underlying crypto market.
What’s more, with the Federal Reserve committed to tackling inflation decisively, the backdrop for cryptos – which are pure risk-on assets – is negative. That’s not helpful at all for COIN stock.
Coinbase is Too Dependent on Crypto Sentiment
If you talk to enough crypto advocates, chances are, you’ll eventually hear the hope that the entire blockchain ecosystem will disassociate from “fiat” based concerns, such as the Fed’s monetary policy. So far, no real evidence exists that such a dissociation is even gaining momentum. Like it or not, cryptos depend on outside fundamentals, and COIN stock itself depends on the whims of crypto sentiment.
All the evidence you need stems from Coinbase’s income statement. In 2019, the company posted revenue of $533.74 million. Back then, the sector was slowly recovering from the late 2017/early 2018 boom-bust cycle. However, in 2020, sales increased significantly to $1.28 billion. During the first year of the COVID-19 pandemic, white-collar workers operating remotely had plenty of time on their hands to speculate in various markets.
Then, Coinbase enjoyed a landmark year in 2021, as crypto sentiment skyrocketed. Essentially, the easy money policy that the Fed implemented – along with the proliferation of stimulus checks – hit the economy as businesses started to reopen. Subsequently, the ensuing inflation launched cryptos into low-earth orbit. At the same time, Coinbase rung up $7.84 billion in sales.
Of course, 2022 saw the Fed get serious about curbing accelerating consumer prices. Unsurprisingly, Coinbase’s revenue fell to $2.84 billion. Finally, in the most recent first quarter of 2023 earnings report, the company incurred a sales loss of roughly 38%.
Frankly, the correlation couldn’t be clearer: wherever cryptos go, so goes demand for Coinbase’s services. That’s great for COIN stock when cryptos run in a bull market — not so much when they struggle in a bear market.
Is Coinbase Stock a Buy, According to Analysts?
Turning to Wall Street, COIN stock has a Hold consensus rating based on seven Buys, eight Holds, and seven Sell ratings. The average COIN stock price target is $74.79, implying 20.6% downside risk.
The Takeaway: COIN Stock Doesn’t Control Its Fate
For serious shareholders of COIN stock, they must be willing to conduct an objective risk assessment. As demonstrated above, the revenue profile follows the fortunes of the underlying crypto market. So far, no real evidence has come to light about virtual currencies and their underlying platforms marching to their own beat.
Instead, whatever outside fundamentals ails risk-on assets also ails cryptos. In turn, whatever ails cryptos ails Coinbase. By logical deduction, the crimping of the top line would likely hurt COIN stock. Given the lack of an accommodative monetary environment on the horizon, investors should approach Coinbase extremely cautiously, if at all.