Stock Analysis & Ideas

Coinbase Stock: Tread Carefully. Here’s Why

Story Highlights

All of the signs point to extreme fear in the cryptocurrency and blockchain sectors. Coinbase stock could offer a compelling contrarian trade, but it would be wise to monitor crypto prices and moderate your position size in this volatile environment.

Headquartered in Delaware, Coinbase Global (COIN) operates a popular cryptocurrency trading platform. I am neutral on the stock.

Is cryptocurrency a currency, security, or commodity? Will more large corporations adopt and incorporate blockchain technology? There are many unanswered questions in the realm of crypto and the blockchain, and some investors hesitate to get involved as they might view this sector as the Wild West of finance.

At the same time, cryptocurrency and certainly segments of stocks are becoming increasingly interconnected in the 2020s. As a trading platform that specializes in crypto, Coinbase’s fate cannot be separated from the ups and downs of bitcoin (BTC-USD) and altcoins in general.

In other words, if you’re going to wager on Coinbase stock, it’s crucial to monitor cryptocurrency price movements while also keeping tabs on Coinbase as a business venture. If crypto crashes, it’s bad news for Coinbase – but then, there also may be a contrarian opportunity for long-term blockchain bulls.

Also worth noting, on TipRanks, COIN receives a Smart Score rating of 4 out of 10, indicating that the stock may not outperform the broader market.

The Loud Clash of Bitcoin’s Crash

As bitcoin recently sank below $21,000, new traders might have felt a sinking feeling in their stomachs if they weren’t accustomed to price drops of 50% or more. It really wasn’t very long ago – November of 2021, to be exact – when bitcoin approached $69,000, and it seemed like the rally would last forever.

Rallies don’t last forever, though, and this has been a painful lesson to learn for some retail cryptocurrency investors. Still, history shows that bitcoin has survived multiple price crashes of 50% or more, and each time it recovered and then reached new all-time highs.

For the time being, however, bitcoin and many altcoins are in deep water, and so are a number of stocks connected to the cryptocurrency and blockchain markets. Among the most prominent is Coinbase stock, which has dropped from $350 in November of last year to the $50 area recently.

It’s not difficult to connect to identify the cause-and-effect relationship here. When cryptocurrencies crash, interest in crypto trading wanes. Consequently, we can expect that trading activity on Coinbase’s platform will diminish since many people don’t want to hold a falling asset.

To put it another way, people tend to freak out when crypto crashes. Adding to the fear and uncertainty on June 13 was the news that cryptocurrency lending platform Celsius had paused all account withdrawals and transfers due to “extreme market conditions.” On that same day, rival cryptocurrency trading platform Binance temporarily halted bitcoin withdrawals “due to a stuck transaction causing a backlog.”

Signs of a Possible Bottom

Further fueling the flames of panic on that same fateful day, June 13, cryptocurrency lending platform BlockFi announced plans to reduce its headcount by “roughly 20%.” It felt as if all of the financial headlines and social media posts were telling people to abandon anything related to crypto and the blockchain.

However, extremely bearish sentiment isn’t new to folks who have been in the crypto game for a decade or longer. When the outlook is so deeply negative, sometimes that’s a signal that amateur traders are selling and professional investors may be buying.

Indeed, there’s FactSet data indicating that a number of fund managers have increased their positions in Coinbase stock during the past few months, even as the price was declining.

So, this could be the right time to put on your contrarian cap and consider what a market bottom looks like. Are amateur traders gleefully buying hand over fist or panic-selling? Are the headlines overwhelmingly bullish or bearish? Going against the grain isn’t emotionally easy, but buying near potential market bottoms can reward folks who possess the right combination of audacity and patience.

This isn’t to suggest that folks should just back up the truck and purchase as much Coinbase stock as possible. The company isn’t entirely free of problems, as evidenced by Coinbase’s June 2 blog post containing a rather unfortunate “update.”

In particular, Coinbase cited “the current market conditions and ongoing business prioritization efforts” and revealed that the company is extending its hiring pause “for both new and backfill roles for the foreseeable future” and rescinding “a number of accepted offers.”

Coinbase is clearly being stress-tested amid the current crypto crash, and Coinbase stock could certainly fall further. That’s why, if you choose to take a contrarian approach, it’s wise to scale into a position slowly and avoid over-leveraging yourself.

Wall Street’s Take

Turning to Wall Street, COIN stock comes in as a Moderate Buy, based on 15 Buys, three Holds, and two Sell ratings assigned in the past three months. The average Coinbase Global price target is $152.16, implying 192.6% upside potential.

The Takeaway

Like it or not, the cryptocurrency crash has spilled over into the stock market, or at least parts of it. Coinbase stock traders will definitely want to monitor crypto prices, particularly bitcoin, since that’s the leading cryptocurrency.

If you’re preparing for a crypto comeback, that’s fine, and holding Coinbase stock is one way to position yourself for a potential rally. Just be careful in your investments, as negative sentiment toward cryptocurrency-related businesses in general and toward Coinbase, in particular, could persist for a while.

Disclosure

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