Coinbase (NASDAQ:COIN) is one of the largest cryptocurrency exchanges. COIN stock is 81% below its all-time high. However, the Bitcoin halving cycle is nearing, suggesting that the crypto bear market may come to an end in 2024. Historically, Bitcoin halving has been a positive catalyst for cryptocurrencies. Plus, Coinbase is set to benefit from growing crypto adoption and its diversification efforts. Therefore, I’m bullish on COIN stock.
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What is the Bitcoin Halving Cycle?
Every four years, the number of BTC that can be mined and given as rewards is reduced by 50%, which increases the scarcity of the digital asset. The total number of Bitcoin in circulation is limited to 21 million, of which 19.3 million have already been mined. So, this halving event is quite significant, as it showcases the deflationary nature of Bitcoin, increasing the demand for the world’s largest cryptocurrency.
There have been three Bitcoin halving events in the past. Prior to 2012, the number of Bitcoins rewarded to miners who validated a new block of network transactions was 25 BTC, which fell to 12.5 BTC in 2016 and 6.25 BTC in 2020. The next halving event scheduled in April 2024 will reduce the rewards by 50% to 3.125 BTC.
This event has generally driven prices of Bitcoin toward record highs. Around 12 months before the Bitcoin halving in 2016, prices spiked by 200%, while it almost doubled a year prior to the halving event in 2020.
Further, 17 months after the 2016 halving, prices surged by 2,900% while BTC skyrocketed another 600%, 18 months after the halving event in 2020.
The performance of Coinbase is closely tied to Bitcoin prices. Currently, Coinbase generates a majority of its revenue from trading fees and commissions, which gain pace during bull markets. Alternatively, during bear markets, trading volumes decelerate significantly, resulting in lower sales.
Coinbase reported record revenue of $7.83 billion in 2021, up from $1.27 billion in 2020 and $533.7 million in 2019. However, its top line fell to $3.19 billion last year, driving share prices lower in the process.
A Bitcoin ETF is Likely to be Approved in 2024
Another key driver of BTC prices will be the approval of several spot Bitcoin exchange-traded funds or ETFs. In the last few months, traditional asset managers, including Blackrock (NYSE:BLK), Invesco (NYSE:IVZ), and ARK Invest, have applied to introduce a spot Bitcoin ETF in the U.S.
The massive size of the U.S. institutional market and the expansion of self-directed retail investors in the country are expected to attract over $200 billion to these ETFs once they are launched, according to a MarketWatch report.
According to several experts, the Securities and Exchange Commission (SEC) is likely to approve the launch of Bitcoin ETFs in the first half of 2024, which would drive institutional adoption rates much higher in the upcoming decade.
The exponential rise in BTC prices in the last 10 years has resulted in robust demand from the largest asset managers globally. Right now, Bitcoin and other cryptocurrencies are viewed as an alternate asset class, and exposure to digital assets can further diversify investment portfolios and reduce overall risks.
Coinbase is Diversifying Its Revenue Base
In the last few years, Coinbase has been looking to shield itself from fluctuations in cryptocurrency prices and diversify its revenue base. In 2022, its Transaction revenue accounted for 73.7% of total sales, compared to 87% of sales in 2021.
However, its Subscription and Services revenue continues to expand at a steady pace, rising from just $45 million in 2020 to $517 million in 2021 and $792 million in 2023.
Subscription and Services revenue consists of Blockchain Rewards, Staking, Custodial Fee revenue, and Interest Income. Blockchain rewards are derived from blockchain protocols where users are rewarded for various blockchain activities, including staking.
Coinbase also generates a custodial fee, which is based on the value of the crypto assets held under its cold storage solution. Further, the company earns interest income on fiat currencies under a revenue-sharing agreement with the issuer of USD Coin (USDC-USD), which is a stablecoin.
In Q2 of 2023, Coinbase reported total revenue of $662.5 million compared to $802.6 million in the year-ago period. However, Subscription sales accounted for more than 50% of sales for the first time ever in the June quarter at $335.4 million, an increase of 128% year-over-year.
Comparatively, Transaction sales stood at $327 million in Q2, down from $655 million in the prior year quarter.
Is COIN Stock a Buy, According to Analysts?
Analysts remain bullish on Coinbase stock, as they expect the company to enjoy a first-mover advantage and benefit from secular tailwinds surrounding the cryptocurrency sector. Out of the 22 analysts covering COIN stock, seven recommend a Buy, nine recommend a Hold, and six recommend a Sell. The average Coinbase stock price target is $86.00, implying 11.2% upside potential.
The Key Takeaway
Investors may consider buying Coinbase stock if they expect Bitcoin prices to move higher over time, which is possible due to the Bitcoin halving cycle and rising BTC adoption. Further, the company continues to diversify its revenue base and has successfully expanded its digital asset ecosystem to gain traction among retail and institutional investors. Coinbase is a partner of choice for several institutional investors and is eyeing expansion in several international markets, too, bolstering its investment case.
