As a long-term investment, cryptocurrency platform Coinbase (NASDAQ:COIN) appears to offer an intriguing proposition. In the early days of cryptocurrencies, blockchain assets were relatively unknown to the general public, and acquiring them presented a significant challenge. Coinbase, while not the first consumer-friendly crypto platform, quickly became the industry benchmark, allowing lay investors to easily purchase their favorite digital assets via bank accounts and credit cards, much like buying blue-chip stocks through an online brokerage account. The platform’s accessibility and success deserve commendation.
However, considering Coinbase stock as an investment presents a mixed picture. Although shares have surged by over 182% since the beginning of the year and generated a return of nearly 51% in the trailing one-year period, they have experienced a steep decline of more than 72% since the company’s public market debut in April 2021, during a bullish crypto frenzy.
Coinbase Stock Faces Challenges Due to Monetary Policy
Looking beyond day-to-day price fluctuations, my concern for COIN stock lies in the potential disappointment that investors may face over the next several months. With the Federal Reserve raising the short-term federal funds rate by 25 basis points, those investing in risk-on assets must contend with a hawkish monetary policy.
While some cryptos have demonstrated resilience, driven partly by speculation that the Fed may ease its monetary tightening program to avoid a recession, the central bank has not committed to such measures. In fact, some officials have advocated for raising borrowing costs. Despite recent data showing a fading trend in consumer prices, the central bank is still a long way from reaching its inflation target.
This framework suggests that contrary to the hopes of crypto advocates, the Fed may raise rates to combat persistent inflation. If this occurs, individual cryptos could suffer, potentially dragging down COIN stock due to its alignment dilemma with the underlying platform.
Correlation Between Coinbase Revenue and Crypto Prices
The revenue trend of Coinbase strongly correlates with the average price of the benchmark cryptocurrency, Bitcoin. The correlation coefficient between the BTC price and Coinbase sales stands at 93.3%. Essentially, when crypto sentiment is positive, Coinbase’s top line also benefits.
While sentiment for COIN stock may differ from the underlying business’s revenue trajectory, the problem arises if cryptos experience prolonged declines. In such cases, Coinbase’s financial statements are likely to reflect poor performances.
Limited Strategies and Lack of Shorting Opportunities
Unlike the equities sector, which offers various strategies such as capital gains targeting or passive income through dividends, cryptocurrencies largely rely on the greater fool theory – hoping to sell blockchain assets to someone else at a higher price. While this works well during bullish trends, it can lead to difficulties during bearish phases.
In the crypto market, average Coinbase users typically engage in long-side transactions, buying low and selling high. However, there is no easy way for them to actively short the market when sentiment turns bearish. While high rollers can short virtual currencies through Coinbase, this privilege is limited to a select few.
As a result, if crypto sentiment collapses, regular retail investors may not have readily accessible options to short the market, potentially leading to a decline in COIN stock.
In conclusion, betting heavily on Coinbase shares may not be prudent given the dependency on crypto sentiment and the uncertainty caused by the Federal Reserve’s monetary policy. The correlation between Coinbase sales and crypto prices suggests that the fate of COIN stock is intertwined with the crypto market’s performance. With limited shorting opportunities and a potential hawkish monetary policy ahead, investors should exercise caution before making significant investment decisions with Coinbase stock.
Featured Image: Unsplash
