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Coinbase Global, commonly known as Coinbase, is a North American company that operates a cryptocurrency exchange platform and is an integral part of the crypto economy in the United States as well as internationally. In terms of trading volume, it is the largest cryptocurrency exchange in the United States. Coinbase does not have any physical headquarters and all of its employees operate remotely.
The crypto market has not been in very good shape for the last few months and the constant ups and downs in the cryptocurrencies have made a huge impact on Coinbase stock. Also, the company is under immense pressure thanks to the government’s increased regulatory scrutiny on cryptocurrency markets. Coinbase has lost more than 70% of its value year-to-date. Further, the selling pressure on the stock has considerably amplified these days and it has been reported that some of the insiders have also dumped their shares of the company.
The high exposure to the risks associated with the crypto market as well as in the technology sector has painted a bearish picture about the Coinbase stock in today’s market. So, does Coinbase make a suitable buy in the present times?
The Downturn in the Crypto Market
Is Coinbase Stock a Good Buy Right Now After a 70% Value Drop?
Despite all the volatility, the crypto market does hold a lot of potential and just a few months back the market was booming. But now, since the beginning of the year, the crypto market has been down substantially. After the release of the monthly consumer price index report by the Labor Department, the price of Bitcoin had dropped to its lowest since the December 2020 levels. High levels of inflation took a toll on cryptocurrencies as well.
The US Federal Reserve’s rate hikes to combat inflation have also fueled fears of an impending recession among the masses resulting in a further sell-off of risky assets including the cryptocurrencies.
When Bitcoin dipped below the $26000 mark, it had to go through one of the largest sell-offs with the market witnessing a loss of almost $200 billion in a single day. Moreover, Ethereum, which is the second most popular digital currency, too had fallen below $2,000. There is a huge correlation between the prices of cryptocurrencies and the Coinbase stock. This is because the lower price of cryptocurrencies leads to lower transaction volumes which impacts the total number of active users in crypto exchanges like Coinbase.
Due to this, as the cryptocurrencies started getting hammered, the Coinbase stock too got pushed into a rough patch and the price of its stock went down considerably affecting the shareholder’s overall return. However, considering the prospects of the crypto market, this seems to be a short-term problem for cryptocurrencies. Coinbase stock is a different beast.
Deteriorating Financials
The weak cryptocurrency market and lower trade volumes have affected the business of Coinbase largely. While back in the first quarter of 2021, the company’s total transaction revenue had increased by a massive 795% year-over-year, in the first quarter of 2022, it recorded a decrease of over 34% instead. Besides, the net revenue for the quarter had also decreased by around 27%. In addition to such a decline, the company also ended up posting a worse than expected loss of $430 million compared to the profit of $771 million posted a year ago. This is the first time since the company went public it had posted a loss.
Such a decline in the revenue might have occurred because a majority of the company’s revenue comes from trading fees which had got adversely affected because of the falling crypto prices and lower trading volumes. Coinbase’s trading volume had fallen to $309 billion during the first quarter from $335 billion a year ago and $545 billion a quarter ago. Moreover, its monthly transacting users (MTUs) had also fallen to 9.2 million for the quarter indicating a sharp decline of 2.2 million or 19% compared to the last quarter.
Bankruptcy Associated Risks
Other than the deteriorating financials, the thing that is causing investors to worry the most is that the company’s quarterly financial filing with the Securities and Exchange Commission this time portrayed certain bankruptcy risks. Through its custodial wallet service, Coinbase provides its customers with the opportunity to leave their digital assets on the exchange itself rather than moving them to any external wallet.
The company has stated that in the event of bankruptcy, all crypto-assets held in its custody on behalf of its customers would be subjected to bankruptcy procedures, and all customers who actually owned those assets would be classified as unsecured creditors. This means they will be unable to access their own funds that are held by the company on their behalf.
However, the CEO of Coinbase did reassure the customers that their funds are completely safe with Coinbase and that there is no such indication of the company going bankrupt anytime soon. Still, many investors have become skeptical about this matter as the crypto-assets do not have any sort of insurance or possess any guarantee from any government institution and it is solely the duty of Coinbase to protect its assets.
Is Coinbase Stock a Good Buy Right Now?
Coinbase stock could be perfect for investors who are not afraid of taking risks. This is a good stock for investors who want to get indirect exposure to the crypto economy but don’t want to bear the risks associated with the individual tokens. On the other hand, if investors really want a piece of the crypto market, they can look at the largest and oldest cryptocurrencies to invest in. Coinbase is extremely cheap now and is trading only at 6.64 times its earnings. However, the risks associated with it and the gut-wrenching volatility in today’s market make it quite a risky investment source for investors who do not have much of a risk appetite.
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