It’s no secret that the crypto-economy has experienced a major boom in 2021. And as a result, the US-based exchange Coinbase (NASDAQ: COIN) has featured regularly in headlines since its IPO back in April. Its share price fell $100 after it debuted on the stock market, but the last six months have seen Coinbase shares rise nearly 40%. However, they’re only roughly level with their original listing price. So, as cryptocurrencies seemingly continue to go from strength to strength, should I be buying Coinbase shares?
Q3 results
Let’s start by looking at the Q3 results the firm released last week. While there were positives to take away from these results, some of the figures were of concern to me. Firstly, monthly transacting users stood at 7.4m, which represented a 1.4m fall from Q2 2021. On top of this, trading volume also witnessed a near 30% fall ($135bn), while net revenues fell close to $800m quarter-on-quarter. Net income also took a massive 75% hit. As a potential investor, these are worrying signs. While the firm was keen to mention that it was not a “quarter-on-quarter investment, but rather a long-term investment in the growth of the crypto-economy”, as an investor these declines are hard to ignore.
With that said, I expect a stock of this nature to have its ups and downs. After all, cryptocurrencies are still a relatively new phenomenon. As such, the stock has plenty of long-term potential. Q3 saw verified users grow to 73m, and although net revenue did fall, the $1.2bn generated marked the third consecutive quarter of over $1bn. For a long-term investor like me, this shows that the business has solid foundations for long-term growth.
Bitcoin correlation
Another concerning factor for me is the correlation between the Coinbase share price and the price of Bitcoin. This adds further volatility and a future drop in the Bitcoin price could have a negative impact on Coinbase shares. More broadly, a large number of cryptocurrencies tend to mirror Bitcoin’s performance – which means if Bitcoin falls, the impact is worsened even further for Coinbase.
Yet one aspect that fills me with confidence about Coinbase is its brand recognition. As my colleague James Reynolds highlighted, Coinbase has a large hold on the market. Rumours of a new coin listing are enough to boost the share price. This shows the firm’s strength. It also has large fees, up to 3% in some cases. As the firm makes its money from transfer fees, if cryptocurrencies continue to become more popular and are traded on a larger scale, we could see a large boost in Coinbase revenues. This would see the share price rise.
Should I buy?
I think Coinbase has great potential, and if cryptocurrencies continue to grow the firm will only reap benefits from this. What does concern me however, is the volatile nature of the market. I deem the Q3 results as evidence that the crypto-economy is still at an early stage – and therefore Coinbase shares could be a risk. The market’s correlation with the Bitcoin price is also worrying. As such, I’m going to keep Coinbase on my watchlist for the time being.
Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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