It is common information among the many investing neighborhood that cryptocurrency costs are extraordinarily risky, and main value fluctuations on a day-to-day foundation are regular. So, if you need safer portfolio publicity to this burgeoning asset class, what are you presupposed to do?
One common plan of action is to invest in shares of public companies that provide services that serve the cryptocurrency market. Shopping for a inventory like Coinbase (NASDAQ:COIN) would possibly make plenty of sense at first, however it too has a critical flaw that it’s best to hold in thoughts.
Let’s break down what traders have to know.
Following Bitcoin up and down
Since Coinbase had its initial public offering (IPO) on April 14 of this yr, the inventory has fallen 28% from the closing value on its first day of buying and selling. The enterprise appears to be thriving as income and web earnings within the second quarter grew astronomically larger than they had been within the prior-year interval. And the variety of month-to-month transacting customers now stands at 8.8 million, up from simply 1.5 million within the second quarter of 2020.
Coinbase, which generates nearly all of its income from buying and selling charges, does properly when cryptocurrency volatility is excessive. This has definitely been the case in 2021 as Bitcoin, the most important cryptocurrency by market capitalization, has been on a roller-coaster experience this yr. However what stands out essentially the most is simply how intently Coinbase’s inventory value follows that of Bitcoin. Within the time since Coinbase’s IPO roughly 5 months in the past, Bitcoin’s value has declined about 25%, not a lot totally different than Coinbase’s efficiency. A take a look at the chart beneath makes it fairly obvious how these two property monitor one another.
In an interview from April, Coinbase co-founder and CEO Brian Armstrong talked about how proudly owning shares of the corporate may very well be considered as an “listed wager on the crypto house extra broadly.” He additionally defined that his firm is not “tied to 1 crypto asset.” Though Bitcoin accounted for simply 24% of whole buying and selling quantity for the enterprise in the newest quarter (down from 57% within the prior-year interval), Armstrong’s assertion hasn’t confirmed true to date throughout Coinbase’s short public history.
The corporate at present presents 83 digital property for buying and selling and 142 for custody. Moreover, an emphasis on boosting subscription and providers income within the years forward might disconnect Coinbase from the value of Bitcoin. This has not, nonetheless, been the case not too long ago. And traders trying to put cash to work in cryptocurrencies through the inventory market should think twice earlier than shopping for Coinbase shares.
The investor takeaway
Changing into a profitable investor basically is difficult, and investing in a brand new and unfamiliar asset class is even more durable. Whereas it might seem to be proudly owning shares in Coinbase is a comparatively secure wager to achieve publicity to the cryptocurrency market, the inventory has clearly been fairly risky in its personal proper. The enterprise is rising its non-Bitcoin income, however primarily based on their related trajectories, the market nonetheless views the 2 property in the identical gentle.
It is vital to not solely perceive the basics of any specific firm that you just’re involved in but additionally how the market perceives that enterprise and inventory. Coinbase remains to be closely influenced by the rise and fall of Bitcoin. Maintain this essential level in thoughts in the event you’re contemplating Coinbase as an funding.
This text represents the opinion of the author, who might disagree with the “official” advice place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis — even one in all our personal — helps us all suppose critically about investing and make choices that assist us turn out to be smarter, happier, and richer.