Coinbase value nears $70bn in stock market debut


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Shares in the cryptocurrency exchange peaked at $429 (£311) before closing at $328 (£238) in a watershed moment for the cryptocurrency industry.

Coinbase, a cryptocurrency exchange founded in a two-bedroom apartment in 2012, became the first major cryptocurrency exchange to go public via a direct listing on the Nasdaq yesterday. The listing is seen as another large moment in the growth of the cryptocurrency industry and the adoption of digital currencies.

Coinbase cashes in on Bitcoin boom

Coinbase has been a key beneficiary of the huge rally we have seen in cryptocurrency during the past twelve months. The most notable cryptocurrency, Bitcoin, saw its market value surpass $1tn (£725k) recently as a combination of retail and institutional demand have pushed its value to new heights.

As the largest cryptocurrency exchange in the U.S, Coinbase represents one of the easiest routes for investors to buy coins like Bitcoin, Ether, Litecoin, and more, using traditional fiat currency. The exchange earns a large chunk of its revenues from fees it charges users to deposit and trade on the exchange, meaning the recent boom in popularity of cryptocurrency has equaled a healthy revenue increase for Coinbase. The exchange expects to report first-quarter profit of $750m (£544k) in 2021, whilst generating revenue of $1.8bn (£1.31bn) – more than the company’s entire 2020 revenue.

However, the company’s success is interdependent on the performance of the cryptocurrency market in general, and whilst Coinbase is clearly bullish about long-term growth prospects of the cryptocurrency sector, many investors may not be so sure and wish to learn more about it. As such, investors face various considerations before purchasing shares in the exchange.

Are Coinbase shares right for you?

The decision of whether to invest in Coinbase is a complex one given the companies dependence on the volatile cryptocurrency markets. The company stated in its SEC filing that “a majority of our net revenue is from transactions in Bitcoin and Ethereum” and that the firm’s operating profits could be “adversely affected” by a fall in demand. As such, investors who worry the cryptocurrency market is currently in a bubble or simply see the asset class as too volatile may wish to look elsewhere.

There is also the argument that the company’s wide margins are a reflection of the large fees the exchange can charge, given the lack of clear competition for Coinbase at the moment. However, the market is a profitable one and many fast-growing competitors are emerging, such as Bitfinex. This increased competition is expected to lead to pressure on exchanges like Coinbase to lower fees, eating into their profits.

But there are many arguments for investing in Coinbase shares too. The most obvious being that when Bitcoin’s price rises, so does the demand for cryptocurrency and also Coinbase’s revenue. Hence, shares in Coinbase can be a prudent way for investors to gain exposure to the cryptocurrency without actually owning it, should they feel more positive about the direction Bitcoin’s price will move in the future.

Investors may also find comfort in the widespread adoption of cryptocurrency that we have seen by institutional investors during the last twelve months – a notable difference between this rally and Bitcoin’s last in 2017, which was largely propped up by retail investors. Many of the world’s largest banking institutions, like Morgan Stanley and Goldman Sachs, have responding to increased demand for digital assets by announcing plans to offer crypto investments to their clients in the future. This adoption could create more stability in the market in the future, and thus more stability in Coinbase’s market value.

These are just a few of the consideration’s investors should make before investing in Coinbase. The stock, like many others, comes with its own, unique risks; and with shares far from cheap (currently trading at $328 (£238)) I would urge each investor to do their own research into these aforementioned risks.

This article offers general information about investing and the stock market, but should not be construed as personal investment advice. It has been provided without consideration of your personal circumstances or objectives. It should not be interpreted as an inducement, invitation or recommendation relating to any of the products listed or referred to. The value of investments can fall as well as rise, and you may get back less than you invested, so your capital is at risk. Past performance is no guarantee of future results. If you're not sure which investments are right for you, please get financial advice. The author holds no positions in any share mentioned.

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