After much anticipation, Coinbase Global Inc (NASDAQ:COIN) finally went public through an April 2021 direct listing. As the first cryptocurrency exchange to do so, it made history within the crypto community, but it also happened at a time when Bitcoin ($BTC) is struggling to maintain historically high values.
So, if you’re an investor in digital coins and exchanges, is it best to invest in Coinbase vs Bitcoin?
The benefit to investing in Coinbase is that it’s a traditional stock like any other on the NASDAQ. This means shareholders have traditional rights associated with holding their shares, something Bitcoin was initially launched to replace.
Bitcoin is a store of value that’s not the same as a publicly traded company (it doesn’t produce cash flows), and many financial managers are barred from recommending it to their clients. That means the Coinbase listing is a way for people to invest in it indirectly, and research is revealing that Coinbase stock follows the overall crypto market.
We decipher the encryption to determine if you’re better off investing in the most popular crypto in Bitcoin or the most high-profile crypto exchange in Coinbase.
Coinbase: A Virtual Firm Transacting Virtual Currency
Coinbase was founded by Brian Armstrong in Wilmington, Delaware and generated $1.14 billion in annual revenue last year. The company lacks a physical headquarters and operates as a decentralized, virtual company.
It offers products for both retail and institutional investors, with Coinbase, Coinbase Pro, and Coinbase Wallet for retail traders. Institutional traders can access Coinbase Prime and Coinbase Custody, while it also has an interest in USD Coin, a Visa debit card that can spend crypto, and a payment service for merchants.
The company’s valuation of around $50 billion fluctuates with cryptocurrency prices. And that poses risks to investors.
Coinbase Top Line Is Growth Extraordinary
The crypto exchange had a banner year in 2020, and 2021 is only getting better. The company reported $1.8 billion in its first post-listing earnings report. That’s a 900-percent increase from $190.6 million in the previous year.
Of course, this is entirely because its price is tied to the crypto market. Americans earned over $4 billion from bitcoin in 2020, and Coinbase obviously profited significantly from that. Coinbase fees are notoriously high compared to those charged by Robinhood, tastyworks, Kraken or other places where crypto can be bought and sold.
Those fees should come under pressure over time. The bet Cathie Wood and others are making is that volumes go up even more.
In the meantime, the company continues to profit from trading fees and other transaction fees, no matter what the price of the individual coin is. This creates an interesting investment for those interested in the crypto industry, but is it better than a pure and direct investment in BTC?
Influencers Expanding Bitcoin Adoption
Bitcoin is at the apex cryptocurrency – it’s the most visible and highest valued, and it tends to lead the price of other coins both up and down. That makes it arguably the “safe haven” of all cryptocurrency investments. But its volatility cannot be understated.
Bitcoin’s value was cut in half in 2021 after a meteoric rise in 2020. A lot of investors who jumped onboard too late could be in for another years-long wait before potentially getting back into the black.
Timing the crypto market is nearly impossible, and there are many factors in play in the 2020s that weren’t there the first time the industry’s value skyrocketed. Major players like Elon Musk’s Tesla Inc (NASDAQ:TSLA) are heavily promoting crypto, helping it to gain mainstream acceptance.
And with integration into major banks like USAA, fintech companies like PayPal, and payment processors like Visa, Bitcoin is clearly becoming more acceptable as a means of transacting. However, it’s important to understand it’s not the same thing as investing in a company’s stock, as you do not have the same legal rights.
Bitcoin Price Is An Unpredictable Rollercoaster
Bitcoin reached an all-time high valuation of nearly $20,000 per coin in 2018 before falling below $5,000 per coin in the proceeding years. During 2020 it to started to climb again, to a new all-time high of over $63,000 in April 2021 before dropping sharply to settle in the mid $30,000 range.
Nobody knows what the price will do, and there are a lot of great arguments to be made for both a higher climb and a steep decline. Most recently, Michael Burry has been predicting a head and shoulders pattern will lead to a catastrophic decline.
If you invest in bitcoin, you need to do so with a purpose and understanding that price volatility can’t be controlled. Not only that, but it affects crypto markets like Coinbase too.
Coinbase Is A Highly Risky Venture
The biggest risk to Coinbase valuation is the industry-specific risks being intrinsically tied to the cryptocurrency market. COIN price is connected to the crypto market (which is connected to BTC), and it also can be the direct target of cyber-attacks and regulatory ire.
Should the company find itself in a hotseat, it could be detrimental to investors and cause it to dive below the crypto curve.
But bitcoin investors aren’t exactly on a slow path to riches.
Bitcoin is a stigmatizing investment for a lot of reasons, mainly because it’s decentralized. It’s not a government-backed currency, and there’s no company whose performance you’re investing in. This means the market is completely open to manipulation without any solo bitcoin holder having much say, unless they’re a whale.
This aspect of bitcoin is what caused the project to fork multiple times, creating new cryptocurrencies like Bitcoin Cash. And this further dilutes a market that already includes exponentially more currencies than existed in the fiat world. We may reach a point where there’s simply not enough value to go around.
Coinbase Vs Bitcoin: Which Crypto Investment Is Best?
Cryptocurrency is a hot investment, but it’s also volatile and difficult to regulate. This has some people believing Coinbase is a safe alternative to invest in it by proxy. While that does have truth, it doesn’t relieve the risks.
Coinbase is fully exposed to the volatile pricing of cryptocurrencies more broadly. And it could be hacked or hit with regulatory and legal expenses. This could cause it to drop under the price of crypto as a market. However, the risks may be outweighed by the potential returns if the industry grows into 2030 the way ARK Invest believes it will.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.