As Markets Swoon, Investors Make the Bull Case for Coinbase

The stock market continued to remain choppy, with Tuesday bringing an initial gain followed by a pullback. By the end of the day, worries about inflation and other potential market disruptions seemed to outweigh optimism about a strong economy. As a result, the Dow Jones Industrial Average (^DJI 0.40%), S&P 500 (^GSPC 1.02%), and Nasdaq Composite (^IXIC 2.02%) all lost very modest amounts on Tuesday.

Data source: Yahoo! Finance.

In the cryptocurrency industry, stocks were generally mixed, reflecting the lackluster performance of major tokens after a huge sell-off over the weekend that lopped off as much as 50% or more from the price of some types of cryptocurrency. However, the newest participant in the publicly traded crypto stock space, Coinbase Global (COIN 5.68%), was up sharply. Below, we'll look at the reasons and what it means for Coinbase's long-term prospects.

An about-face for Coinbase?

Coinbase has had a tough time since coming public. After doing a direct listing with a reference price of $250 per share, Coinbase initially traded as high as $430 per share on its first day of trading before falling nearly 25% from those high levels by the end of the trading session on April 14. From there, Coinbase struggled, falling below its reference price on May 17 and bottoming out at $208 per share on May 19, down more than 50% from its highs.

Yet as long as cryptocurrency markets were strong, Coinbase had some attractive qualities. As one of the most highly regarded crypto exchanges in the U.S., Coinbase's customer count reached the 56 million mark by the end of the first quarter.

Mining cryptocurrency is just one way to profit from the industry. Image source: Getty Images.

The environment seemed to change for Coinbase over the weekend. Massive losses called into question whether the bull market in cryptocurrency was finished, and plenty of influencers stepped forward to weigh in on whether the entire experiment of digital currencies was fundamentally flawed and doomed to failure.

The path forward for Coinbase

Yet a couple of prominent Wall Street companies gave more promising views of where Coinbase could go from here. Late Tuesday, Goldman Sachs weighed in with comments about Coinbase, arguing that the core cryptocurrency exchange is far from the only means by which the company could foster greater growth. In particular, to the extent that new initiatives in cryptocurrency drive innovation, Coinbase has positioned itself as a natural go-to provider of related services that could bolster its revenue.

JPMorgan added to the bullish sentiment, starting coverage on Coinbase with a rating of overweight and a price target of $371 per share. That's higher than the stock traded just about any time after its first day and would represent a gain of more than 50%, even from today's higher levels. JPMorgan's argument is similar to Goldman's, with the idea that even with token prices falling, cryptocurrencies will survive, and as markets develop and grow, Coinbase will play a vital role in that development.

Coinbase wouldn't be the first pick-and-shovel play to find ways to thrive, even as the underlying market it serves goes through turmoil. Given the history of cryptocurrency, no one should be surprised at the massive pullback in token prices. If crypto gets through this latest bout of volatility, then it's likely here to stay -- and Coinbase could well lead the way into the future.