Several of the popular cryptocurrencies have performed spectacularly well over the last 12 months as digital assets gain more mainstream acceptance. However, volatility has intensified in recent months, raising fears of an impending crash.

Coinbase Global (NASDAQ:COIN), which operates as a cryptocurrency exchange platform, debuted as a public stock in mid-April right about the time that several cryptocurrencies became even more volatile and saw significant price drops. That depressed the value of the stock right out of the gate, although Bitcoin (CRYPTO:BTC) has seen some price recovery this week and Coinbase stock has followed suit (Coinbase stock jumped 6.7% in Monday trading).

Let's explore why this increased cryptocurrency volatility and competition not usually found in traditional fintech companies could hurt this stock. 

Crypto is currently experiencing a crash

Cryptocurrencies are in a bear market. Volatility is increasing, with Bitcoin down nearly 39% from its April all-time high of around $64,800. Ethereum (CRYPTO:ETH) and Dogecoin (CRYPTO:DOGE) have also performed poorly, falling roughly 42% and 56%, respectively, from their peak valuations. Coinbase earns the vast majority of revenue from commissions charged as a percentage of crypto assets traded. Smaller prices mean smaller commissions.

Person about to pop a Bitcoin-labeled balloon with a pin.

Image Source: Getty Images.

Also, Coinbase maintains a retail-focused business model. The company generated 81% of its $1.8 billion in first-quarter revenue from retail transaction fees, exposing it to risk if cryptocurrency speculation falls out of favor. Despite their popularity, these assets have very few real-world use cases to support demand. According to a report from loan marketplace Fundera, only 2,300 businesses in the U.S accept Bitcoin as a form of payment -- a drop in the bucket compared to the roughly 33 million businesses in the country. 

Many retail investors buy crypto with the hope of selling it to someone else for more in the future. While Coinbase does benefit from the transaction fees it charges whether a particular cryptocurrency goes up or down, a price downturn is not nearly as lucrative because trading volume falls when interest in the coins is depressed. A significant price drop means a primary source of demand (and Coinbase's transaction fees) evaporates. 

Coinbase faces significant competition

Coinbase has a first-mover advantage when it comes to processing cryptocurrency transactions, but the competition is growing in number and in its ability to match Coinbase's pricing and services. To mitigate this threat to its main revenue source, Coinbase is expanding services into other cryptocurrency opportunities.

Coinbase also has its eye on the online payments industry through its Coinbase Commerce platform, which lets merchants accept cryptocurrency on their websites. This business could provide much-needed diversification, but it faces competition from established fintech companies like PayPal Holdings (NASDAQ:PYPL) which boast superior scale and acceptance. 

In March, PayPal launched "Checkout with Crypto" to allow American customers to convert their cryptocurrency to dollars to pay for items at checkout. Unlike Coinbase, this strategy doesn't make the merchant hold cryptocurrency, opening it to a much wider audience. 

Over 200 million businesses already accept PayPal globally, and PayPal could technically roll out "Checkout with Crypto" to all of them. Coinbase Commerce, on the other hand, is only accepted by 8,000+ merchants globally, according to its website. PayPal's established fintech ecosystem gives it a competitive advantage that Coinbase will struggle to crack. 

Is Coinbase a good value?

With a market cap of $49.6 billion, Coinbase trades for 26 times forward earnings, which is not particularly high compared to the S&P 500's average forward P/E ratio of 21. The company is also expanding rapidly, with Q1 revenue surging by 845% year over year to $1.8 billion and earnings increasing from $32 million to $771.4 million in the period.

But while Coinbase's reasonable valuation and rapid growth rate could help support a bull case for the stock, that doesn't make it a safe investment. The period between the first quarter of 2020 and the first quarter of 2021 coincides with a massive bull run in cryptocurrency prices (Bitcoin more than tripled in that time).

Coinbase is currently trading down about 44% from its 52-week high set around the time of its IPO in mid-April. While the price has recovered a bit this week, it's unclear if Coinbase can build any momentum in a bear market, especially because of its over-dependence on retail transaction fees and a weak competitive moat in online payments. The company's growth rate could decelerate because of these challenges. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.