When looking back on this year, perhaps no other topic will garner more attention than cryptocurrencies. Digital assets have become a playground for speculators looking to get rich quick, tech-savvy entrepreneurs seeking to build the next game-changing technology, and creative artists interested in finding new ways to monetize their work.
In an effort to diversify their portfolios, investors might be wondering how to get exposure to the burgeoning asset class. If you're in this camp, then look no further than Coinbase (COIN +6.20%).
I believe the cryptocurrency trading platform company makes for a great investment right now.
Image source: Getty Images.
Bringing crypto to the masses
A discussion about Coinbase can't ignore how exceptional the company's financials are. In the most recent quarter, the business generated $618 million of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) on revenue of just over $1.2 billion. That's an outstanding EBITDA margin of 50%, and it underscores how insanely profitable this enterprise already is.
But because Coinbase derives almost 90% of its sales from transaction fees, it's exposed to the whims of the broader crypto ecosystem. When values are soaring and volatility is elevated, it's the perfect environment for Coinbase. On the other hand, forecasting financial results is extremely challenging due to quarter-by-quarter unpredictability.
To mitigate this risk, management is focusing on expanding subscription and services revenue by offering new capabilities like custody and analytics. One initiative I am especially interested in is Coinbase Cloud, a tool for developers to build applications on top of Coinbase's existing infrastructure. This service has the potential to be the Amazon Web Services of the crypto economy -- a must-have piece of infrastructure that serves the needs of many businesses.
A budding cryptocurrency market translates to greater sales for Coinbase in the form of higher transaction fees (from more trading) and growing subscription and services revenue (from more users and engagement). What makes an investment in Coinbase particularly intriguing is that you don't need to pick which specific coins will appreciate. This is an attractive selling point for me because I know I don't have the technical knowledge to pick winning cryptocurrencies. Coinbase lets me skip that step to place a bet on the entire market instead.
As you can see, Coinbase's future success will ultimately be tied to the growth in value of the world's cryptocurrency assets, a trend that I think will continue next year.
Crypto market cap will rise in 2022
According to CoinMarketCap, a cryptocurrency data provider, the crypto market is currently worth approximately $2.3 trillion, a figure that has surged exponentially over the past decade. Looking ahead, I think there are three main reasons to believe the crypto market will continue rising in value in 2022.
Top talent is increasingly flocking to jobs in the crypto industry. For example, Coinbase more than doubled its headcount this year and now has 2,781 employees (as of Sept. 30). Leading companies in the financial sector like hedge-fund firm Bridgewater Associates and Goldman Sachs have lost high-level executives to crypto enterprises. Even more remarkable is the fact that venture capital funds have invested a whopping $30 billion in crypto start-ups in 2021, more than all prior years combined.
Real-world use cases are also coming to market. A current example includes cheaper and faster remittances, a process that traditionally costs more than 6% per transaction. It's not difficult to see how appealing this is in a developing country like El Salvador, where remittances represent roughly one-quarter of the economy. The Central American nation recently made Bitcoin acceptable as legal tender as well.
The threat of heightened regulation is definitely scaring existing investors and preventing new users from coming into the space. In October, SEC Chairman Gary Gensler said that cryptocurrencies won't be banned in the U.S. like they were in China. His comments mirror what Federal Reserve Chairman Jerome Powell said in September. For what it's worth, Coinbase has a broad list of licenses already in place and has even proposed a regulatory framework for U.S. leaders to implement. Being ahead of the curve certainly helps.
Coinbase influence
Let's not forget about Coinbase's direct influence in bringing cryptocurrencies mainstream. The company's expanding suite of products and services for individuals, institutions, and developers supports the growth of the overall ecosystem. It also bridges the gap between the existing financial system and the cryptocurrency economy.
Based on the arguments I've outlined above, Coinbase is undoubtedly my top cryptocurrency stock for 2022 and beyond.
