What happened
Shares of Coinbase Global (COIN +1.85%) have been hammered because of ongoing volatility in the cryptocurrency market. However, today Coinbase is also getting smacked because of a lowered price target from a Wall Street analyst. As of 1:45 p.m. ET, shares of Coinbase were down 2% but had been down almost 8% earlier in the session.
So what
According to The Fly, Mizuho analyst Dan Dolev lowered the price target for Coinbase stock from $300 per share to $220 per share -- a meaningful 27% decrease. While Dolev's rating is technically neutral, as it's always been, the lower price target signals lower confidence to the investors who follow advice from Mizuho.
Image source: Getty Images.
Now what
In fairness to Dolev, there's good reason to lower near-term expectations for Coinbase. You may have heard that volatility is good for Coinbase's business. That's true in a way -- the company generates most of its revenue from trading fees. Therefore, more volatility leads to increased trading and hence more business for Coinbase.
However, Coinbase's transaction fees are based on trading volume. Let's say a cryptocurrency trades at $50 today but it traded at $500 last week. That cryptocurrency could trade hands the exact same amount of times, but its volume would be 90% lower because volume is based on the total price of transactions, not just the number of transactions.
According to CoinMarketCap.com, the entire global cryptocurrency market was valued at $2.9 trillion in November. As of this writing, the entire market is now worth around $1.6 trillion -- a more than 40% decline. For this reason, it's fair to assume that Coinbase's revenue will be negatively impacted when it reports results for the fourth quarter in coming weeks.
This doesn't mean that Coinbase can't be a great long-term winner -- the company is notably shooting for 1 billion users. However, all great long-term winners go through periods where financial results are challenged, and it's fair to assume Coinbase is experiencing more challenges now than what it faced the last couple of years when cryptocurrencies were booming.
