After the value of the cryptocurrency market nearly tripled in 2021, it has since retreated at the start of 2022. Nonetheless, you may be eyeing the asset class to possibly make your first investment in this space. The potential to achieve returns that exceed the stock market is definitely drawing attention to digital currencies.
If you're a cryptocurrency newbie, then Coinbase Global (COIN 3.63%) makes for a worthwhile investment to gain exposure to the fast-growing industry. Here's why.
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Building the crypto economy
Coinbase's mission is to "increase economic freedom in the world," and crypto seems to the be solution to do just that. The company's entire premise is built on the belief that the current financial system is outdated, full of expensive middlemen, and not fair and accessible to everyone in the world. Crypto, on the other hand, is a global network that is unbiased and open to anyone with an internet connection.
While many people may recognize this company as a cryptocurrency brokerage, Coinbase wants to power the crypto economy and bring it to the mainstream. Today, retail and institutional customers can buy and sell crypto on its platform, and developers can use Coinbase's technology to build blockchain-based projects. As of Sept. 30, Coinbase had 73 million verified users and supported 103 crypto assets for trading and 158 for custody.
The company's competitive advantage stems from its powerful brand recognition, its regulator-first approach, and its relentless focus on security. Coinbase has engaged with government agencies from the start and has even proposed policy changes for the crypto industry. And even more impressive, since its founding in 2012, Coinbase has never been hacked, a remarkable feat given that it's one of the oldest crypto brokerage and exchange businesses.
Coinbase hopes to be the primary tool for people who want to access all things crypto. In the way our grandparents can now use Apple iPhones with no issues, Coinbase wants to emphasize ease of use in order to bring 1 billion people into the crypto economy. That's an incredible goal.
Volatility is normal
The biggest knock on owning cryptocurrencies directly is just how volatile they are. Even Bitcoin (BTC 0.33%) and Ethereum, the two most valuable and developed cryptocurrencies with a combined market cap of more than $0.965 billion (as of Jan. 24), often experience price movements of 5% or more on a daily basis. This type of volatility is almost unheard of when it comes to blue chip stocks. Investing in this unproven asset class means having the stomach to endure the ups and downs of the market's development and remaining focused on the long term.
Because 88% of Coinbase's revenue in the latest reported quarter (ended Sept. 30) came from transaction fees, unsurprisingly, the business is susceptible to the unpredictability of crypto prices. When crypto prices soar, trading volume rises, and Coinbase benefits. But the opposite is also true. Investors selling their cryptocurrencies are also generating transaction fees for their trading platform of choice. Prospective investors should keep this in mind.
And even though Bitcoin's percentage of overall trading volume is trending downward, from 39% in Q1 2021 to 19% in the most recent quarter, Coinbase's stock still tends to follow the top cryptocurrency's price movement closely. As a result, shareholders should be fully prepared for a bumpy ride. With time, however, I think the market will begin to decouple Bitcoin's price from Coinbase's underlying business.
That's because the plan is for Coinbase's subscription and services revenue to become a larger part of the overall business. As the crypto industry transitions from the investment phase to the utility phase, management hopes that offerings like Coinbase Cloud, an infrastructure tool for blockchain developers; Coinbase NFT, a soon-to-be-released marketplace for non-fungible tokens (NFTs); and Coinbase Wallet, a consumer-friendly application that gives users access to decentralized applications, will add a level of stability to sales.
Jumping into the cryptocurrency waters can be a daunting endeavor. The industry is evolving quickly, and there is still a lot of uncertainty facing the market today. I applaud you for making an effort to become more informed about the space, and I believe Coinbase stock makes a compelling investment for those who are new to crypto.
