Popular cryptocurrency brokerage and exchange Coinbase Global (COIN -0.34%) generates the bulk (93% in 2021) of its revenue from transaction fees. And because the market for digital assets is notoriously volatile, so too are the company's financial results in any given period since they are largely dependent on trading volume.
That's why when management released Coinbase's first-quarter outlook at the end of February, it was influenced by the fact that the cryptocurrency market was down about 27% to start the year up until that point. However, through the end of March, the entire market's value rose from roughly $1.6 trillion to $2.1 trillion.
And this reversal trend could foreshadow a positive quarter for Coinbase when it announces Q1 results on May 13.
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Exceeding management's forecast
Coinbase's leadership team consistently emphasizes that an investment in the stock should be judged on a multi-year basis, not by what happens in any quarter. And that's because the business's success so far relies on crypto asset prices, which determine trading volume conducted on the platform. Soaring inflation and the Federal Reserve's plans to hike interest rates led investors to take a risk-off approach, negatively impacting the crypto market to start the year.
On Feb. 24, management predicted that the first quarter would have lower trading volume than the all-time highs registered in Q4 2021, when the crypto market had a strong quarter. It also forecasted lower retail monthly transacting users (MTUs) compared to the 11.4 million retail MTUs in Q4 2021.
No one ever knows what's going to happen next with the prices of digital assets. Even some of the most credible people in the industry, Coinbase's executives, don't have any clue. Therefore, it's not surprising that they simply extrapolated the weak market trends up to that point when making their quarterly estimate.
But as I pointed out earlier, the crypto market had a strong five or so weeks to finish Q1. And this could mean that trading volume and retail MTUs should come in higher than management originally anticipated. Because the company's performance depends heavily on transaction fees, Coinbase's financials could surprise to the upside as well.
Even the two most popular cryptocurrencies, Bitcoin and Ethereum, which represented a combined 32% of Coinbase's trading volume in the fourth quarter of 2021, had a superb month of March. And as prices rise, users are more inclined to trade as they chase returns. This probably means the business had a better-than-expected first quarter.
A bet on crypto's growth
I'm not suggesting that investors buy up Coinbase shares before the earnings call in hopes of making a quick profit. But I do think that being aware of what's going on with broader cryptocurrency asset prices is important for shareholders.
Owning Coinbase is essentially a bet on the growth of the entire crypto ecosystem. The company has proven its success as a trading platform, particularly during a time when digital assets continue to be viewed primarily as a speculative vehicle. Looking ahead, though, the business hopes to gain as crypto's utility rises.
Although shares trade at a ridiculously cheap price-to-earnings multiple of under 10, Coinbase's stock is incredibly volatile. Again, this isn't surprising, as the stock tracks what's happening with crypto prices in general. Nonetheless, if you believe in the expansion of the crypto economy, there's probably not a better investment opportunity than Coinbase.
