After Coinbase (COIN -5.10%) reported its 2022 first-quarter financials on May 10, investors immediately sent shares tumbling to all-time lows. A 27% year-over-year decrease in sales, coupled with lower trading volume, echo weak trends in the broader cryptocurrency market.
At the start of 2022, the crypto industry had sold off along with stocks before recovering somewhat in March, so a poor showing from Coinbase shouldn't have been a big surprise. Shareholders must practice patience with this stock, adopt a long-term mindset, and be prepared for a roller-coaster ride as the business helps to build the crypto economy.
No one ever wants to see falling revenue, but investors do have one key metric to be excited about.
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Coinbase's user base is huge
As of March 31, Coinbase counted 98 million verified users on its platform, up 81% from the prior-year period. A verified user includes retail users, institutions, and ecosystem partners that have registered an account. While some of these customers might have signed up a long time ago and been inactive recently, I think it's still an important number that investors should be happy about.
Why does having almost 100 million verified users make Coinbase an attractive investment, despite its otherwise weak first quarter? It's actually quite simple. According to crypto.com, there are an estimated 300 million cryptocurrency users worldwide. This means Coinbase represents about one-third of the entire market. Binance and FTX, the company's biggest rivals, don't have nearly as many users.
The cryptocurrency market is volatile. And for Coinbase, which derived 87% of its net revenue in Q1 from transaction fees, any quarter's financial results are directly affected by crypto prices and volatility. When prices go up, people tend to open new accounts, add money to existing accounts, and trade more, which is a boon for business. The opposite scenario can also happen, as Coinbase just experienced.
However, what benefits the company over the long term is its ability to attract more users. We are still very early in the development of this nascent technology, but if Coinbase remains the first place individuals and institutions go to gain exposure to cryptocurrencies, that's clearly a positive sign.
Coinbase was one of the first crypto brokerage and exchange businesses, and as a result, it has built a powerful brand that is recognized for security and ease of use. Management has plans for the company to be the primary gateway for users to interact with the crypto economy. This goal can't be achieved without first bringing customers onto the platform.
Co-founder and Chief Executive Officer Brian Armstrong highlighted this theme on the Q1 2022 earnings call:
I think if you fast-forward 20 years from here, the crypto economy is going to represent probably a large portion like that, 15% of global GDP. And so Coinbase can help create that vision and make it a reality in the world.
Investors should expect both Coinbase's financial results and stock to be extremely volatile in the near term. For now, it's best to focus on the next decade and try to ignore fluctuations in quarterly financial results.
