While most readers are already very familiar with how the stock market can help build wealth for investors over the long term, cryptocurrencies have caught the attention of many in recent years. The budding asset class has certainly fallen out of favor in the past few months, but the impressive returns it produced before that can't be denied.
Facing tough times
With the entire market down over the past several months, Coinbase has been facing major headwinds. Because the business generates 87% of its revenue from trading fees, the huge plunge in valuations across the industry has pummeled volume on the company's platform. And management, led by founder and Chief Executive Officer Brian Armstrong, is bracing for a prolonged period of macroeconomic weakness.
"We appear to be entering a recession after a 10+ year economic boom," he said in a company blog post. "A recession could lead to another crypto winter, and could last for an extended period."
This pessimistic outlook is why Coinbase recently decided to cut 18% of its workforce. Managing expenses and maintaining operating flexibility is the top priority right now, especially as other crypto companies have failed or are on the brink of going under.
The recent turmoil in the crypto sector might scare investors away from the still nascent and unproven asset class. While some of the top cryptocurrencies out there, like Bitcoin and Ethereum, have produced stellar historical returns, investors must be able to handle the inevitable ups and downs. The current outlook is challenging, but that doesn't mean you should write off the industry's prospects.
Betting on crypto's growth
Up to this point, cryptocurrencies have mainly been used as a tool for financial speculation. People see soaring prices and want to get in on the action to make a quick profit. And this is precisely why Coinbase's revenue mix has skewed toward transaction fees. In the future, though, the company is hoping to help build the crypto economy where real-world utility dominates.
The next part of Coinbase's strategy is to help make a new financial system. And then, it wants to be the primary gateway for users to access the crypto economy as an application platform. Think of Apple's App Store, but all of the services are crypto-native. It's a bold ambition, but this plan is important because with real use cases, cryptocurrencies should become less volatile and will have greater importance in people's daily lives.
In the most recent quarter, Coinbase's subscription and services revenue, which includes things like blockchain rewards and custodial fees, increased 169% year over year, faster than the company's overall sales growth. This is clearly a positive trend to keep an eye on. Promising features like Coinbase Cloud, an infrastructure tool for developers building blockchain-based projects; and Coinbase NFT, a marketplace to mint, buy, and sell non-fungible tokens, could provide new pillars of growth.
Probably the most underrated aspect of the business is Coinbase Ventures. Coinbase's internal venture-capital arm has made over 250 different investments (as of Dec. 31, 2021) since its founding in 2018. The leadership team has not only created one of the most well-known brands in the industry in Coinbase itself, but it also has financial ties to a number of other innovative crypto enterprises.
I believe that an investment in Coinbase stock is essentially a bet on the growth of the whole cryptocurrency sector. In other words, as the market for digital assets hopefully continues to gain in value over the next decade and beyond, Coinbase's business should benefit thanks to its multiple revenue sources and through its ownership of up-and-coming crypto companies. For newbies to the industry, the added bonus is that it isn't necessary to figure out which individual cryptocurrencies will rise in value.
Nonetheless, investors should practice extreme patience and expect lots of volatility along the way.