What happened
Among the most volatile crypto-related stocks this year, Coinbase Global (COIN 3.24%) has certainly been one of the hardest-hit large-cap stocks this year. Today, Coinbase surged as much as 4.4% at its intraday high, before giving up most of its gains in its afternoon session. As of 2:20 p.m. ET, Coinbase stock is still up a marginal 0.7%.
Today's price action for Coinbase appears to align well with how this stock has performed on a year-to-date basis. Starting the year around $250 per share, COIN stock sunk to nearly $40 per share in May before rebounding to a high of $116 per share earlier this month. Since then, however, Coinbase has given up roughly half of these gains, trading around $70 per share.
In an interview with CNBC yesterday, Coinbase CEO Brian Armstrong discussed many of the catalysts that have driven shares lower this year. The CEO outlined plans to cut costs, engage with regulators, and transition toward more services-oriented revenues as opposed to relying on trading fees. Thus far, the market hasn't reacted particularly favorably to these comments.
So what
Coinbase is perhaps the most well-known centralized crypto exchange in the U.S. and has ridden the speculative waves of momentum this sector has seen over the better part of two years. This year, sentiment among most crypto-related investments has shifted into seriously bearish territory, as the prices of most cryptocurrencies have plunged amid risk-off portfolio rotations among many market participants.
Lower crypto prices have meant lower trading volumes, something that's hit crypto exchange Coinbase and its peers hard. However, prolific short-sellers such as Jim Chanos have jumped on Coinbase as a top short idea, due to the potential for fee compression in this sector.
Over time, Chanos argues that trading fees in the crypto sector (which are representative of where stock trading fees used to be, before getting cut to zero) are likely to take the same trajectory over time. Additionally, despite espousing a move toward services-oriented revenues, Chanos notes that Coinbase's services revenues have remained roughly flat over the past four quarters. Overall, his view is that this stock is seriously overvalued on a risk-reward basis.
Other investors have focused on regulatory concerns tied to a probe from the SEC into whether Coinbase allowed users to trade unregistered securities, as well as charges tied to an ex-Coinbase manager who reportedly acted on insider information. Both issues highlight broader regulatory concerns among many investors. And while CEO Brian Armstrong says the company is working with regulators, it's unclear just how favorable regulators will be moving forward.
Now what
The bear case for Coinbase is relatively well known and has been taken seriously by many in the market, judging by this company's stock price performance this year. It appears investors are indeed pricing in higher risks associated with regulation and fee compression. However, the question remains whether enough risk is priced in at these levels.
Armstrong has cited some positive developments with the company's worth with regulators. If more regulatory clarity is achieved, the Coinbase CEO believes that's a good thing for the broader sector. Additionally, if the company is indeed able to shift toward more services-related revenues, perhaps concerns around trading fee compression are overblown.
Furthermore, more cost-cutting efforts in the near term could improve the company's balance sheet, which continues to deteriorate due to a cash burn of roughly $1 billion per quarter.
That said, Coinbase is a company that appears to be standing on the precipice of what could be a very difficult path to growth. It's unclear if we'll see the market excesses we saw during last year's boom in crypto again, or at least any time soon. Accordingly, this is a stock I'm happily watching from the sidelines right now.
