What happened
Today, Coinbase (COIN 7.04%) is finally seeing some investors hit the bid, with this prominent cryptocurrency exchange surging 3% as of 11:45 a.m. ET. This move comes amid a broad-based market recovery, with most risk assets rising today as the U.S. dollar shows signs of cooling down.
The overall cryptocurrency sector rose 3.7% over the past 24 hours, with the Nasdaq exchange also shooting 0.7% higher. Risk-on sentiment in today's market has led to outsize gains for more volatile equities and tokens, leading to a more bullish outlook for Coinbase, which relies heavily on trading volumes from retail investors for its revenue and earnings.
That said, it's not all roses for this centralized crypto exchange. There are expectations that the existing crypto regulation framework put forward by the White House earlier this year could evolve over time, putting pressure on centralized entities like Coinbase. There's also a recently announced $350 million patent infringement lawsuit from blockchain company Veritaseum, which seeks damages from Coinbase and others for allegedly using its patent unlawfully.
So what
Coinbase has certainly been among the more volatile stocks momentum investors have been able to ride this year. During bear market bounces, Coinbase stock has surged to a much greater degree than the overall market. During downturns, the opposite has been true.
Of course, most of the attention Coinbase has received of late has been of the negative variety. Regulatory and macro headwinds forcing crypto valuations lower aren't a great catalyst for this company's fee-based business model. Coinbase is often seen as a gauge of where transaction volumes could be headed over time. And while today's rally is certainly appreciated by those bullish on this stock, it's clear that volatility may be the name of the game for Coinbase and its peers, at least over the near term.
Now what
Today's rally with Coinbase could signal another vicious bear market bounce to the upside could be forming. Some Federal Reserve speakers have started to question whether the recent interest rate hikes have come too heavy and too fast. Accordingly, should a monetary policy stance shift be underway, all risk assets could be due for a revaluation by the market.
That said, there's also the risk that Federal Reserve Chair Jerome Powell will continue on his path, forcing inflation lower at the cost of the economy. This is increasingly being priced in by the market; however, many experts think more pain is to come.
Regardless of who is right in terms of their medium-term outlook for the economy, Coinbase's surge today represents what I think will be the future for this stock over the next few quarters -- a volatile one. Accordingly, while there's a clear bull case for why this stock may be a great way to play a Fed pivot or a bear market rally, it's simply too volatile for my blood right now.
