The recent major event in the cryptocurrency industry, specifically the collapse of crypto exchange FTX, has shone a light on just how opaque the digital asset world really is. The complexity is inherently difficult to understand, and it spurs calls from naysayers about why digital assets have no future.
Consequently, the crypto market's present turmoil might cause investors to sour on the entire sector, but I think this would be a mistake. The industry still has promise, with one company set to benefit over the long term.
Here's why Coinbase Global (COIN 4.68%) is my top crypto stock for 2023 and beyond.
Not a good year for crypto
The crypto market skyrocketed in value in 2021, nearing a peak of $3 trillion last November. But this year hasn't been as friendly, as the entire industry saw its value plummet by roughly $2 trillion. Even the top two cryptos by market cap, Bitcoin and Ethereum, haven't been spared, and both are down more than 65% in 2022.
Coinbase, the largest crypto brokerage and exchange in the U.S., has taken a beating as well -- the stock is down 80% in 2022. Given that Coinbase generated 64% of revenue in Q3 from transaction fees, it's no surprise that anytime interest and trading in digital assets wanes, the business's performance takes a hit.
Through the first nine months of this year, Coinbase had sales of $2.5 billion, down from $4.9 billion in the same period in 2021. The company's monthly active user base stood at 8.5 million in Q3, down sequentially for the third straight quarter. So far this year, Coinbase has posted a net loss of more than $2 billion.
The situation has been so dire that Coinbase cut staff earlier in the year, a reversal of plans to significantly increase headcount in 2022. There's no doubt that the crypto market is volatile and is subject to a boom-and-bust cycle, but I don't think anyone expected how bad things would get.
Coinbase shines bright
Despite the intense pessimism about cryptocurrencies right now, I believe Coinbase has a potentially lucrative future. The recent events with FTX make Coinbase's operations look better in contrast, in part because it is based in the U.S. and abides by all rules and regulations. Coinbase's founder and chief executive officer, Brian Armstrong, publicly said his business doesn't engage in any rogue or risky behavior with client assets. And because Coinbase's books are audited, investors and users have a high level of assurance that this is true. I don't think it can be overstated how much this trust factor matters in the crypto market now.
Looking specifically at Coinbase's investment merit, I view the stock as essentially a tax on the growth of the cryptocurrency industry. Up to this point, the company's fortunes have been directly tied to crypto prices. Higher prices result in more investor interest, increasing trading activity on Coinbase's platform and leading to more revenue. And the opposite also is true, as we've seen this year. But when the crypto market bounces back, whenever that may be, Coinbase should once again thrive, producing profits along the way.
Furthermore, should crypto starts to have real utility, Coinbase stands to gain. In the latest quarter, subscription and services revenue, a segment that includes blockchain rewards and custodial fees, jumped 45% year over year. Management hopes that Coinbase can usher in a new era of crypto as a financial ecosystem and as an application platform. The ultimate goal is to have 1 billion people using web3 services on Coinbase's platform daily.
This could take years, but there's little doubt that the business is positioned well to capitalize on crypto's growth over the long term. With the stock trading at a price-to-earnings ratio of just 5, Coinbase is the top crypto stock to buy in 2023. It's not even a question.
