It has been a brutal end to the year for Coinbase (COIN -2.31%). The onset of crypto winter, combined with the fallout from the FTX meltdown, has led droves of investors to dump Coinbase shares. Coinbase is now down 82% year to date, and its market value has plunged below $10 billion on more than one occasion. And for the past two weeks, Coinbase has been hitting new all-time lows.
However, there is a strong case to be made that Coinbase is now significantly undervalued by investors. Due to all the fear, uncertainty, and doubt (FUD) in the marketplace, investors are knocking Coinbase down to unreasonable lows. Let's take a closer look at the contrarian case for investing in Coinbase now.
Underlying fundamentals
The starting point is Coinbase's balance sheet. After all, if all those fears about FTX contagion are real, investors are going to want to know if Coinbase is financially strong enough to resist this contagion.
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Coinbase Chief Executive Officer Brian Armstrong is adamant that his company has no material exposure to FTX. Moreover, he has aggressively asserted that Coinbase has absolutely no liquidity issues. In short, there is no need to worry about an FTX-style bank run on Coinbase.
Even Coinbase skeptics have to acknowledge that Coinbase has taken extra measures to protect its balance sheet. The company, for example, still has $5 billion in cash on the balance sheet and has been taking aggressive steps to slash expenses.
So how is it possible that Coinbase only has a $10 billion valuation in the marketplace? This valuation is basically assuming a worst-case, apocalyptic scenario in which the entire crypto industry burns down to zero.
Will the crypto market ever rebound?
The next factor to consider is whether the crypto industry is ever going to recover. At one time, it was a $3 trillion industry. Now, the entire crypto industry is worth about $800 million. It can seem especially discouraging when the price of Bitcoin (BTC 0.89%) continues to plummet, dragging the entire market lower.
Until Bitcoin recovers, the crypto industry is not going to recover. And the individual retail investor is not going to return until Bitcoin recovers.
However, despite the onset of crypto winter, institutional investors appear to be adding to their crypto positions. According to a recent Coinbase survey, 62% of institutional investors who already had a position in crypto increased their allocations during the past year. Overall, 58% of those surveyed expect to add to their crypto portfolios over the next three years, and only 6% plan to decrease their exposure. Granted, this latest survey was taken before the FTX scandal hit, but you can see how even the onset of crypto winter earlier this year has not deterred big-name institutional investors from crypto.
Take, for example, Cathie Wood of Ark Invest, which is one of the biggest backers of Coinbase. Her fund now holds a 4.7% stake in Coinbase, and she's been on a buying spree of late. Since the start of November, her fund has acquired more than 1.3 million shares of Coinbase. The takeaway is clear: The current market meltdown has become a buying opportunity for value-seeking crypto investors.
Is Coinbase a buy?
Of course, a lot depends on how you view the crypto market. If you view it as a giant liquidation sale, Coinbase is too risky to buy. It's just throwing good money after bad. But if you view the current crypto market as a giant year-end holiday sale, with all kinds of huge markdowns on offer, then this is a remarkable buying opportunity. Everything is just so cheap.
In April 2021, investors were certain that Coinbase was worth upward of $381, its opening initial public offering price. How is it possible that Coinbase is now worth only $45? That's a nearly 90% discount. This might be the cheapest you will ever get to buy this company.
A growing number of investors are now expecting Bitcoin to rebound in 2023. If and when that happens, retail investors will return to Coinbase. If you believe in the long-term future of crypto, Coinbase is still a strong long-term buy.
