Investing in cryptocurrencies can seem daunting, especially if you really have no idea about them. Good luck trying to choose from among the more than 22,000 various tokens out there today. And because of how new and undeveloped the industry still is, even though Bitcoin has been around for almost 14 years, investing in digital assets might be too intimidating.
If you're a newbie when it comes to cryptocurrencies, however, there's still hope. Here's why you should look no further than Coinbase Global (COIN +4.30%).
NASDAQ: COIN
Key Data Points
Betting on the industry's growth
At a high level, an investment in cryptocurrency exchange Coinbase is essentially a bet on the growth of the entire cryptocurrency industry. Yes, the business did generate 63% of its revenue in the third quarter from unpredictable trading fees, which are absolutely fantastic for profitability in good times (like 2021) but are horrible in down markets (like 2022). This is something Coinbase bears point to as a reason to avoid the stock.
But management is developing more-stable sources of revenue. In the latest quarter, Coinbase's subscription and services, a segment that includes things like custodial services and blockchain rewards, saw revenue jump 45% year over year. The expectation is that over time, Coinbase and its 108 million verified users will start to interact with crypto less as a tool for financial speculation and more in terms of real utility.
Coinbase is known mainly as a popular brokerage and exchange business for buying and selling tokens, but looking ahead, I believe the company could become a crucial tech infrastructure provider for noncrypto businesses looking to access or integrate blockchain technology into their operations. Look at Coinbase's partnerships with BlackRock and Alphabet's Google Cloud as two prominent examples.
And as a result, betting on Coinbase is a bet on the growth of the whole industry. The plus side with this perspective is that investors don't have to pick what individual cryptos will win over the long term. As the industry attracts more users, capital, and developers, Coinbase can benefit.
A priority on trust and transparency
The recent implosion of one of Coinbase's chief competitors, FTX, has cast a shadow over an industry that is already recognized as being a nexus for complex, opaque financial structures and risky behavior. Investors have lost faith in major crypto institutions. And once trust is lost and a reputation is impaired, it can be awfully difficult to recover.
By being a publicly listed company in the U.S., Coinbase must abide by the rules of the Securities and Exchange Commission -- unlike FTX, which was based in the Bahamas. This means that Coinbase is required to provide audited financial statements to its investors. We might have no clue what a crypto company operating without this oversight has on its balance sheet. But we can be fairly sure that Coinbase isn't engaged in any shady practices.
It's easy for investors to throw the baby out with the bathwater here and disregard all businesses in the crypto sector, but this isn't the right approach. I think Coinbase could prove to be a winner thanks to its focus on safety and security for its user base.
A compelling valuation
Another important reason that investors new to cryptocurrencies should buy Coinbase stock is its attractive valuation. As of this writing, shares are trading at a price-to-earnings ratio of just 4, which is the lowest level since the business went public in April 2021.
To be fair, the recent turmoil shaking up the crypto market, coupled with a general risk-off sentiment by investors in digital assets, probably justifies Coinbase's low valuation right now. Investors are rightfully hesitant to put money into a nascent asset class that is extremely volatile.
But I still think that allocating a tiny percentage of a well-diversified portfolio to Coinbase makes sense.
As of Sept. 30, the business had $5 billion in cash and cash equivalents on its balance sheet. This is not money that belongs to clients or is tied up in other activities. This is strictly Coinbase's capital. Compare this cash balance to the company's market cap (as of this writing) of about $10 billion, and investors are presented with an intriguing opportunity. The road ahead will be full of uncertainty, but for those who are new to crypto, Coinbase looks like a smart buy.
