Coinbase (COIN +4.25%), one of the world's largest cryptocurrency exchanges, went public through a direct listing last April. It closed at $328.28 on the first day. Coinbase initially dazzled the bulls as Bitcoin (BTC +0.59%), Ether (ETH +0.70%), and other cryptocurrencies surged to record highs.
But over the past year, the crypto market collapsed as rising interest rates drove investors toward more conservative investments. The failures of numerous smaller cryptocurrencies and exchanges further tarnished the fledgling industry's reputation, which spooked the bulls and incurred the wrath of financial regulators.
Now, Coinbase trades at about $40 per share.
Image source: Getty Images.
In June, Coinbase's CEO warned investors that a "crypto winter" could start soon. It also laid off nearly a fifth of its workforce, yet it still remains unprofitable. All these problems have made Coinbase a tough stock to own as the bear market drags on. But today, I'd like to focus on three lesser-known facts about Coinbase -- and how they might shape its future.
1. Coinbase relies heavily on institutional investors
Many retail investors -- driven by social media recommendations, commission-free trading platforms, and stimulus checks -- bought cryptocurrencies for the first time in 2020 and 2021. However, larger institutional investors actually played a much larger role in driving cryptocurrency prices to record highs last year.
NASDAQ: COIN
Key Data Points
Last December, Ark Invest's Cathie Wood claimed Bitcoin's price could top $500,000 if all institutional investors allocated just 5% of their portfolios to the top cryptocurrency. That's why Wood bought Coinbase for several of Ark's exchange-traded funds (ETFs). As of this writing, Coinbase still accounts for 3.2% of Wood's flagship Ark Innovation ETF (ARKK +1.53%), 4.6% of the Ark Next Generation ETF (ARKW +0.84%), and 5.4% of the Ark Fintech Innovation ETF (ARKF 0.05%). All three ETFs have declined by more than 60% over the past 12 months.
Wood was likely interested in Coinbase because most of its trading volume comes from institutional investors instead of retail investors. That distinction sets Coinbase apart from retail-oriented platforms like Robinhood and Block's Cash App. But as the following table illustrates, both institutional and retail investors fled as crypto prices plunged.
|
Metric |
Q3 2021 |
Q4 2021 |
Q1 2022 |
Q2 2022 |
Q3 2022 |
|---|---|---|---|---|---|
|
Institutional Trading Volume |
$234B |
$371B |
$235B |
$171B |
$133B |
|
Retail Trading Volume |
$93B |
$177B |
$74B |
$46B |
$26B |
|
Total Trading Volume |
$327B |
$547B |
$309B |
$217B |
$159B |
Data source: Coinbase.
2. Bitcoin is becoming a bigger slice of its business
Bitcoin's price hit an all-time high of $67,567 last November, yet many investors still dismissed it as a legacy cryptocurrency that couldn't keep pace with the newer players. Bitcoin's price has tumbled to about $18,000 today, but it survived the industrywide wash-out that crushed many smaller cryptocurrencies and tokens over the past year.
As a result, we've seen Bitcoin become a much larger part of Coinbase's business again. Bitcoin accounted for 31% of Coinbase's total trading volume in the third quarter of 2022, compared to 19% a year earlier. Ether's share also rose from 22% to 33%. Meanwhile, Coinbase's trading volume from "other crypto assets" plunged from 59% to 36%.
Coinbase's loss of trading volume from more speculative altcoins might throttle its near-term growth, but it could also stabilize its long-term returns if Bitcoin and Ether emerge as the most resilient cryptocurrencies.
3. The company has a growing debt problem
At the end of 2021, Coinbase had $7.1 billion in cash and equivalents. It also generated $3.6 billion in net income for the full year. At the time, it didn't seem like the $3.4 billion in long-term debt it had issued would cause any major problems.
But by the end of the third quarter of 2022, Coinbase's cash and equivalents had dwindled to $5.0 billion -- and it posted a net loss of $2.1 billion in the first nine months of the year. Moreover, its long-term notes that mature in 2031 have now fallen to about 50 cents on the dollar, implying that Coinbase only has a 50/50 chance of surviving for another nine years.
Those notes have a coupon rate of 3.625%, and they were issued last September along with another tranche of 3.375% notes that mature in 2028. It also issued another tranche of 0.50% notes last May. These mature in 2026.
Those bond sales all occurred last year before the crypto market crashed and interest rates skyrocketed -- so any new financing (if it can be secured at all) will come at a much higher price. Coinbase won't go bankrupt anytime soon, and it should be able to cover the first $1.4 billion tranche of debt that matures in 2026. But if the crypto winter turns into a multi-year ice age, there's still a strong chance its liabilities will overwhelm its assets by the end of the decade.
Just buy Bitcoin instead
Coinbase's business is messy, capital intensive, and will likely be closely scrutinized by regulators after the recent FTX debacle. If you still believe in the crypto market's long-term potential, it makes more sense to buy a Bitcoin or two instead of Coinbase's beaten-down stock.
