Regardless of our grades in our school Physics tests, we can all agree that Newton's law of gravity isn't easy to argue. However, even Newton's genius probably did not imagine that what goes up must come down would also serve in a metaphorical sense.
In 2020 and 2021, investors witnessed unprecedented activity in the markets. Meme stocks were on the rise, social media influencers were pumping crypto coins that had little (if any) utility, and start-ups were raising venture capital by the billions. Perhaps no other industry embodied these elements more so than cryptocurrency.
Market commentators on CNBC and acclaimed investors like Cathie Wood all seemed to be speaking highly of the elusive asset class. However, over the last several weeks, a lot has come to light in the crypto marketplace. The collapse of BlockFi and FTX have crypto skeptics feeling vindicated, while crypto enthusiasts feel left holding the bag. Moreover, rumors are swirling that other cryptocurrency companies, such as Gemini, co-founded by the Bitcoin-touting Winklevoss twins, could be the next to fall.
With all this concern around the marketplace, it is natural to wonder if it's worth having exposure to the crypto marketplace at all. In this article, we are going to explore Coinbase (COIN 7.66%). While it's possible that the crypto exchange could be the next to implode, it's also possible that it could be the last one standing when the dust settles.
What is going on?
The first thing investors should realize is that each crypto company is different. While these firms compete with one another for market share, each platform offers its own unique products and services.
Unsurprisingly, investors that are shareholders of Coinbase could be concerned that their investment is at risk given the fallout of FTX. While new details seem to be emerging by the hour, the short version of FTX's downfall is that the company was allegedly funneling customer deposits on its exchange to an otherwise lesser-known hedge fund affiliated with, but not part of, the FTX parent company. This hedge fund, called Alameda Research, has been accused of making a series of extremely risky investments that did not work out. Subsequently, customer funds were lost.
Although this makes for an interesting case study, it has little to do with Coinbase's business. Coinbase offers a number of products and services, but the company is primarily used as an exchange to buy and sell crypto tokens. Just as Charles Schwab or Morgan Stanley-owned E*Trade allows users to buy and sell stocks, bonds, and derivatives such as options, Coinbase facilitates the flow of funds of trading Bitcoin (CRYPTO: BTC), Ethereum (CRYPTO: ETH), among others.
Since the FTX debacle began making headlines about a month ago, Coinbase stock has dropped over 20%.
How low can it go?
That's the multibillion-dollar question. It wasn't long ago that serial entrepreneur Elon Musk was frantically (and comically) tweeting about a new altcoin called Doge (DOGE 0.00%). Despite its cute, welcoming logo showing a Shiba Inu puppy, Dogecoin does not have any real utility. Unlike Bitcoin, Ethereum, or Solana (CRYPTO: SOL), Dogecoin is not widely used in crypto transactions such as purchasing non-fungible tokens (NFTs).
As of the time of this writing, the current market capitalization of Dogecoin is $10 billion, and Solana is $4 billion. For reference, Coinbase's market cap is $8.8 billion.
Stated another way, a crypto token that is widely thought of as a joke has a higher valuation than a market leader in the space. Moreover, Solana, which is very much still an unproven component of the blockchain, is valued at nearly half of Coinbase, which generates billions of dollars in revenue and is historically a profitable enterprise.
Is the risk-reward profile worth it?
Given the precipitous decline in Coinbase stock, investors may be wondering if now is a time to average down or if they should sell now and abandon crypto altogether. 2022 has been a challenging year for Coinbase. Trading volumes are declining, and therefore the company's primary revenue stream has taken a material hit. Furthermore, as revenue has decreased, there has been a strain on cash flow, which has led to cost-cutting efforts.
However, it does not seem that everyone on Wall Street has lost faith. ARK Invest CEO and longtime Bitcoin bull Cathie Wood has been on a buying spree as of late, increasing her total position in Coinbase from 6.9 million shares in early November to 8.5 million shares currently.
Perhaps CEO Brian Armstrong said it best in Coinbase's S-1 filing when he stated, "You can expect volatility in our financials, given the price cycles of the cryptocurrency industry. This doesn't faze us, because we've always taken a long-term perspective on crypto adoption."
While the crypto winter is likely to continue into 2023, investors who want exposure to crypto should consider Coinbase stock. To be clear, Coinbase stock absolutely carries risk. However, for investors with a long-term time horizon and those wanting exposure to crypto, Coinbase stock may be your best bet.