Cryptocurrency may be the most-hyped asset class of the past decade. Crypto started off largely as an academic discussion, as alternatives to traditional currency began to take shape. But over the past few years, the rise of the retail investor served as a catalyst for the growing interest in crypto tokens. Whether it is digital art such as non-fungible tokens (NFTs), traditional tokens like Bitcoin (BIT -0.55%) or Ethereum (ETH -0.22%), or meme coins pumped by notable public figures, cryptocurrency started to peak.
One of the most notable companies in the crypto industry is the trading exchange Coinbase (COIN -0.34%). The company's stock price has been volatile over the last few years, which isn't entirely surprising, given the waning enthusiasm in crypto during these uncertain economic times.
One silver lining may be that after the collapse of several competitors, perhaps most notably FTX, Coinbase is still standing. And Wall Street is buying.
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A modern-day tale of crypto
When cryptocurrency started to gain momentum and become part of the modern-day lexicon, the casual investor almost always referenced Bitcoin. One of the biggest reasons Bitcoin appeared so attractive is because not only was it the first crypto, but there is a finite amount of it. Unlike traditional fiat currency like dollar bills, Bitcoin cannot be printed on demand. Hence, Bitcoin has been labeled "digital gold" by people ranging from social media influencers to hedge fund managers.
Not long after Bitcoin's rise in popularity, software programmers and tech visionaries hopped on the bandwagon, claiming that new tokens with different use cases and utility would be created. Perhaps the fever pitch occurred during the height of the COVID-19 pandemic, when corporations of all sizes started publishing (or minting, as it's called in crypto) virtual assets such as paintings, music recordings, and more and selling the rights to these digitized goods in the form of NFTs.
Unsurprisingly, entrepreneurs noticed a gap in the marketplace and set out to facilitate crypto transactions. It seemed like overnight new trading venues started popping up. The largest and most notable were Coinbase, FTX, Gemini, and BlockFi, among others.
FTX famously raised billions in venture capital funding, and was viewed as Coinbase's largest competitor. However, in late 2022 the company found itself at the root of an alleged Ponzi scheme and filed for bankruptcy. Prices of tokens such as Bitcoin and Ethereum, already plunging, cratered. Trust in the crypto economy was losing steam, and not long after FTX's collapse, BlockFi also filed for bankruptcy.
Now, as crypto battles a public relations image problem, Coinbase has navigated the storm to the best of its ability. Between major reductions in the workforce and decreased usage on the platform, Coinbase has somehow managed to survive. But after its earnings report a couple of weeks ago, some Wall Street investors believe Coinbase may have some long-term secular momentum.
Last one standing
For the year 2022, Coinbase reported $3.1 billion in total revenue. By contrast, total revenue in 2021 was $7.4 billion. This material decline in revenue flowed straight to the bottom line, as the company reported a net loss of $2.6 billion in 2022, compared to $3.6 billion net income in 2021.
While the financial results can be attributed to macro events such as the downfall of FTX, Coinbase's own key performance indicators shed light on the current investor sentiment for crypto. Total assets on the platform decreased from $278 billion in 2021 to $80 billion by the end of 2022. Furthermore, trading volume fell from $1.7 billion in 2021 to $830 million in 2022, indicating traders were less active.
As a result of this underwhelming performance, Coinbase stock has fallen more than 60% during the past year. Yet despite the mounting losses and cratering share price, the stock is actually up more than 80% year to date as of the time of this article.
Given the extremity of the ebbs and flows in the company's revenue and profitability, it's not surprising to see the stock price whipsawed so dramatically. Additionally, traditional metrics such as price-to-earnings or price-to-sales may prove less useful for Coinbase, given the degree to which the company's performance fluctuates.
By zooming out, investors may be able to discern that despite the lackluster financial performance, the stock may be undervalued. It could be argued that cryptocurrency still has long-term secular tailwinds.
Although use cases and specific tokens are still being developed, the advent of digital currency does not seem to be going away. Moreover, even though its performance does leave much to be desired, Coinbase is still standing after its competitors have fallen.
Who on Wall Street is noticing?
Cathie Wood is the chief executive officer of Ark Investment Management. Wood has become a fixture in the headlines of financial journals due to her bullish stance on growth companies. More specifically, Wood often forgives short-term losses of businesses she believes will become industry leaders in the future.
While Wood has long been a supporter of Bitcoin, it appears that her fund may also be a fan of Coinbase stock. According to her investment profile, Wood sold a large stake in Coinbase over the summer, slashing her total position from 8.4 million shares to 2.5 million.
Starting in August, the investment manager began slowly accumulating shares in Coinbase again and went on a buying spree in November and December in particular when the stock was trading in the $30 price range. Wood seems to have doubled down on her bullish stance, as she bought nearly 1 million more shares between January and early this month at average prices of about $60 per share.
It should be noted that cryptocurrency is in its early days. It is, for now, a highly speculative asset class. However, given the Coinbase's survival in an otherwise turbulent market, coupled with the support of a prominent tech investor, it may warrant a small position in your portfolio. At the least, if you are already a holder, now may be a time to add more and lower your cost basis.
