Since hitting an all-time high of $357.39 in November 2021, it has been a terrible ride for Coinbase (COIN 4.68%). The leading cryptocurrency brokerage and exchange operator was devastated by the industry's massive downturn in 2022, a year that saw the company's net revenue decline 57.2% year over year, with an annual net loss of $2.6 billion. 

However, with a new year comes renewed optimism about cryptocurrencies and the businesses that support the industry. Coinbase shares are up a jaw-dropping 85% in 2023 (as of March 29), even outpacing the world's two most valuable digital assets, Bitcoin and Ethereum. 

Is it time for investors to take advantage of this momentum and buy the stock? 

Coinbase is a volatile business 

Rising interest rates caused investors to sour on speculative assets like cryptocurrencies, and the entire market shed roughly two-thirds of its value in 2022. Because 75% of overall revenue last year came from transaction fees, Coinbase's financials were decimated. When crypto-asset prices take a nosedive, trading volumes go down with them as interest from investors and institutions dries up. This helps explain why Coinbase's stock was down 86% in 2022. 

But this is a very lucrative business model in more favorable times. In 2021, for example, Coinbase's net revenue of $7.4 billion was up 544% versus 2020. And last year, the business generated a hefty profit of $3.6 billion, good for an outstanding margin of nearly 50%. You'd be challenged to find any company with that type of financial situation. However, as we've seen, the trend with digital-asset prices is extremely volatile and unpredictable...and so are Coinbase's operations. 

This means that daring investors should only think about adding Coinbase to their portfolios if, and only if, they adopt a truly long-term time horizon. Coinbase's management team has been pounding the table about its focus on diversifying revenue streams, trying to lean less on trading revenue and more on subscriptions and services, like staking, custody, and blockchain rewards, a segment that saw sales jump 53% year over year in the latest quarter. The hope is that once the adoption curve of cryptocurrencies transitions from one dominated by risky financial speculation to one of greater utility, Coinbase can be the leading gateway application for users to access the crypto economy. Surely, the company's financials could be much more stable in this type of scenario. 

That is the ultimate goal, but it comes with challenges. Speaking of staking, Coinbase is caught in a battle right now with the Securities and Exchange Commission (SEC) about its staking services, bringing into the spotlight the question of whether cryptocurrencies are securities or not. Unsurprisingly, Coinbase is aggressively fighting back, not least because the SEC's eventual ruling could send shockwaves throughout the crypto industry broadly -- and Coinbase's business specifically. Investors need to monitor these developments closely. 

Coinbase shares are cheap 

As of this writing, Coinbase's stock is trading at a price-to-sales ratio of 4.5, which is near the cheapest that shares have ever traded for in their short public history. This is a direct result of the sustained crypto winter that is going on. 

"Given the unpredictability of crypto markets, we have limited certainty around the rest of the year," management wrote in the fourth-quarter 2022 shareholder letter. While it's nearly impossible to try and forecast what the future holds for this company, Coinbase's leadership team is optimistic. Cost-cutting efforts, as exemplified by the announced January layoffs of 20% of the workforce, could help the business reach its stated goal of improving upon last year's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $371 million. 

To be clear, buying Coinbase stock today would mean that investors need to be bullish on the entire crypto ecosystem over the long term. With more users, developers, and capital flowing into the space, it's hard to envision a situation where Coinbase wouldn't be one of the few dominant enterprises serving both individuals and institutions that want access to digital assets. 

Investors who are mulling buying Coinbase must weigh the attractive valuation and leading market position with the ongoing uncertainty around regulation and the prospects for greater crypto adoption. The upside is certainly high but so is the risk. Therefore, it's best to be cautious with this stock.