On April 14, crypto investors will have an opportunity to celebrate the two-year anniversary of the Coinbase Global (COIN 4.75%) initial public offering (IPO). When Coinbase went public in 2021, it was easily one of the most-hyped moments in the crypto industry, which was already in the midst of one of its biggest booms ever. Since then, however, the path forward has been challenging, to say the least. Coinbase is now trading at about $62, a stunning decline from the company's IPO price of $381.
It's easy to dismiss Coinbase as being overvalued and overhyped, but there are a lot of very smart investors out there -- including Cathie Wood of Ark Invest -- who continue to accumulate Coinbase at a prodigious pace. If you're willing to take a contrarian approach and rethink some of your earlier assumptions, Coinbase stock might actually be undervalued.
Retail vs. institutional investors
Back in April 2021, analysts assumed that retail investors were the key to Coinbase's future. After all, many of the biggest Wall Street banks were still dismissive of crypto, and it looked like mainstream institutional investors were never going to come around to the idea that crypto might actually be an asset class worth investing in. As a result, it seemed appropriate to value Coinbase according to metrics such as monthly active users and monthly trading volume. The more investors using the platform, the more profitable Coinbase becomes, and the higher it should be valued, right?
Image source: Getty Images.
Wrong. It turns out that big institutional investors might be the key to Coinbase's future, not small retail investors. The same Wall Street banks that once mocked crypto are now embracing it, and the same institutional investors who once scoffed at Bitcoin are now tempted to buy it. The defining moment for Coinbase came in August 2022, when it announced a major new partnership with BlackRock, the largest asset manager in the world. According to the terms of the partnership, Coinbase would offer crypto trading services to BlackRock's institutional investors, who were clamoring for a way to get access to crypto.
Crypto trading fees
Two years ago, most people thought crypto trading fees were going to be the key to profitability for Coinbase. This makes sense if you think of Coinbase as a cryptocurrency exchange for retail investors. But guess what? The market downturn in 2022 forced Coinbase to search out entirely new sources of revenue to survive, and that is helping to diversify Coinbase's overall revenue stream.
Case in point: Crypto staking, once an insignificant part of Coinbase's revenue mix, now accounts for 10% of all revenue. And Coinbase has found plenty of other sources of revenue, including subscription fees. Coinbase also has a revenue sharing arrangement with Boston-based payment company Circle, the issuer of USD Coin. So it might be unfair to value Coinbase simply as a one-trick pony anymore.
The regulatory outlook
When the Coinbase IPO took place, everyone knew that regulatory risk was part of the story at Coinbase. But nobody could have imagined just how much of a nightmare this regulatory risk would become. The Securities and Exchange Commission (SEC), for example, has gone after Coinbase for a wide range of purported infractions, such as offering crypto tokens for trading on its platform that the SEC considers to be securities. The latest brouhaha is over crypto staking, which the SEC considers to be a form of securities offering.
What investors also didn't anticipate two years ago is just how hard Coinbase would be willing to fight each of these claims. And, indeed, it does appear at times as if Coinbase takes a modern 21st century approach to crypto, while regulators rely on outdated regulations and court rulings dating to the mid-20th century.
Coinbase is now taking its regulatory fight to the next level with the recent launch of Crypto435, a lobbying initiative designed to inform and advise the 435 members of Congress. This is a way to influence the future regulatory framework of crypto.
What does the future hold for Coinbase?
Most importantly, Coinbase continues to innovate. Some of these efforts have worked out, such as its bet on crypto staking as a viable source of revenue. Others have not, such as the introduction of its non-fungible token (NFT) marketplace one year ago. At the time, the thinking was that NFT trading fees might provide a needed patch during bleak times in the crypto market.
If you are willing to rethink your original assumptions about Coinbase from two years ago, the stock could be undervalued. Remember -- back in April 2021, the smartest people on Wall Street thought Coinbase was a $250 stock. At its current price of about $62, Coinbase might represent real value, as long as you're willing to embrace a contrarian mindset.
