If you were looking for a good swing trade, buying shares of Coinbase Global (COIN 7.04%) at the beginning of the year would have been a well-timed move. Since the start of 2023, Coinbase stock has rallied more than 80% as of this writing. After a quick run-up like that, some traders are undoubtedly wondering if now's the time to sell.
It might indeed be time to sell Coinbase stock. But that call has little to do with its recent rally.
Watch Coinbase's business, not the stock
Swing trading is a strategy that tries to make money in the stock market by buying and selling stocks over shorter time periods. Concrete statistical data is hard to find, but most sources agree that swing traders usually lose money. Even if you analyze trends and technical patterns, timing the short-term top or bottom is an overwhelmingly imprecise science.
Selling Coinbase stock now because of its strong year-to-date performance would be a swing-trade type of move. In coming days or weeks, the stock could drop -- or it could continue to rally. There's no way to be certain.
By contrast, buy-and-hold investing attempts to profit from the stock market in a different way. Rather than using the trend to predict the future stock price, investors try to predict the business's profits years in advance. There's overwhelming data showing a correlation between earnings growth and stock price appreciation.
For evidence of this point, consider the following long-term chart of the performance of the S&P 500 and the earnings per share (EPS) for the S&P 500.
Therefore, I wouldn't look at Coinbase's stock price when deciding if it's time to sell. I would rather try to predict its future earnings. And when it comes to Coinbase's future, there are some legitimate reasons for concern.
Troubles at Coinbase?
There's plenty of cyclicality in cryptocurrency markets. The two most valuable cryptocurrencies, Bitcoin and Ethereum, both fell substantially in 2022. Consequently, the overall crypto market cap fell 64%, wiping out more than $1 trillion in value. Under those circumstances, the revenue Coinbase generated from trading fees understandably declined.
Because crypto trading has its ups and downs, I'd say it's reasonable to assume this trading-related revenue will rebound for Coinbase eventually. Indeed, the price of Bitcoin is up 77% year to date, which means trading volume could already be recovering.
Image source: Getty Images.
Coinbase's management understands trading is cyclical, which is why it wants to expand more predictable revenue streams in subscriptions and services. And at first glance, it looks as if the company is making progress. While Coinbase's overall revenue dropped 57% year over year in 2022, revenue from subscriptions and services jumped by 53%.
However, drilling down into Coinbase's numbers for subscriptions and services is less encouraging. The biggest jump in revenue for this segment came from interest income.
Interest income for Coinbase rose from $25.8 million in 2021 to $327.0 million in 2022. The company really benefited from the rapid rise in interest rates. And don't get me wrong, that's pretty cool. But it could be fleeting.
Coinbase had more than $4.4 billion in cash and cash equivalents at the end of 2022, which is the source for some of its interest income. However, its cash position was down 38%. And it should decline further in 2023 because expenses are still high.
The other source of interest income for Coinbase is its partial ownership of USD Coin. This stablecoin has real cash deposits that earn interest. The size of its reserves can be measured by looking at USD Coin's market cap.
According to CoinMarketCap, USD Coin's market cap started 2023 at about $44.5 billion. It's now dropped to $31.3 billion. Perhaps it's merely a coincidence, but the market cap for rival stablecoin Tether climbed from $66.2 billion to $84.1 billion during this period. Therefore, Tether gained what USD Coin lost and more, suggesting that this market-share leader is taking even and even bigger slice of the stablecoin market.
The Coinbase conundrum
Looking at the next year or so, I'm concerned about Coinbase's interest income; its cash position is shrinking, and USD Coin is losing market share, putting this revenue stream on shaky ground. Also, revenue from trading could rebound. But cyclicality makes it hard to count on that.
While we haven't discussed it here, Coinbase is also working on projects that could boost the adoption of cryptocurrency products and services. That would be good for the industry overall and for Coinbase as a leader. That's something I like about the company. However, it's extremely hard to predict its future earnings at the moment, which is why now isn't a great time to buy, in my opinion.
Indeed, Coinbase had a net loss of $2.7 billion in 2022. And its earnings could get hit in 2023 if interest income declines. This being the case, one might choose to keep holding Coinbase stock. But I believe a decision to sell is easily justified.
