As one of the top crypto exchanges in the world, Coinbase Global (COIN +1.32%) is unlike many other U.S. companies simply because it is a publicly traded company whose business model solely depends on cryptocurrencies.
There is no denying that Coinbase is a leader in the industry in the U.S., but just because it's a front-runner doesn't necessarily mean its stock is worth buying -- however, that could be changing.
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Noteworthy progress
For quite some time, I have been cautious about buying Coinbase for a multitude of reasons. For one, the company's bottom line struggles during crypto bear markets. Due to its reliance upon transaction fees serving as its primary means of revenue, when fewer trades are occurring on the exchange, fewer profits are being made.
However, as a testament to the company's innovation, it has prioritized other revenue-generating business models outside of just transaction fees. Coinbase now boasts a diverse set of income-producing products. Some of the most lucrative include a staking service that helps users easily stake their crypto, the expansion of its offerings to institutional clients, and even the launch of its own Layer 2 blockchain called Base, which developers can use to build decentralized applications.
There are even rumors that the company is looking to develop a cryptocurrency pegged to the U.S. inflation rate and offer holders a way to maintain their wealth, even as inflation remains at multi-decade highs.
These innovations are truly novel and worthy of recognition. Yet, despite these new products, I couldn't get myself to become a buyer of Coinbase due to two larger and much more significant reasons: increased regulatory pressure and an unfavorable crypto environment in the U.S.
Unfavorable regulation in the U.S.
Since the fallout of FTX -- then one of the world's largest cryptocurrency exchanges -- in November 2022, regulators in the U.S. have been ratcheting up efforts to take the cryptocurrency industry head-on. In just the first few months of 2023, multiple allegations, investigations, and lawsuits have targeted cryptocurrency companies operating in America.
One of the most alarming was with Kraken, another cryptocurrency exchange. In February, the Securities and Exchange Commission (SEC) fined the company $30 million and forced it to cease offering its staking product (one very similar to Coinbase) as it was deemed to meet the criteria of an unregistered security.
Yet, the most damning obstacle so far for Coinbase might be the Wells notice it received from the SEC in late March 2023. Simply put, a Wells notice means the SEC has finalized an investigation and plans on bringing about a formal case against the company.
After hearing of this development, the entire prospect of Coinbase's operations seemed to be in jeopardy. As such, I wanted nothing to do with its stock.
NASDAQ: COIN
Key Data Points
A new strategy comes into focus
But that has changed almost completely due to one primary reason: Coinbase is going international. Even before the Wells notice, the company had some roots in other countries. But now, there is a united effort to expand its offerings in more crypto-friendly countries.
This past March, Coinbase announced its eight-week Go Broad, Go Deep global expansion strategy targeting economies on six other continents. The announcement said Coinbase would prioritize offering products in countries such as the U.K., Brazil, Switzerland, Hong Kong, Singapore, United Arab Emirates, Australia, Japan, and Canada. All countries where crypto is in a more favorable position than in the U.S.
It has been a while since the announcement, but just this month, Coinbase finally made progress on its effort to go global. Citing its high trading volumes (and potential for profits), the company launched its own international derivative exchange, which will allow users to trade cryptocurrencies with up to 5x leverage. If this is a sign of things to come, consider me a buyer.
The bottom line is that Coinbase has a proven record of success in this unique economy. Since 2012, the company has navigated tumultuous crypto winters, yet somehow consistently finds its footing when a bull market returns.
With the company now choosing to solidify its presence on a global scale, the threats of unfavorable regulation to its business model here in the U.S. look to be but a minor obstacle as Coinbase explores new opportunities abroad, thereby increasing its potential customer base by billions.
It will likely take some time before the benefits of these efforts start showing up in earnings reports, but that makes buying the stock today a potentially lucrative decision. In preparation for Coinbase becoming a global leader in the cryptocurrency market, investors can pad their portfolios today while the stock trades for 80% less than its all-time high. Should a crypto bull market return and Coinbase can build out its global presence, the company (and investors) could be set up for a profitable future.
