Cryptocurrency exchange Coinbase Global (COIN +0.11%) is up a stunning 72% this year. It remains a top pick of value investors, such as Ark Invest's Cathie Wood, who has repeatedly scooped up Coinbase shares on the cheap throughout 2023. For investors taking a long-term view of the crypto market, Coinbase has been an obvious choice.
But don't overlook the rise of decentralized cryptocurrency exchanges, such as Uniswap (CRYPTO: UNI), which continues to pose a significant competitive threat to Coinbase. In fact, Uniswap might actually have more long-term upside potential than Coinbase. Here's why.
Centralized versus decentralized exchanges
Coinbase is a centralized cryptocurrency exchange, and Uniswap is a decentralized cryptocurrency exchange. That might seem like an arcane technical factor, but it actually has tremendous implications for how people invest in crypto. In the wake of the FTX (CRYPTO: FTT) meltdown last year, the debate over centralized exchanges and decentralized exchanges flared up into public view.
From the perspective of individual investors, the biggest difference between centralized and decentralized exchanges is how your investments are handled. With Coinbase, you must sign up for an account, and your investments are held on the exchange. With Uniswap, you do not need to sign up for an account, and you connect to the exchange with your own blockchain wallet, which you control at all times.
This difference has tremendous implications if a cryptocurrency exchange such as FTX goes belly up. You might not be able to get your money back from a centralized exchange, but you don't have that same risk with a decentralized exchange. Thus, in the wake of the FTX debacle, a lot of scared money flowed from centralized into decentralized exchanges. For that reason, people started discussing Uniswap -- the largest decentralized exchange by trading volume -- as a potential threat to Coinbase.
Trading volume
Trading volume is a particular area of weakness for Coinbase that you may hear many analysts talk about. Usually, the narrative is very simple: "The crypto market is down, so people aren't trading, and that means people aren't using Coinbase." But the narrative is actually more complex. One reason trading volume at Coinbase is down is that people are moving to decentralized exchanges like Uniswap.
Image source: Getty Images.
You can see this dynamic reflected in crypto trading volume, which is the most popular metric for ranking the relative size of any exchange. Uniswap has seen more trading volume than Coinbase for four consecutive months now. This no longer looks like a momentary blip on the radar screen after the FTX meltdown -- it looks much more like a long-term trend.
Regulatory risk
Moreover, keep in mind that Coinbase is a much bigger regulatory target than Uniswap. Almost every month, it seems, the SEC is unhappy about something Coinbase is doing. In contrast, Uniswap has largely flown under the radar. Since it is completely decentralized, there is no CEO, headquarters, or executive team.
Thus, while we are now hearing about Coinbase planning to leave the U.S. market in search of more regulatory-friendly locales, there are not the same concerns for Uniswap. When the SEC recently released its list of 37 cryptos it considers to be securities, Uniswap was not on the list. So, purely in terms of regulatory risk, Uniswap appears a safer investment right now than Coinbase.
NASDAQ: COIN
Key Data Points
And the winner is...
If you consider only market capitalization and recent price performance, Coinbase clearly has the upper hand. Coinbase currently has a market cap of $14 billion, whereas Uniswap's is only $3 billion. And while Coinbase is up 72% for the year, Uniswap is actually down 4% for the year.
However, Uniswap is in front of a major trend: the move from centralized to decentralized exchanges. It is now topping Coinbase in terms of trading volume, and the recent meme coin craze has only intensified this trend. The only drawback, however, is that decentralized exchanges have become so popular that Uniswap faces a lot of new competition.
If you are looking for a high-risk, high-reward investment, Uniswap could be a sneaky choice. Trading at just over $5, it's well below the $28 mark where it traded just two years ago. If you buy into the long-term appeal of decentralized exchanges, Uniswap could represent an unbelievably overlooked value right now.
