With its historic debut on the stock market in 2021, the Coinbase Global (COIN 5.68%) initial public offiering (IPO) marked a pivotal moment for the crypto industry. However, the post-IPO journey proved challenging as a crypto bear market took a toll on the company's financials, causing its shares to plummet by more than 90% at one point. As a skeptic myself, I too had doubts about Coinbase's potential for quite some time.
It was around first-quarter 2023 that a shift occurred, prompting me to take a fresh look at Coinbase as a viable investment opportunity. Had you asked me at the beginning of 2023 what my main concerns about the company were, I would have highlighted an unfavorable regulatory environment in the U.S. and continuous lackluster earnings reports.
But since then, Coinbase has proven agile and resilient, renewing my faith in the company's long-term potential. Here are three compelling reasons I believe Coinbase is on track to become a leading choice for investors' portfolios for years to come.
1. Evolving favorable regulatory landscape
The regulatory landscape surrounding cryptocurrencies has been uncertain and challenging in the U.S., but recent developments indicate a potential shift in favor of the industry. In March 2023, the Securities and Exchange Commission (SEC) issued a Wells Notice to Coinbase, a prelude to legal enforcement action. By June, an official subpoena was filed alleging the sale of unregistered securities on Coinbase's platform and threatening its primary source of income. While this understandably alarmed investors, there are a handful of reasons to believe that the SEC's plans to rein in Coinbase will be unsuccessful.
First, in a separate case brought by the SEC against the cryptocurrency XRP, a judge ruled that XRP was not a security. This generalizes some details, but the overarching result was viewed as a resounding success and a step forward in crypto's case for being outside of the SEC's purview. Since the SEC is only able to bring cases to courts and the final decision lies in the hands of judges, the result of the XRP trial provides a glimmer of hope for Coinbase's own legal battle.
Moreover, frustration among the public and politicians with the SEC's approach to crypto regulation is mounting and has led to calls for Congress to enact legislation. Multiple pieces of legislation to provide a clearer framework are under review. In a letter penned to the SEC, Representative Ritchie Torres of New York eloquently captured current sentiment when stating that it was past due to "give us some damn legislation so we can get on with life."
2. Robust earnings and diversified revenue streams
One of the other main concerns with Coinbase was its correlation to the health of the broader crypto market. During the most recent crypto bear market, the company's reliance on transaction fees led to a significant revenue decline. However, Coinbase proactively addressed this issue by expanding its subscriptions and services division, offering custodial services, staking, and interest-earning products.
This strategic move is beginning to show signs of paying off. As was evident in the Q1 2023 earnings report, Coinbase's dependence on transaction fees went from more than 95% in 2021 to only about 50% today. Adding to more profitable earnings, a rebound in the crypto market and record low expenses helped bolster Coinbase's position and close the gap on returning to profitability.
Data source: YCharts
3. Expansion overseas and growing institutional base
To add to revenue diversification, Coinbase took significant strides to expand its customer base with its "Go Broad, Go Deep" international strategy. In recognition of potential domestic challenges, Coinbase has made it a priority to solidify its role overseas. Today, it offers its Coinbase One subscription plan in 34 countries. In addition, the company's entry into financial hubs like Brazil, Singapore, and India further showcases its commitment to international expansion.
Coinbase also unveiled its International Exchange for institutional investors across the globe, catering to rising demand for leveraged trades via perpetual future contracts. These types of trades constitute 75% of total crypto trading worldwide and offer potential revenue growth.
Adding to the development of institutional products, Coinbase will play an integral role in the race among Wall Street giants like BlackRock, Fidelity, and Invesco looking to gain approval for the first spot Bitcoin ETF in the U.S. Fresh agreements between Coinbase and these firms will have the company serve varying roles to ensure smooth operation of spot Bitcoin by providing custodial services and market surveillance capabilities, and even serving as the broker for purchases, adding yet another source of income.
Coinbase's long-term promise
Recognition of Coinbase's potential might slowly be happening among investors. The stock is up more than 175% year to date, and up more than 50% in the last month alone. However, even with this recent surge, shares remain well off from their all-time high of $357.
With its price hovering around $100 today, an opportune moment for investors with a long-term horizon presents itself. As past uncertainties evolve into promising progress, a more favorable regulatory landscape, diversified revenue streams, and international expansion create a compelling case to gain exposure to one of crypto's most prominent leaders.
