In 2023, the cryptocurrency market's value surged from about $800 billion at the start of the year to more than $1.6 trillion at the end. After a terrible 2022, investors appear to be much more optimistic about digital assets.
Coinbase Global (COIN 5.68%) rode this wave of enthusiasm to new heights. The cryptocurrency stock soared 391% in 2023, a gain that trounced the Nasdaq Composite Index, although it has fallen 26% this year (as of Jan. 22).
But is Coinbase a magnificent crypto stock that investors should consider buying right now? Let's take a closer look.
A dominant trading platform
Amid all the chaos that took place in the cryptocurrency industry over the past couple of years, Coinbase has been a stalwart. Credit for that resilience goes to the founder and CEO, Brian Armstrong, who from the beginning made it a priority to work within the regulatory framework and with lawmakers, unlike many other crypto companies.
This has resulted in Coinbase not only surviving the industry's turmoil but becoming a leading trading platform. According to theblock.co, Coinbase's trading volume in December was $70 billion. This put it in fourth place globally.
Of course, focusing extensively on delivering a superior user experience has made Coinbase a top cryptocurrency brokerage and exchange operator among both individuals and institutions. The recent approval of 11 spot Bitcoin exchange-traded funds (ETFs) proves this. The vast majority of asset managers that launched this product use Coinbase as the custodian (more on this below), indicating its industry position as a trusted partner.
Driving greater recurring revenue
Armstrong and his team have long realized that in order to make Coinbase a viable business, the operations need to depend less on volatile trading volume and the fees that this provides and more on a stable and recurring revenue stream. That's why there's been tremendous focus on bolstering Coinbase's subscription and services offerings. This should also make the business easier to manage, as executives will have better visibility into the company's future revenue streams.
Within subscription and services, one of the ways Coinbase makes money is from custody solutions. This is where the approval of spot Bitcoin ETFs could be a major sales driver going forward. And the potential for Ethereum spot ETFs to hit the market adds greater financial upside.
In the most recent quarter, sales from subscriptions and services rose by 59% year over year to represent 52% of the overall company's revenue. These are exactly the trends that management wants to see. And it's something shareholders should be encouraged by.
High risk, high reward
After the stock's monster performance in 2023, plus a renewed sense of optimism surrounding the cryptocurrency industry, it's extremely easy for investors to view Coinbase stock as a no-brainer investment. But I think it's best to temper expectations a bit.
Coinbase should be viewed as a high-risk, high-reward stock. The risk comes from the fact that the cryptocurrency market is still in its relative infancy, and there is a lot of uncertainty about what things will look like five to 10 years from now. Should cryptocurrencies fail to gain mainstream adoption, with fewer real use cases than many are hoping for, and a painful regulatory burden, then I don't think Coinbase will do well at all. In fact, in this scenario, the company might eventually cease to exist.
On the other hand, investors who are bullish on the future of the crypto industry may not find a better way to gain solid exposure to the asset class. Coinbase could essentially be viewed as a bet on the growth of the overall market. But again, it all comes down to your risk tolerance and cryptocurrency conviction.
