Coinbase Global (COIN 5.68%) may be the most polarizing crypto stock you can buy right now. While the stock is up 136% over the past 12 months, investor sentiment appears to be cooling fast. Since the start of the year, Coinbase is down 28%.
But I'm not giving up on Coinbase. While it might be fashionable right now to say that the new spot Bitcoin (CRYPTO: BTC) exchange-traded funds (ETFs) will have a significant negative impact on Coinbase, I'm not so sure that's the case. Here are three key questions to ask before you decide to abandon Coinbase.
Can Coinbase offset a decline in Bitcoin trading volume?
Admittedly, the Coinbase bears are correct on one key assumption: The new spot Bitcoin ETFs will likely result in a decline in the amount of Bitcoin that gets traded on the main Coinbase-trading platform. That's a big deal because Bitcoin accounts for about a third of all crypto-trading volume on Coinbase. Over time, any behavioral shift from trading Bitcoin to trading Bitcoin ETFs could result in a continued loss of high-margin fee revenue from retail traders.
But that's only part of the picture. In theory, all of the excitement and enthusiasm around the new Bitcoin ETFs should bring more attention to cryptos not named Bitcoin. While Bitcoin does account for about half of the entire crypto market right now, there are more than 150 different cryptos to trade on Coinbase. If you believe in the "rising tide lifts all boats" theory, then a rising tide for Bitcoin should boost trading in other cryptocurrencies. If there is a sustained crypto rally led by Bitcoin, it could bring a lot of retail traders off the sidelines and into the crypto market.
Can Coinbase pivot from a retail to an institutional focus?
While many investors perceive Coinbase as a retail-only trading platform, the fact is that Coinbase has been steadily pivoting to more of an institutional focus for nearly two years. There will always be some institutional investors that want (or need) to trade Bitcoin directly, and that's where Coinbase comes into the picture.
Back in August 2022, Coinbase initiated a historic partnership with BlackRock Inc. (NYSE: BLK), the largest asset manager in the world. The goal was to offer BlackRock's institutional customers a trusted platform on which to trade and manage crypto.
Then, when BlackRock became one of the first issuers to receive Securities and Exchange Commission (SEC) approval for its new ETF product, it chose Coinbase as its crypto custodian. And now it looks like Coinbase will be the custodian of eight of the 11 spot Bitcoin ETFs. In a best-case scenario, Coinbase will be able to offset some of the loss of its retail-trading volume with this new source of fee revenue.
Can Coinbase continually find new innovative products to offer customers?
And finally, there's something that I would call Coinbase's secret sauce -- the ability to come up with innovative product offerings in response to changes in the crypto industry. Yes, sometimes these products flame out, like when Coinbase decided to offer non-fungible token (NFT) trading on its platform in 2022. This was supposed to jack up trading volume, but nobody seems to buy NFTs these days.
Image source: Getty Images.
However, some of Coinbase's innovations could eventually work out. One that I'm keeping my eye on is the launch of the Base blockchain project back in August. This was the first-ever blockchain launched by a publicly traded company, and it immediately attracted a lot of buzz.
As I see it, Base has the potential to power new decentralized finance (DeFi) initiatives for Coinbase. That's because Base is a Layer 2 blockchain for Ethereum (CRYPTO: ETH), enabling the creation of entirely new financial products, including real-world tokenized assets that can then be traded on Coinbase.
Coinbase and the democratization of crypto
Making the bull case for Coinbase can be difficult right now, especially with Cathie Wood of Ark Invest selling Coinbase and shifting attention to the new Bitcoin ETFs. And yes, JPMorgan Chase (NYSE: JPM) recently downgraded Coinbase as a result of the new Bitcoin ETFs.
However, at the end of the day, the continued democratization of the crypto market via the new Bitcoin ETFs is a big win for Coinbase. As a result, I'm still long-term bullish on Coinbase. As long as Coinbase can continue to find new revenue streams to offset any loss of retail-trading volume, and as long as Coinbase can come up with innovative new product ideas, I'm still buying.
