Shares of cryptocurrency exchange Coinbase (COIN 5.68%) have made an incredible comeback over the past six months, more than tripling in that time. The stock is still trading below its all-time high, but much of the damage inflicted by the post-pandemic cryptocurrency crash has been undone.
Coinbase slashed costs last year, which was enough to push its net income into positive territory, despite a slight decline in revenue. The company ended the year with about 24% fewer employees, compared to the start of the year.
Higher interest rates also helped the cause. Coinbase's interest income more than doubled in 2023.
While there's no doubt that Coinbase is a much leaner company today, its fortunes are still deeply intertwined with the boom-and-bust cryptocurrency market. Transaction revenue is still nearly half of total revenue, and some of Coinbase's non-transaction revenue ultimately depends on sustained interest in cryptocurrency.
Just buy Bitcoin
Coinbase does well when cryptocurrency prices are high and rising, with its results driven by heavy transaction volume. In contrast, it does poorly after prices have plunged and investor interest has dried up.
If you look at how Coinbase stock has performed since the company went public in early 2021, two things stand out. First, Coinbase stock tends to rise and fall along with Bitcoin's (BTC -2.27%) price. Second, simply buying Bitcoin directly on the day Coinbase went public would have yielded a better return.
Bitcoin can flourish if Coinbase fails, but it's not likely the other way around. By buying Bitcoin, you expose yourself to the risk that regulators will take actions that permanently hurt your investment. By buying Coinbase stock, you'll be exposed to the same risk plus additional regulatory risks that could derail Coinbase's business model.
The U.S. Securities and Exchange Commission filed a lawsuit against Coinbase in June alleging that the cryptocurrency exchange was illegally operating as a securities exchange, broker, and clearing agency regarding 13 cryptocurrency tokens. A judge this week ruled that the case could move forward to trial, setting up a showdown that could rock the cryptocurrency industry.
Keep it simple
Buying Bitcoin is a bet that Bitcoin will remain relevant in the long run. Buying Coinbase stock is a more complex bet that Bitcoin will remain relevant, centralized exchanges will continue to play an outsized role in what's ostensibly a decentralized industry, and Coinbase will survive the regulatory barrage being hurled at it.
You only have to be right about one thing for your Bitcoin investment to work out, while you have to be right about a bunch of things for Coinbase stock to deliver solid returns. Given a choice between the two options, buying Coinbase stock looks hard to justify.
I fall into the Warren Buffett school of thinking when it comes to cryptocurrencies. "Rat poison squared" is one way the Oracle of Omaha has described Bitcoin. But if you feel the need to invest in the cryptocurrency industry, stick with a simple investment in Bitcoin or one of the new Bitcoin exchange-traded funds (ETFs). As risky as it is to invest in Bitcoin, investing in Coinbase is even worse.
