As one of the stocks that provide investors with a sentiment gauge on cryptocurrencies markets, Coinbase (COIN) is an interesting case study to examine.
Indeed, the value of COIN stock is uniquely tethered to cryptocurrency prices. When Bitcoin, Ethereum, and the merry gang are outperforming, transaction volumes on exchanges such as Coinbase skyrocket. For investors in COIN stock, higher transaction volumes flow into higher fee-based revenue, and greater profitability for investors. (See Coinbase stock charts on TipRanks)
Accordingly, Coinbase has a lot to gain from the hype train continuing to chug along, dragging crypto prices higher. When highly-respected celebrity CEOs like Elon Musk go on Twitter and flip-flop on whether they’ll allow Bitcoin to be used as a transactional currency, cryptocurrency prices fluctuate wildly.
After all, these assets are much more volatile than your grandpa’s traditional investment. Indeed, the fact that a series of tweets from someone like Musk has the potential to drive the degree of volatility we’ve seen of late in crypto, makes investing in all cryptocurrency-related businesses, such as Coinbase, a much more difficult task.
That said, let’s take a look at whether investors may want to consider COIN stock in light of these drivers.
Attractiveness of Crypto Investing Matters to Investors in COIN Stock
Coinbase’s business model is quite simple, really. This company is a cryptocurrency exchange. As the company points out on its website, “Coinbase is the easiest place to buy and sell cryptocurrency.” Now that’s a simple, yet effective value proposition investors can get behind.
Moreover, as a crypto exchange that derives more than 90% of its revenues streams from “Transactions & Services,” one might argue that cryptocurrency markets' actions might not impact investors in COIN stock to the degree many believe. This is true to a point. Coinbase’s fee-oriented business model means that even if investors are selling their holdings, Coinbase will make money. Coinbase wins when there is massive buying volume, but also when investors are scrambling to get out. That’s good for investors in Coinbase.
However, the factor investors are closely watching is the rate at which new users jump aboard exchanges like Coinbase to buy or sell crypto.
Given the easy money many young investors have made on “YOLO” bets in the crypto space, a flood of first-time crypto investors has driven a significant portion of Coinbase’s overall volume of late. Should this influx of new first-time crypto investors slow, Coinbase could see a deceleration of growth.
Accordingly, investors will be keeping a close eye on how influential thought leaders drive crypto markets moving forward. Let’s stay on this idea a minute.
Elon Musk & Friends Have Market-Moving Power
The wild swings Bitcoin has seen in recent months have been accelerated by market-moving tweets from influential individuals such as Elon Musk.
Indeed, Elon Musk’s mid-May tweets sent Bitcoin on what looked to be a death spiral downward. After already losing some altitude from hitting an all-time high of nearly $65,000 per token in mid-April, Bitcoin has dipped to around $33,000 per token in recent days, losing more than 50% of its value in approximately one month.
With Bitcoin seeming to have stabilized around the $35,000 level of late on relatively normal volume, perhaps all will be forgotten in short order. However, it’s worth looking at what drove this volatility to get a feel for what could potentially be on the horizon.
On May 13, Musk tweeted that Tesla (TSLA) will no longer be accepting Bitcoin for Tesla purchases. Why? Tesla’s CEO cited climate concerns related to Bitcoin mining activities. On May 16, a series of cryptic tweets from Mr. Musk inspired further selling, with the implication being that Tesla may, or may have already, attempted to divest some of the $1.5 billion the company invested in Bitcoin. Mr. Musk followed these tweets up with a quick clarification that the company had not sold any of its holdings, at that time.
Regardless, the fact that Bitcoin plunged approximately 20% in short order on these tweets has confirmed the market-moving power of Mr. Musk. Investors in Bitcoin or Coinbase are de facto putting their returns in the hands a CEO who seemingly has not made up his mind on the crypto space.
Mr. Musk’s recent moves to push for greater green energy usage in the Bitcoin mining space led to the founding of the “Bitcoin Mining Council.” This council has gone live, with Elon Musk seemingly on the sidelines on this endeavor. However, Musk has recently flip-flopped on his initial decision to not allow Bitcoin for Tesla purchases, pending confirmation of “reasonable clean energy usage” from Bitcoin miners.
This statement's vagueness appeared to anger a significant portion of Elon Musk's fans.
Whether this apology will satisfy Tesla investors, and/or reignite interest in cryptocurrencies and equities acting as crypto derivatives such as COIN stock, remain to be seen. However, it appears one thing is certain – more volatility is likely on the horizon with crypto-related assets.
What Analysts Are Saying About COIN Stock
According to TipRanks’ analyst rating consensus, COIN stock comes in as a Moderate Buy. Out of 16 analyst ratings, there are 11 Buy recommendations, 4 Hold recommendations, and 1 Sell recommendation.
As for price targets, the average Coinbase analyst price target is $381.93. Analyst price targets range from a low of $225.00 per share to a high of $650.00 per share.
Overlaying Bitcoin’s price chart with that of COIN stock, investors may notice some rather high correlation between the two.
That’s not by accident.
Indeed, investors appear to be factoring in a high correlation between Bitcoin prices and transaction volumes for exchanges. Given how new Coinbase is (the company only IPO’d in mid-April), we have yet to see how transaction volumes fluctuate with crypto prices. For now, it appears Bitcoin prices will act as a proxy for this key metric growth.
Accordingly, investors in Coinbase ought to be wary of the high volatility in this sector for now. This appears to be a stock that could be a double-up, or a big loser, depending on which way the winds blow. Thus, investors may be well-served by practicing proper portfolio discipline in sizing positions in accordance to their risk tolerance levels.
Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.