Coinbase Global (NASDAQ: COIN) appears to be a bad investment. The stock tripled in 52 weeks. The bitcoin exchange operator's shares are worth 103 times free cash flows and 950 times earnings. Even experienced growth investors seek for the smelling salt.
Many investors won't look deeper. Not interested in this expensive crypto stock, they move on. Could be a big error. Coinbase is in the traditional four-year crypto boom-bust cycle, and its bottom-line profits have barely above breakeven. I'll give you two reasons to buy Coinbase stock.
1. Coinbase's business is sophisticated. Coinbase stock appears costly. The crypto industry is booming after another harsh winter. Over the past year, Bitcoin (CRYPTO: BTC) rose 138% while Ethereum (ETH) rose 85%. Cheap altcoins like Solana (CRYPTO: SOL) are rising, with a 730% one-year gain. For good reason, Coinbase returned 270% during the same period.
Bitcoin and Ethereum tokens don't add value to the company. It holds little digital money and solely uses it to help consumers exchange crypto. Coinbase records digital asset prices as operations costs, not revenue.
Instead, transaction fees, interest, blockchain rewards, and subscription-style services generate revenue. Pretty much like a regular bank, but with various financial assets. The company's finances depend more on cryptocurrency interest than on individual cryptocurrency prices.
This crypto cycle differs from previous as Coinbase has been there from the early days of crypto. The exchange, founded in 2012 with three cryptocurrencies and one Bitcoin valued less than $7, has seen three Bitcoin halving cycles. The fourth one will halve Bitcoin mining rewards next week. Each Bitcoin halving has caused a huge rise in values, bringing the crypto industry back into the spotlight and increasing transaction volumes across digital coins.
This time, the scenario will repeat, but with changes. ETFs related to Bitcoin's spot price are included. Spot Bitcoin ETFs offer a novel method to invest in this emerging asset class. Instead of registering a new Coinbase or other crypto exchange account, learning new trading regulations, and gaining direct ownership of digital currency, you can now trade Bitcoins like stocks. The SEC authorized 11 applications for this new ETF type in January, and they manage about $53 billion in Bitcoin assets.
As spot Bitcoin ETFs were expected, the fourth halving rally began early. Many cryptocurrencies and related equities have risen over the recent year because to halving forecasts, ETF plans, and lower economic inflation. In addition to this strong launch, Coinbase will see larger trading volumes from the new ETFs.
But why would that be good? Aren't these ETFs reducing Coinbase's crypto trading volume? Thanks for asking. Most ETFs use a third-party custodian to trade Bitcoin and store crypto assets in a secure digital wallet. Nine of the 11 ETFs use Coinbase.
"We're earning revenue, not just on custody, but also on trading and financing," Coinbase CEO Brian Armstrong said on a February earnings call four weeks after the ETF approvals. Crypto will be part of every diversified portfolio soon because every institution is holding it. Financial institutions are adopting crypto. This is great, and Coinbase is our most trusted partner." Thus, Coinbase generated fresh money while boosting the bitcoin market. Yes, win-win.
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