In the 21st century, cryptocurrency has become an important form of asset. The future of the cryptocurrency market has many speculations and hypothesizing surrounding it. The digital currency, even though it has been in play only for a decade or so, has established a wide and possibly growing market. 

What is Cryptocurrency

We are all familiar with the term Bitcoin. Bitcoin was the world’s first blockchain-based cryptocurrency to come into play in the year 2008. It was invented by Satoshi Nakamoto. Cryptocurrency is a virtual or digital currency.  ‘Crypto’ in the word refers to the records of these currencies that are maintained in cryptography. It is free from government involvement as it is a decentralized structure as opposed to a centralized authority. The different forms of cryptocurrency include Bitcoin, which is the most valued one, and other altcoins like Ethereum and EOS. One of the advantages of Bitcoin is the elimination of a third party like banks.

Some of the other benefits include transparency, ease in transferability and portability, and security. 

What is Coinbase?

Coinbase is a cryptocurrency company., one of the largest in the US.  It was started in 2012 with the initiative of making the process of sending and receiving Bitcoins easier, secure, and accessible. They provide a platform for this purpose i.e. for accessing the broader cryptocurrency. Coinbase was found in the year 2012 by Brian Armstrong. Coinbase is present in over 100+ countries with over 56 million users and 115,000 ecosystem partners.

Coinbase offers a wide range of products and services. They offer their services to both retail traders and institutional traders. A few of their products are Coinbase Wallet, Coinbase VISA Card, Coinbase Commerce, etc. In 2019 and 2020, they had net revenue of $483 million and 1.14 billion respectively.

Pros and Cons of Investing in Coinbase

If one were to answer the question ‘Is Coinbase a good investment?’ one has to be aware of the pros and cons of the company.

Pros

  • Only a low minimum is required to fund and maintain your account.
  • It has a system in which it alerts the customers about price fluctuations.
  • It is equipped with strong security that protects the customers’ wallets and funds.

Cons

  •  In comparison to the many other companies that exist in the industry, Coinbase’s prices are higher as they have a strong and easy-to-use platform. This may be a competitive disadvantage in the future.

Investing in Coinbase

Investing in Coinbase is basically investing in cryptocurrency. Earlier this month on the 14th of April 2021, Coinbase listed on NASDAQ, which is a stock market exchange that ranks second after the New York Stock Exchange in the US.  It was listed not through the Initial Public Offering Route but the Direct Listing Route. Indians can now participate in investing in Coinbase. This is where the question arises, is Coinbase a good investment?

Coinbase Stock Price

Before getting to the answer ‘Is Coinbase a good Investment’, let us first take a look at Coinbase stock price. Coinbase stock price saw a decline in the last couple of weeks. Starting with an opening price of $328, Coinbase now stands at $263.70. There a number of reasons speculated for the drop in Coinbase stock price. One of the major reasons being the decline witnessed by Bitcoin prices by 15%. 

Is Coinbase a Good Investment?

Since Coinbase is under Direct Listing, this poses a few risks to the investor. As it does not use banks for underwriting their stock, there is a risk of volatility in the beginning i.e. the level of price change with the security.

Although the company has had a greater net revenue than 2019 and 2020 combined, there are some factors to consider before investing in Coinbase, because not all scales tilt in favor of investing in Coinbase. 

Coinbase’s major product of sale is Bitcoin. There are many risks associated with owning Bitcoin. One of them being the risk of volatility, which will have a direct effect and impact on Coinbase as it is one of their two major products. When Bitcoin’s value came down in  2017-2019, Coinbases’s sales came down by half. The recent decline in Bitcoin value might bring down Coinbase’s MTU (Monthly Transaction Users).

Coinbase operates on a higher commission scale compared to its competitors. This should be a factor to consider before investing in Coinbase as it is not an impossibility for a competitor cryptocurrency platform to undercut Coinbase’s commission, they may even cut their trading fees to zero.

According to reports, the future of Coinbase does not seem to be a strong one. Even though they have done well in the past year they may not be able to meet the future expectations of profit and also their transaction margins might drop down to a new low. Yet another factor affecting the question, ‘Is Coinbase a good investment’ is that the cryptocurrency market is not a very popular or mainstream one.  A survey conducted by Civic Science showed that 66% of US adults are not interested in investing in cryptocurrency.

The risk of investing in Coinbase has been calculated using the Reverse Discounted Cash Flow or the DCF method by experts in the field. It has been calculated that if certain involved factors like NOPAT (Net Profit After Tax) and Revenue Growth can lead to results on either side of the spectrum. Coinbase’s future expected valuation stands at $100 billion. This strong valuation has a lot to do with the growing history of the company. But, given that there are other external factors to consider like the crashing of tech stocks, it is forecasted by experts that their valuation may be worth only $18.9 billion. On April 14th, Coinbase investors first saw a rise but were left disappointed with the stock closing at a 14% lower than its opening price. 

So, there are numerous factors to consider that are highly versatile in nature. It would be an incorrect conclusion to say that Coinbase is not a good investment. These factors in the future may also tilt the scales in favor of Coinbase. Nevertheless, one has to be cautious while investing in a company with such a high expected valuation. Consider and calculate, then make an informed decision.

PC: Image by WorldSpectrum from Pixabay 

Sources

https://www.livemint.com/

https://www.bloombergquint.com/markets/coinbase-backer-wilson-parlays-fantasy-bet-into-4-6-billion

https://www.marketwatch.com/story/should-you-buy-coinbase-the-valuation-is-ridiculous-11618254467

https://www.fool.com/investing/2021/04/12/2-reasons-the-coinbase-ipo-is-a-risky-buy/

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