Coinbase (NASDAQ: COIN) is a United States-based company that maintains and operates a cryptocurrency exchange. It also provides digital wallets to help consumers store their holdings. It is the largest cryptocurrency exchange in the US and the third-largest globally.
But, despite its popularity, the stock has declined by over 50% from record highs due to the pullback in the cryptocurrency market. Investors, however, are still quite optimistic about the long-term prospects of Coinbase. Cryptocurrencies are here to stay, and Coinbase should be able to maintain its position as a global market leader.
Coinbase - A vital constituent of the crypto economy
Similar to most other exchanges, Bitcoin trading initially accounted for most trading volumes on Coinbase. However, with time, its dependency on that particular cryptocurrency has reduced, and by the fourth quarter of 2021, Bitcoin accounted for only 16% of its total trade volume. At present, this Coinbase offers both the retail and institutional customers 139 assets for trading and 172 assets for custody purposes.
Coinbase used to derive most of its revenue in the form of transaction fees. But the crypto market is susceptible to extreme levels of volatility, and the unpredictable quarter-to-quarter trading volume might frustrate the investors in the long term.
Therefore, the company is now focusing on expanding its subscription and services offerings like blockchain rewards and custodial fees. Moreover, two other projects, Coinbase Cloud and Coinbase NFT, will also be released soon. The former would help the developers build blockchain projects on Coinbase's infrastructure, and the latter will aid in the minting and trading of NFTs.
So, as the crypto economy transitions from the investment phase to the utility phase, Coinbase will be in a perfect position to reap maximum benefits due to this secular shift. The company can become the one-stop destination for almost every kind of service one may need in the new decentralized world.
Huge cash reserves
Coinbase’s growth over the years has been exponential, and one of the best aspects of COIN stock is its robust profitability metrics despite the below-average performance of the crypto market in general.
The company’s revenues surged by 144% to $1.14 billion in 2020, and top-line growth skyrocketed by a whopping 545% to $7.36 billion in 2021. While Coinbase reported a loss in 2019, its net income rose from $322 million in 2020 to $3.62 billion in 2021. Coinbase also ended 2021 with $7.1 billion in cash and $1 billion worth of cryptocurrency on its balance sheet.
As most of its revenue comes from cryptocurrency transactions, the trading volume, monthly transacting users (MTU), and assets on the platform play a massive role in its growth. Compared to 2020, Coinbase’s MTUs grew by 307% in 2021. Further, the trading volumes and assets have increased by 766% and 209%, respectively.
However, due to the ongoing pullback in the crypto market, its quarter-over-quarter growth has been bumpy. Further, due to a weak macro environment, rising inflation rates, and the possibility of multiple interest rate hikes would mean a shift towards lower-risk investments may gain pace in the near term. Coinbase expects monthly transacting users to range between five million and 15 million in 2022. At the lower end, it indicates a decline of 56,% while the higher end estimates suggest growth of 32%.
The final takeaway
Cryptos were one of the hottest trends last year. In July last year, a study by the University of Chicago said about 13% of Americans had traded cryptocurrency during the previous 12 months. This indicates that a tiny niche of investors have adopted the digital assets, and there is enormous scope for further growth.
Analysts tracking Coinbase stock have a 12-month average price target of $312 which is 80% high than its current trading price.