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Should you buy Coinbase stock on the open market?

Coinbase Global Inc. enters the open market in the wake of three mega-trends: cryptocurrencies, stock listing and retail. Initial quotes indicate that the stock will open in the $ 350 region, close to the level at which the stock traded last month by private subscription, when it was valued at about $ 90 billion.

The much-anticipated direct listing of the cryptocurrency exchange, created eight years ago, is scheduled just as bitcoin is hitting all-time highs. The world’s largest digital currency by market cap traded at around $ 64,100 on Wednesday, with other coins including Ethereum, XRP, and Litecoin rallying.

And investors need new listings. Markets around the world have witnessed some of their busiest months in IPOs, with several firms raising billions of dollars from Airbnb Inc. to Deliveroo Holdings Plc.

At the same time, retail investors began to trade from phones, both stocks and cryptocurrencies. According to a new poll by E * Trade Financial, about 75% of retail investors believe the market is in some form of a bubble. However, bullish sentiment has now reached 61%, which is more in line with pre-pandemic sentiment.

All this gave rise to speculations that Coinbase will be valued at $ 100 billion, which is more than the combined value of the New York Stock Exchange and Nasdaq, where the firm will be registered.

So is it worth adding a company to your portfolio? This listing is considered by many to be an important milestone for cryptocurrencies as they gain popularity. But even the most optimistic bitcoin investor hasn’t forgotten the crash of 2018. And the fate of Coinbase is closely tied to the digital currency market.

Here’s what analysts say about the company’s performance and its pros and cons as an investment:

What’s going on with the company

Coinbase has benefited greatly from the latest Bitcoin boom. It is the largest marketplace in the United States where you can buy the most famous digital coin. Cryptocurrency exchanges are becoming an increasingly common means of investing in digital currencies. Exchanges charge a commission of a few percent for deposits and trading, which is one of the main earners for Coinbase.

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And she really makes money. The company said earlier this month that first-quarter earnings could range from $ 730 million to $ 800 million, more than double its full-year 2020 profit. Coinbase said it likely generated $ 1.8 billion in revenue in just the first three months of this year, already surpassing last year’s $ 1.3 billion.

Many people continue to use the firm’s services. Coinbase said it had 56 million verified users in the first quarter; on average, more than 6 million users made transactions every month.

However, the company clearly noted in its filing with the Securities and Exchange Commission that its success is due to fluctuations in the digital currency market, stressing: “Our operating results are highly variable and will fluctuate due to the extremely volatile nature of cryptocurrencies.”

When to buy

If you’re wondering where bitcoin is heading, the fact that bitcoin grew in 2021, more than doubling in value, is little said. As a result, the cryptocurrency market surpassed $ 2 trillion and Coinbase’s revenues skyrocketed. As bitcoin grows, so does the number of Coinbase users who, in turn, make more transactions on the exchange, which means that the company makes more money.

“The most compelling factor should be the price of Bitcoin and other cryptocurrencies,” said Julie Chariell, senior analyst at Bloomberg Intelligence for fintech companies and payment firms. “And Coinbase lets you play this game.”

Of course, there is no guarantee that Bitcoin will continue to grow. But the company has an optimistic theory: it has identified four price cycles for cryptoassets since 2010. Each cycle lasted from two to four years and increased the total value of all cryptocurrencies in the world. During these cycles, the price of a cryptocurrency peaks and then drops to a low. However, this low is higher than the peak of the previous cycle.

If you want to enter the world of cryptocurrencies using your usual investment methods: since the estimated value of Coinbase is closely correlated with the price of bitcoin, the exchange offers investors the opportunity to catch the cryptocurrency wave by investing in the company, not in the currency. The firm is now required to report earnings and communicate with investors in a more familiar way for retail traders.

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“Many investors are hesitant to invest in bitcoin or other cryptocurrencies because they cannot do it the way they used to,” said Teddy Fusaro, president of Bitwise Asset Management in San Francisco. “This will allow investors to buy or sell with a brokerage or retirement account, and this opens up other investment opportunities in the industry.”

If the presence of institutional players reassures you: In recent months, one of the biggest trends in cryptocurrencies has been the emergence of large financial institutions in this space. Tesla Inc. now accepts payment for electric vehicles in bitcoins; in addition, the company announced at the beginning of the year a $ 1.5 billion investment in the currency. Morgan Stanley and Goldman Sachs Group Inc. also plan to offer clients access to crypto investments.

According to Fusaro, who believes that the company is now focused on both the consumer and corporate clients, the influx of institutions into Coinbase has been “astounding.” One of the company’s growth strategies was to attract large financial institutions as clients, which would increase revenues and, possibly, increase stability. Services for institutions include advanced trading technology and custody services.

“Institutional growth can help improve stability somewhat,” he added. “As a rule, institutions take a long time to conduct a check, to enter a new market, but once they do this, they will not go anywhere.”

Such diversification could better protect the company from cryptocurrency price fluctuations.

When to bypass Coinbase

If you don’t like the strong correlation with bitcoin: after the rise, the fall should start, right? If this is how you feel about Bitcoin’s current takeoff, then chances are you will feel the same way about Coinbase.

As noted in the company’s prospectus, “Our bottom line is primarily attributable to Bitcoin and Ethereum transactions. If the demand for these cryptoassets decreases, and it is not compensated by the demand for other cryptoassets, this could negatively affect our business, operating results and financial condition. ”

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“It’s so great now because everything has been fine since the end of 2020,” said Chariel. – It’s easy to forget how bad it was at the end of 2018 and in 2019. And the company is really subject to sharp fluctuations. A roller coaster awaits them. “

If competition scares you, there is no doubt that cryptocurrencies are a promising direction now, and many companies are trying to enter this area and start making money. Therefore, it is quite expected that Coinbase is not the only exchange in the world: Kraken, Bittrex and Binance are just a few other exchanges. And although cryptocurrencies are gaining popularity in the mainstream, they have not yet gotten rid of all their shortcomings. Many firms are unregulated and can bypass Coinbase, which is becoming a large public company.

Strong competition usually means higher price risk. In the case of Coinbase, this could mean lower fees and lower profits.

“The competition is intensifying,” wrote Luke Saddards, an analyst at Pepperstone Group Ltd. in an email. “Coinbase must provide a holistic approach that enables additional functionality to keep users from leaving their ecosystem.”

If, after the debut of Deliveroo, you have an unpleasant aftertaste: it’s always interesting to watch a company go public and try to win a stake before potential success. But there is also always the possibility that the situation will develop in the opposite direction, and then the company may fail.

This has just happened to one of the most notorious IPOs in the UK. Food delivery company Deliveroo dropped 31% in the minutes after its London debut, to the disappointment of retail investors who were invited to participate in the IPO.

“I would urge anyone who wants to invest in any stock on the market to always do research and understand what you plan to participate in or buy,” said Craig Melling, head of investment at UK-based financial consulting firm Progeny Group Limited.

The firm does not currently include cryptocurrencies in its asset portfolio. But Melling noted that they, like many others, “are following with interest.”

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