3 Things About Coinbase Global That Smart Investors Know

coin base (coin -5.50%)One of the world’s largest cryptocurrency exchanges went public last April with a direct listing. It closed the first day at $328.28. Coinbase initially attracted the bulls. Bitcoin (Bitcoin -3.29%), ether (ETH -5.34%)and other cryptocurrencies surged to record highs.

However, over the past year, the cryptocurrency market has collapsed as rising interest rates pushed investors toward more conservative investments. The failure of a number of smaller cryptocurrencies and exchanges further damaged the fledgling industry’s reputation, spooked bulls and angered financial regulators.

Coinbase is currently trading at around $40 per share.

In June, Coinbase’s CEO warned investors that “crypto winter” could soon begin. Also, he laid off nearly 1 out of every 5 of his employees, but he’s still not making a profit. All of these issues make Coinbase a difficult stock to own during a prolonged bear market. But today, I want to focus on his three little-known facts about Coinbase and how they shape its future.

1. Coinbase relies heavily on institutional investors

Many retail investors bought cryptocurrencies for the first time in 2020 and 2021, boosted by social media recommendations, commission-free trading platforms and economic stimulus. However, large institutional investors have actually played a much larger role in pushing cryptocurrency prices to record highs. Last year’s high.

Last December, Kathy Wood of Ark Invest argued that if all institutional investors allocated just 5% of their portfolios to the top cryptocurrency, the price of Bitcoin could exceed $500,000. did. That’s why Wood bought Coinbase for some of Ark’s exchange-traded funds (ETFs). As of this writing, Coinbase still makes up his 3.2% of Wood’s flagship. Ark Innovation ETF (Arc -4.90%)4.6% Ark Next Generation ETF (ARKW -4.85%)and 5.4% of Ark Fintech Innovation ETF (Arkf -5.00%)All three ETFs have fallen more than 60% in the last 12 months.

Wood was interested in Coinbase because most of its trading volume came from institutional investors rather than individual investors. This difference sets Coinbase apart from retail-oriented platforms. robin hood When blockcash app. But as the following table shows, both institutional and retail investors fled as cryptocurrency prices plummeted.

Data Source: Coinbase.

2. Bitcoin is becoming a bigger part of business

Bitcoin’s price hit an all-time high of $67,567 last November, but many investors dismissed it as a legacy cryptocurrency that could not keep up with new players. Bitcoin’s price fell to around $18,000 today, but survived an industry-wide washout that has crushed many smaller cryptocurrencies and tokens over the past year.

As a result, Bitcoin has once again become a big part of Coinbase’s business. Bitcoin accounted for 31% of his total Coinbase trading volume in Q3 2022, compared with 19% in the same period last year. His share of Ether also rose from 22% to 33%. Meanwhile, Coinbase trading volume from “other crypto assets” plummeted from 59% to 36%.

Coinbase’s loss of trading volume from the more speculative altcoins could constrain short-term growth, but should Bitcoin and Ether emerge as the most resilient cryptocurrencies, long-term Earnings can also be stable.

3. The company’s debt problem is getting worse

As of the end of 2021, Coinbase had $7.1 billion in cash and equivalents. It also generated $3.6 billion in net income for the full year. At the time, it didn’t seem like his $3.4 billion long-term debt issued by the company was going to cause much trouble.

But by the end of the third quarter of 2022, Coinbase’s cash and equivalents had dwindled to $5 billion, posting a net loss of $2.1 billion in the first nine months of the year. Additionally, long-term bonds maturing in 2031 are currently down to around 50 cents on the dollar, meaning Coinbase has only a 50/50 chance of surviving another nine years.

These bonds have an interest rate of 3.625% and were issued last September along with another tranche of 3.375% bonds maturing in 2028. These will mature in 2026.

All of these bond sales took place last year, before the cryptocurrency market crashed and interest rates soared. Coinbase isn’t going bankrupt anytime soon and should be able to cover his first $1.4 billion debt maturing in 2026. Overwhelm its assets by the end of the decade.

buy bitcoin instead

Coinbase’s business is messy, capital intensive and could come under close scrutiny by regulators after the recent FTX debacle. If you still believe in the long-term potential of the cryptocurrency market, it makes more sense to buy a bitcoin or two than the crashing Coinbase stock.