Coinbase Global (NASDAQ:COIN) is a company that makes most of its money from consumer commerce cryptography on your platform. However, the company is trying to expand its business into other crypto spaces such as crypto storage. I am bearish on Coinbase because its profits are tied to Bitcoin (BTC-USD) prices, which appear to be in a state of euphoria, signaling a peak in trading volume. Furthermore, the company’s business model has been questionable so far and has been financed by debt, share dilution and Bitcoin appreciation.

Why Crypto Trading Volumes May Be Peaking

Crypto seems to me to be a speculative asset and one whose popularity may decline over time. Over the past few months, whenever I have discussed investing with someone, I have been asked if I trade Bitcoin. Alternative’s Crypto Fear/Greed Index, which measures crypto sentiment based on six different factors, recorded a mostly high Greed rating in March of this year.

Bitcoin seems to have captured people’s imagination because people like to get rich quick. Everyone and their dog was talking about meme stocks in 2021, and looking back, it signaled a euphoric spike in these stocks. The same thing happened with silver as a commodity in 2011, but fads inevitably fade.

Although Bitcoin has other uses, such as protecting against the devaluation of fiat currency and carrying out hidden (sometimes illegal) transactions, I believe that people mainly use it for gambling/speculation. Harming other uses of crypto, there has not been any devaluation of the US currency in the last two years, as evidenced by the US M2 money supply, and illicit activity puts crypto at risk of being banned.

Even as a currency, Bitcoin does a poor job because the items that can be purchased with it are few and far between and its value fluctuates dramatically.

Due to this euphoria and outlook, I think we may be close to another peak in demand for Bitcoin and other cryptocurrencies, which would be bad news for Coinbase. The company’s profits are tied to Bitcoin prices, reporting record profits in 2021, huge losses in 2022, and now increasing profits again in 2024. Rising prices attract traders, and falling prices scare traders. The other problem is that Coinbase has its own “crypto assets held for investment,” which can amplify losses.

The business model has some flaws

Despite its market value of US$53 billion, Coinbase averaged just $68 million in operating income for the past three years, which means its core operations are not very profitable. Because Coinbase needs to protect all of its customers’ cryptocurrencies and money, the company has relatively little capital available to invest, resulting in an unprofitable business.

To accommodate a flawed business model, Coinbase has been increasing its long-term debt and diluting shareholders. This has helped Coinbase bring money in the door in recent years.

The company now hopes to profit from other crypto-related services, including storing bitcoin for ETF providers like BlackRock (NYSE:BLK). However, with very small fees of 0.1% to 0.2%, I expect the revenue opportunity here to be in the millions and not billions. Additionally, as consumers now have the option to invest in Bitcoin ETFs with minimal fees, I expect this new income to merely replace lost trading income, resulting in little growth. We could also see downward pressure on Coinbase trading fees.

The valuation is reason enough to be bearish

Despite the issues I described above, and did not even discuss the SEC lawsuit underway, among other risks, Coinbase trades at 13.5x sales and 6.4x book value. If we compare this to its growth, the company’s book value per share has grown at a compound annual rate of just 3.5% since 2021, and its sales have been cut in half since then.

I like to look for companies that are obviously undervalued and, as Peter Lynch once said, “avoid longshots.” Coinbase seems like a long shot to me. That doesn’t mean it can’t increase its valuation, but looking at all the information available, I’m skeptical.

Is COIN Stock a Buy, According to Analysts?

Currently, nine of the 23 analysts covering COIN give it a Buy rating, resulting in a Moderate Buy consensus rating. O Coinbase Global’s average share price target is $234.10, implying an appreciation potential of 8.7%. Analyst price targets range from a low of $110.00 per share to a high of $325.00 per share.

The Bottom Line on COIN Stock

Coinbase stock looks like what Peter Lynch would describe as a “shot in the dark.” The valuation, at $53 billion, is quite high for a company that has produced just $68 million in average operating income in recent years. I am also bearish on Bitcoin, which I believe is approaching a euphoric peak and could become a fad of the past or face more government bans. With an ongoing SEC lawsuit and growing competition from Bitcoin ETFs, I think there could be more downside ahead for COIN stock.

Disclosure

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