With the Coinbase IPO building steam, it's bound to also draw some negative attention. But this could be a great way to profit from the rising popularity of cryptocurrency without holding any.
It's not a perfect rule. But I always tell myself that if I hear two or more people making fun of a stock at a party, I'm buying it.
This has been true for investments like Bitcoin and Tesla Inc. (NASDAQ: TSLA) in the last year.
Tesla is up 155% after Forbes said it was "47% overvalued."
A financial planner on CBNC urged readers not to buy Bitcoin, that cryptocurrencies would collapse. Since then, Bitcoin has gone over $40,000, a 700% return from when the article was written.
Bitcoin recently enjoyed its fourth massive bull market – nearly a 350% return in 2020. And Tesla is up a whopping 709% in that same time.
This rule goes double for Coinbase stock.
Now, the Coinbase IPO hasn't happened yet, but that hasn't stopped opinion makers from dismissing the company.
Many traditional investors have yet to go near a cryptocurrency. A Coinbase IPO would scandalize them all the more. But they aren't the only doubters – crypto-lovers are haters all the same.
Coinbase, as a crypto exchange, cuts right between our comfort zones of tradition and progress. How it goes about this may define cryptocurrency for decades.
The company filed for IPO with the SEC in December. Many details are yet to be disclosed. But one thing's for certain: The Coinbase IPO will be one of the most polarizing public offerings of all time.
The question remains whether Coinbase stock is a buy or not once it hits the public exchange. And if it is a buy, traders want to know the best time to jump in.
This will become clearer the closer we get to the offering. But what we know about Coinbase stock right now could hint at a possible strategy.
What Is Coinbase?
Coinbase is essentially a digital "bank" for all cryptocurrencies. The San Francisco company was founded in June 2012 by Brian Armstrong and Fred Ehrsam.
The former is a software engineer who used to work at Airbnb Inc. (NASDAQ: ABNB), and the latter is an ex-trader from Goldman Sachs Group Inc. (NYSE: GS). Put those things together, and you get software-based money.
One reason for Coinbase's popularity is that it is much easier to use than the many specialty "digital wallets" out there. The many moving parts to crypto investing once seemed inaccessible to average investors. You had to stash your coins on a hard drive, keep track of your encryption keys – and if you forgot your keys, it was game over.
Today, anyone with a computer or phone can make a Coinbase account and easily purchase as much of a crypto coin as you like. The service offers access to about 50 cryptocurrencies right now.
The company also offers a crypto "wallet" to enable purchases and better security for its users.
Coinbase is probably the best-known exchange for crypto trading, but it's not the only one. In fact, there is a diverse range of options for crypto buyers to choose from. They vary in purpose, coins offered, and levels of security.
Binance is a competing exchange, for instance, founded in 2017. It's the largest crypto exchange in the world by volume. It can access over 150 coins.
A difference is that Binance was founded in China, while Coinbase operates stateside. Binance was also hacked for $40 million of Bitcoin back in 2019, causing many to lose trust in the exchange – and possibly crypto in general.
That's one of the big controversies over whether crypto is worth investing in. However, no online exchange – of any kind – will be 100% safe.
Here's the real scoop on why the Coinbase IPO is such a bombshell.
Why the Coinbase IPO Is Controversial
The success of a Coinbase IPO is tied to the adoption of cryptocurrency into normalcy. That appears to be happening, but it's slow enough to make some investors worried.
Bitcoin was created in 2009 by Satoshi Nakamoto in response to the 2008 financial crisis. It's touted as a decentralized hedge for an unstable fiat-dollar.
But Bitcoin itself has proven to be extremely volatile.
Yes, the cryptocurrency had a roaring run from around $5,000 to above $41,000 in the last year. That's about double its last high of $19,000 back in 2017.
We can easily forget when, from that $19,000, Bitcoin crashed back to around $3,000 within a year.
Bitcoin fanatics, or "Hodlers of Last Resort," as they are called, will argue that scarcity is what makes the coin valuable. There is a limited amount. However, before Bitcoin can become "digital gold," it must prove its worth to the old money.
In the last couple months, Bitcoin has passed $30,000 to the chagrin of its bears and the joy of its "Hodlers."
Yes, Bitcoin has steadily remained above its psychological barrier of $30,000. But again, Bitcoin alone doesn't speak for Coinbase or crypt on in general.
Crypto-bears can find another example of instability in Ripple (XRP), the world's third-largest crypto behind Bitcoin and Ethereum at $12.5 billion market cap.
Ripple has mostly traded under $1, with a couple exceptions. It soared all the way to $3.37 back in 2018. That might not sound like much, but it made some millionaires. Its last big pop came in 2020, from $0.13 to $0.69.
Buyers felt like they had struck gold. That was until Ripple was sued by the U.S. Securities and Exchange Commission. It wasn't registered with the SEC, so it was accused of "misleading" investors to whom it sold over $1 billion in XRP.
Coinbase ended up dropping XRP from the lineup. But this is still not a good look for Coinbase or the crypto world. Even as Bitcoin is being cemented into the mainstream, cryptocurrency at large still has a ways to go before proving itself to the masses.
Even then, people who love crypto might hate a Coinbase IPO.
Why "Hodlers" Don't Want a Coinbase IPO
The big draw for many crypto fans is that it is decentralized. It is an alternative way to invest that hedges against inflation and the fickle whims of bureaucrats.
That's exactly why crypto investors might not be all smiles when it comes to a traditional Coinbase IPO. They might see it as the crypto world succumbing to the cash world.
What's worse is that we know now, with XRP as an example, that Coinbase is not necessarily the renegade these "Hodlers" wish it was. In fact, they call it the "Facebook of Crypto" for how it cooperates with the public sector.
There might be something to these claims. After all, Coinbase sent transaction data for 13,000 of its users to the IRS after it attempted to withhold its gains to avoid paying taxes. Shouts of #DeleteCoinbase flooded Twitter Inc. (NYSE: TWTR) after that – from the anti-tax, anti-institution strain of crypto buyers.
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Coinbase even catches fire when it "plays the middle," so to speak. The company received loads of bad press regarding the "apolitical" atmosphere it tried to promote during social unrest in 2020. It said whoever didn't like it could get a severance package. Sixty employees ended up leaving.
So, at least politically and culturally, Coinbase is in a tough position, left, right, and center.
That said, one area Coinbase succeeds is financially. And this could be all that matters.
The company is loaded with cash.
Is Coinbase Profitable?
Back in its 2018 report, Coinbase was calculated by Reuters to have made $520 million in total revenue. In 2019, Coinbase profited 163 million on the $543 million revenue.
The recent spike in trading volume for Bitcoin and Ethereum may continue to explode those numbers.
You see, Bitcoin trades at $9 billion daily. Ethereum is said to process 28% more per day, with $12 billion traded daily.
Total crypto trading volume on Coinbase is about $320 billion, with 35 million registered users. That's money in Coinbase's pocket on commissions. And it's future profit for the company as newbies look for easy crypto-purchasing options.
In short, the more excitement around crypto builds, the more profitable Coinbase will be.
Coinbase also makes money from its crypto wallet, crypto credit card, and a host of resources on trading cryptocurrencies.
The company offers "Pro" and "Prime" subscriptions that give professional crypto traders more insights to help it plan strategies.
It operates several businesses in 32 countries, including its Bitcoin exchange and its Coinbase wallet. And it will try to expand this portfolio over time, which could chip into profits.
The company needs to scale quickly with the popularization of crypto. Of course, scaling costs money – but if cryptocurrency is as big as projected, it should be of little concern.
An IPO would help the company weather those winds, of course.
Is Coinbase Stock a Buy?
When you look at the recent success of Bitcoin and other cryptos in the last year, it's hard to deny a case for buying Coinbase stock.
A traditional Coinbase IPO would make crypto investing possible, not just for niche crypto traders, but a wider group of traditional investors.
What that means, then, is that we would look forward to traditional investors coming around to understanding and adopting cryptocurrency.
It's not as much of a long shot as you might think. A JPMorgan Chase & Co. (NYSE: JPM) analyst said in November that institutions were "piling" into Bitcoin. They said retail investment in the Grayscale Bitcoin Trust (made up of mostly institutional investors) tripled from Q3 to Q4 2020.
You don't even have to look further than our own site for a warm projection on this novel industry. The cat's out of the bag, and we now think it's somewhat irresponsible not to have at least some Bitcoin in your portfolio.
Ethereum is up 549% from $174 to $1,130 in the last year. And that's not even the peak. Some analysts say Ethereum could hit $2,000 this year.
As for Bitcoin, our very own Mike Butta's projection of $55,000 Bitcoin is still right on target. The Winklevoss twins – coinventors of Facebook Inc. (NYSE: FB) – also recently targeted $500,000 Bitcoin down the road.
Investors in Coinbase stock will be able to access these gains without buying any crypto at all. If more traditional investors can share in Coinbase's commissions, that's ultimately a good thing.
And for that to happen, cryptocurrencies will need to have a renaissance – which appears to be taking place right in front of our eyes.
When to Buy Coinbase Stock
Of course, IPO investing can always be a little uncertain. You get plenty of IPOs that excite investors in the lead-up and out of the gate, that then end up crashing. Lyft Inc. (NASDAQ: LYFT), for example, lost over 70% of its price since IPO.
That is often what you get when a company prematurely IPOs or isn't profitable.
Coinbase is both profitable and has already made it to the Series E venture funding phase. That means it's making money and promises more stability than a fresh, young startup – though it has been labeled the first "Bitcoin unicorn."
Best case, the Coinbase IPO will cement cryptocurrency into the mainstream. Before it gets there, however, a swath of Coinbase bears could keep the price down shortly after IPO.
Instead of waiting for the stock to drop a year or two in the future, this might be one of those unique cases where Coinbase bears hold the stock down early on, only for the stock to soar later.
If you can get in on Coinbase stock early, do it. Like Bitcoin or Tesla stock, this would be a hugely asymmetric play, meaning the potential upside is significantly higher than the potential downside.
Some sites have already projected the Coinbase ticker symbol as "COIN." Another site, StockTwits, predicts it will be "CBASE."
We only have to wait and see. The closer we get to the Coinbase IPO date, the more we will know from its financial disclosures and potential demand for the stock.
Stay tuned with us at Money Morning to find out.
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About the Author
Mike Stenger, Associate Editor for Money Morning at Money Map Press, graduated from the Perdue School of Business at Salisbury University. He has combined his degree in Economics with an interest in emerging technologies by finding where tech and finance overlap. Today, he studies the cybersecurity sector, AI, streaming, and the Cloud.