Coinbase has been one of the most hottest topics in the stock market this year, as the cryptocurrency industry boomed alongside Elon Musk’s and Tesla’s endorsement of Bitcoin as an asset. Coinbase (COIN) went public via a direct listing in April 2021, selling shares worth $381 apiece and reaching a market capitalization of over $100 billion on their first day of trading. However, the graph of the Coinbase stock, and the crypto market as a whole, has experienced a volatile overall trend in the last few months.
Despite surges and dips experienced by various cryptocurrencies throughout 2021, it is important to note that Coinbase, as an entire company, has yet to report truly profitable earnings. For many investors, this suggests significant downside potential ahead, especially when considering the volatile and often unpredictable market of cryptocurrency. Let’s take a closer look at the potential risks and reasons why Coinbase could be headed for a significant dip in the coming months.
Firstly, it is important to acknowledge the potential regulatory risks posed by the cryptocurrency market. The U.S Securities and Exchange Commission (SEC) has recently announced plans to increase regulation of cryptocurrencies, in response to growing concerns over the potential for fraud and illicit activities. Given that Coinbase is one of the largest and most prominent cryptocurrency exchanges in the world, it is highly unlikely they will go untouched by any regulatory changes. In fact, it is quite likely that Coinbase may have to implement additional compliance measures in order to continue in operation, especially if new laws and regulations are passed. If this occurs, it could lead to a significant drop in Coinbase’s overall value.
Secondly, Coinbase’s position in the market is subject to competition from other cryptocurrency exchanges. Chief among these is Binance, another cryptocurrency exchange that has garnered a significant amount of attention and users over the past few years. Given that Coinbase does not currently have a competitive advantage over Binance, it may struggle to maintain its market share in the long run. In fact, Binance has already overtaken Coinbase as the largest cryptocurrency exchange by trading volume, indicating that competition is already making its presence felt in the market.
One area that Coinbase has been focusing on recently is the introduction of new products and services. However, introducing new products does not necessarily translate into profits. For example, Coinbase recently introduced its own debit card – the Coinbase Card – which allows users to spend their cryptocurrencies at anywhere that accepts Visa. Although this may be an exciting development for many users, it is unlikely to generate substantial profits for the company in the short or medium term. In the end, shareholders are interested in profits in the form of dividends, share buybacks, or reinvestment in the company.
Another factor that could cause a drop in Coinbase’s value is the development of new technologies that render the company’s services obsolete. For example, what if a new platform arises that makes cryptocurrency exchanges unnecessary? This is not an impossible scenario, and if it were to occur, Coinbase could struggle to maintain its current position in the market. Technology companies are particularly vulnerable to this kind of threat, as the possibility of technological replacement is an ever present threat.
Lastly, there is the issue of the cryptocurrency market overall, which is notoriously volatile and unpredictable. It is difficult to predict how the market will behave in the medium or long term, leading to increased uncertainty for investors. The recent history of Coinbase also suggests that the stock price may remain volatile in the coming months, with significant changes likely to occur at any time. This is a significant risk for those investing in Coinbase solely on the basis of its future potential.
Overall, there is significant downside potential ahead despite the recent rally in cryptocurrency prices. Coinbase, as a company, has yet to make substantial profits, and the market in which it operates remains prone to regulatory and technological risks. While there is still significant interest in the cryptocurrency space, it is important for investors to exercise caution and exercise an appropriate level of diversification beyond this area of the market.