If you’re questioning the narrative for cryptocurrency wallet and trading service Coinbase (NASDAQ:COIN), you’re not alone. With the so-called blockchain market tumbling into the weeds, there doesn’t seem to be much hope for COIN stock. I understand that Coinbase is essentially the gateway to crypto. But right now, it looks more like the Cryptkeeper.
Unfortunately, leverage to Bitcoin (CCC:BTC-USD) makes COIN stock a rather perplexing investment opportunity. Sure, Coinbase has plenty of other assets under its belt. Heck, the CEO wants to list every coin or token that is legally permissible to do so. But the reality is that all eyes are on BTC. Wherever Bitcoin goes, so too does the rest of the digital market.
Therefore, it was problematic when Bitcoin began correcting steeply around the middle of May, sending other cryptos and tokens down with it. When COIN stock recently had its upswing to start the final week of June, that was when BTC started to rebound from the prior weekend’s lows.
It’s not just the technical correlation that worries Coinbase investors. This leverage to the health of Bitcoin and other key cryptos reflects in the financials as well.
Can COIN Stock Break from Its Dance Partner?
When Coinbase made its public market debut, anticipation was red hot. Once again, Bitcoin dominated mainstream business news, and for good reason — it was breaking records and looking to set fresh ones that were simply astounding in nature. But amid this cacophony was a concerning development.
While revenue was soaring, it also trended along with the Bitcoin price. Should further corrections derail cryptos, it could impose problems for COIN stock. Below is a list of annual revenues for the underlying company compiled by Business of Apps:
- $16 million in 2016
- $927 million in 2017
- $520 million in 2018
- $483 million in 2019
- $1.14 billion in 2020
You can see where the challenge lies for COIN stock moving forward. Back in 2016, cryptos started to make some noise after the collapse of the market a few years prior. Then, in 2017, the blockchain sector went haywire, with Bitcoin reaching $20,000 in December. Naturally, Coinbase brought in the big bucks, generating $927 million.
But 2018 was the beginning of a major unwinding of speculation. By the end of it, Coinbase’s top-line sales dipped to $520 million, down nearly 44%. Sales would fall further to $483 million in the next year until we got our bonanza moment in 2020.
This is both the allure and the curse of COIN stock. When things are booming, it’s one of the most compelling investments ever. When they’re not, it raises serious questions about viability.
Still, the one wrinkle is that in the first quarter of 2021, Coinbase rang up $1.8 billion, more than what it hauled in all of 2020. So it’s possible that the company could continue to rake in the dollars. However, we can’t forget that in Q1 and at least half of Q2, the crypto market set blistering records. Thus, it’s likely that even in Q2, we’ll see amazing revenue stats, perhaps much bigger than Q1’s tally.
Is It Enough?
Nevertheless, the real test will come in Q3. If the crypto market remains deflated — and that’s no guarantee, though it appears to be likely — then investors will want to know if Coinbase can keep its revenue trend reasonably strong. Should that be the case, COIN stock may prove to be a wise buy.
But overall, this is a risky proposition. Historically, cryptos have printed wild movements to the extremes of the spectrum. And during their lull periods, it’s difficult to figure out what direction they will go. Since cryptos don’t pay dividends in the traditional sense, investors may end up looking in other sectors for profitability.
This isn’t to say that COIN stock can’t move higher. But for me, the evidence has me watching from the sidelines.
On the date of publication, Josh Enomoto held a LONG position in BTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.