Coinbase Is Not Loose Change: How I’m Building a Position

Let’s talk about Coinbase (COIN) . 

Just an FYI, I have been accumulating these shares this week, so I do have a vested interest.

The question that I imagine all of us have asked is simple. Should we be invested in Coinbase? I had written about the name prior to its actual listing on the Nasdaq market, and had said that I thought the stock was tradeable, but not necessarily investable. That was fine for day one. I bought a smallish tranche (about 1/8) of what I consider a full position. I like to think in eighths. I think the whole world should trade in eighths, but I am eccentric and that is neither here nor there.

I bought a few shares just after COIN opened after waiting all day it seemed on Wednesday. I had to take a call just after executing that trade and just through a $425 offer on the book, so I could focus on the call. Lucky. By the time I returned to the desk, COIN had traded up to $429 and then proceeded to sell off for two and a half hours straight.

After-hours that night, I re-established my long, which I added to in after-hours trading on Thursday night and again in pre-opening Friday trade.

Why build a position in Coinbase? Does this mean that I have changed my thinking in regards to cryptocurrencies? One, this is a real business with real earnings. Two, I don’t know.

I still think that at some point the central banks and treasury departments of the world fight back against the power and anonymity provided by “cryptos,” but I would have thought that they would have done so by now. So, either I am wrong, or they are late. Maybe they are too late.

I think it’s quite obvious that the vast majority of cryptocurrencies available to investors today will end up worthless. If the central banks act too slowly, or do not act at all, then the real chance exists that one or more of these cryptocurrencies, though in no way actually fitting my definition for money, could perhaps (think bitcoin) become at some point a reserve asset, or at a minimum, find utility in replacing the cash, or underground economy.

Bad News?

On Thursday, HSBC (HSBC) was reported to have prohibited customers from investing in Coinbase as the firm has a policy in place to avoid crypto, or any virtual currencies. Later on, the Reddit forum known as “WallStreetBets” after briefly allowing discussion of cryptocurrencies on its platform, almost immediately reinstated that ban.

On Friday morning, the government of Turkey banned payments made in cryptocurrencies, based on factors such as market volatility, lack of regulation or supervision, use in illegals activities, irrevocable transactions and potential for complete loss due to theft.

Good News?

Buyers have good company in the funds of ARK Investment Management run by the now famous Cathie Wood. On Wednesday, Wood purchased more than 512K shares of COIN for her flagship ARK Innovation ETF (ARKK) , and added nearly 289K more on Thursday. On Wednesday, Wood grabbed more than 147K shares of COIN for the ARK Next Generation Internet ETF (ARKW) , and then added more than 25K more on Thursday. On Wednesday, Wood bought more than 89K shares of COIN for her ARK Fintech Innovation ETF (ARKF) , and then tacked on another 33K shares on Thursday.

In all, across these three funds, Wood spent more than $352 million on the stock, adding more than 1 million shares worth of exposure. Wood did lighten her long positions in Tesla (TSLA) out of the ARKK and ARKW funds, though Tesla remains the largest holding in ARKW.

There are many analysts that have opined on Coinbase, and I have two different sources that place the average price target at either $520 or $536. I tell you what I see. At least four “highly” rated analysts (by TipRanks) have opined this week.

My favorite among the group is Lisa Ellis at MoffettNathanson. I have interviewed her (where I was the journalist and someone else the expert) for TheStreet in the past in a special we did on FinTech and know her to be brilliant. Ellis has a “Buy” rating on the name and a $600 price target.

It’s not all gummy bears and candy canes, though. While Ellis values Coinbase at 18 times projected 2023 sales, she does see wild volatility ahead, and acknowledges that the shares could be reliant upon the size of the cryptocurrency market in general. Psst, she sees the total market cap of all cryptos dropping some 30%-ish at some point in 2022, before getting back on trend, a trend she sees hitting $11 trillion by 2026. Holy Toledo. If the central banks don’t interfere… Lisa Ellis is no joker.

Fun Facts

1) Coinbase added 13 million new customers in Q1 2021.

2) Coinbase now has a rough 60 million users.

3) Coinbase earns more than 0.5% on every trade. (96% of revenue comes from commission.)

My Levels

As regular readers know, I try to use fundamental analysis to determine which way the bus will travel and technical analysis to determine where my bus stops are. Though it is clear that there is a fundamentally sound business here (for now), the shares are yet to build what we call an IPO base (irregardless of the fact that this was a direct listing), so nothing on the chart is meaningful as of now.

I am working with a $450 target for now basically because I trade my own dough and I am conservative. I am slightly less than 1/3 of the way into building my position. I plan only to add on weakness.

As for a panic point, I am leaving plenty of room and working with the $250 reference price for now. I promise to follow up publicly when the day comes that the chart tells me something that impacts my decision to hold these shares on my book.