As Bitcoin (CCC:BTC-USD) turns 10 years old, there is a temptation to do away with the “wild west” narrative. However, wild oscillations prevent me from pushing this narrative. Still, it’s nice to know there are companies like Coinbase (NASDAQ:COIN) that offer a beacon of light for those looking for stability.
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Coinbase operates a cryptocurrency exchange platform. Despite being an exchange platform, it is not dependent on any particular coin since it deals in over 100 cryptocurrencies on its platform.
In addition, heavy investment in cryptocurrency innovation will help preserve its early-mover advantage.
So, the fact that the stock is down 22% in the last month screams a buying opportunity to me, especially if you are one of those investors on the fence regarding the best way to invest in crypto.
Coinbase Understands the Need to Evolve
One of the major problems that crypto investors face is the inherent volatility of the space. You need not look any further than the most recent market crash, with losses in the market capitalization for the entire cryptocurrency sector nearing $1 trillion.
The reasons are not important. The bottom line is that if you invested in Bitcoin or Ethereum (CCC:ETH-USD), you are sitting on substantial losses. You have little to left to do but wait for the prices to rebound and then decide whether to sell your stake.
Meanwhile, the investors on the sidelines are wondering if there is any way to invest in crypto without getting burned. Well, Coinbase provides you with an interesting option in this regard.
COIN profits are not correlated to the price of Bitcoin or other cryptocurrencies. Rather, they are related to the volume of transactions and other uses of cryptocurrencies. So, whether there is a massive bull run or downturn, transaction fees typically will do well during both these periods.
Admittedly, it does not have a large moat at this stage. However, it is investing aggressively to diversify its offerings. These offerings include cryptocurrency rewards credit cards through a partnership with Visa (NYSE:V), collateralized lending, a prime brokerage product, cryptocurrency-focused cybersecurity services, and loans and deposit accounts.
That makes sense. The company operates within a very competitive industry, with razor-sharp margins. Over time as the competition increases, these margins will erode.
But, for now, Coinbase is in the box seat. Return on invested capital is 48% over the past 12 months. In addition, Coinbase is expected to generate $8.41 in normalized earnings per share this year. And with nearly $2 billion in cash, there is no shortage of funds to grow its ancillary businesses.
Blockchain Is Everywhere
Cryptocurrencies such as Bitcoin are a store of value and medium of exchange. In essence, bitcoin and other altcoins aspire to be an alternative to national currencies. As a result, the major impact of blockchain is on the financial services industry.
However, blockchain has gone far beyond its beginnings in banking and cryptocurrency and is now impacting several industries. Ultimately, the possibilities are endless for a transparent, verifiable register of transaction data.
Coinbase has a lot to gain from this positive momentum. It has accumulated sizable stakes in various cryptocurrency and blockchain startups producing innovative products and services using the technology, and there are 56 million verified users now using its platform.
Yes, there is a danger of revenues eventually declining and competition increasing in the exchange business. But at the same time, Coinbase is working on diversifying its revenue streams which will help preserve EBITDA margin.
Coinbase Is a Must-Have for Your Portfolio
Crypto investing is not for the fainthearted. You stand to make a lot of money when things are going right. But if you do not time your exit well, then things can go awry pretty quickly.
Understandably, investors are still skeptical of parking their capital in the space. However, they have an alternative: crypto stocks that give you some exposure to the crypto world without holding cryptocurrency itself. Coinbase is a multifaceted platform that is different from traditional brokers or exchanges. It offers products for both retail and institutional cryptocurrency investors and an API for developers and merchants to build applications and accept payments in digital currencies.
We have already explored some of the disadvantages. Profits can come under pressure as more companies embrace blockchain and competition in the exchange space explodes. However, the company is diversifying its operations to ensure it does not rely on one revenue stream, making it less of a speculative investment than bitcoin.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.