Remarkably, the strange dynamic behind the novel coronavirus pandemic sparked an extraordinary rally in cryptocurrencies in the latter end of 2020, sparking a paradigm-shifting credibility boost for Bitcoin (CCC:BTC-USD) and other cryptocurrencies. In theory, this should bolster Coinbase Global (NASDAQ:COIN), basically a secondary market for digital assets. However, a quick look at COIN stock will render disappointment.
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As you’ll recall, Coinbase made its initial public offering around mid-April of this year. That coincided with the peak valuation of Bitcoin, where the price went north of $60,000. While BTC would go on to correct the enthusiasm, at the time, it wasn’t a steep drop-off. Furthermore, number-two crypto Ethereum (CCC:ETH-USD) would go on to secure blistering all-time records into May.
Thus, there was every reason for investors — who at this point were foaming at the mouth with the fear of missing out (FOMO) — to gamble on COIN stock. After all, the underlying company represented a platform play instead of a wager on an individual asset.
Still, that wasn’t enough to spare COIN stock from significant volatility once the corrective wave really hit in earnest. Based on the time of writing price, Coinbase shares are down nearly 34% from their mid-April closing peak. And we could expect this kind of volatility if the company continues on its growth-oriented track.
Yes, Goldman Sachs recently issued a “buy” rating on COIN stock, noting that even if Bitcoin’s price remains deflated, “skittish users paying high fees to trade is a lucrative position for the exchange.” But the problem is that this skittishness is a one-off catalyst. Once crypto holders have dumped out, then what?
As you can see from its revenue history, Coinbase’s growth rate ebbs and flows with the underlying crypto market. This dynamic will probably force a rethink (which I hope happens).
COIN Stock as a Dividend Play?
If the circumstances surrounding COIN stock were different, I’d be much more interested in buying shares based on the underlying company’s strategic outlook. But the circumstances that I’m referring to — that the crypto market strongly correlates with Bitcoin’s price action — are too binary for me to be interested.
While crypto advocates may have won the credibility battle, the next step is the trickiest: getting alternative cryptos or altcoins to trade independently of Bitcoin. But we’re hardly making any progress in this department, even as individual cryptos rose to unfathomable levels.
Naturally, then, COIN stock faces a feast-or-famine profile: tremendous growth during the upswings and once the party is over… see you in two years’ time. I’m almost certain this will never work. Therefore, the company needs a complete rethink, involving a transition from a growth play into a dividend-earning one.
Initially, the idea sounds nuts. And after some thought, it still sounds nuts. But I’m also convinced that if these blockchain experts — many of whom are in Coinbase’s employ or sphere of influence — are as smart as we think they are, they’ll figure it out.
In fact, Coinbase already has the goods to make the transition stick. It just needs to market the concept through terms understandable to the widest demographic possible. For instance, Coinbase offers the ability for holders of certain digital assets to earn interest — basically, the blockchain’s version of dividends.
Frankly, that’s a much more appealing narrative for the longer-term stability of the crypto market. No, it’s not a chicken sandwich. But rather than kill the fowl, you can enjoy years of egg sandwiches. Therefore, Coinbase should focus on cutting expenses while reaching out to those who are not already predisposed to cryptos.
If that happens, I’d buy COIN stock.
This Is the Way
The more I think about it, the more certain I am that this transition must happen for Coinbase to enjoy holistic success. What crypto newcomers will quickly realize in this coming correction is that when virtual assets fail, they fail hard.
And it’s completely different from the stock market. With equities, you can roll from growth to income to defensive easily and seamlessly. While the benchmark indexes have significant influence on broader investment behavior, you can almost always find pockets of relative insulation — or even upside — during periods of turmoil.
That’s just not the case with cryptos. Here, you are merely rolling over from Bitcoin to a crappier version of Bitcoin. Thus, during bearish phases, you will probably end up losing your funds far quicker than if you had just stuck with the original crypto.
Like I said, it’s too binary, which will then negatively effect COIN stock. I’d rather see Coinbase focus on and market the heck out of the virtual currency sector’s passive income potential. That’s something even baby boomers can get behind — but you’ve got to convince them first (which is the point).
On the date of publication, Josh Enomoto held LONG positions in BTC and ETH. 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.