What happened
Shares of cryptocurrency exchange Coinbase Global (NASDAQ:COIN) were rising on Monday. As of 11:20 a.m. EDT, the stock was up over 5%. And this is because popular cryptocurrencies like Bitcoin (CRYPTO:BTC) and Ethereum (CRYPTO:ETH) were rising over the weekend. For its part, Dogecoin (CRYPTO:DOGE) is down, but it still has some news worth reporting that may also have implications for Coinbase.
So what
Last week, the CEO of AMC Entertainment announced that digital gift cards could now be purchased with Dogecoin. In the near future, the company hopes to allow Dogecoin and other cryptocurrencies to be used to purchase tickets directly through its payment system. But for now, gift cards can be bought through a third party.
Image source: Getty Images.
Trading volume for Dogecoin spiked around the time of this announcement, according to data from CoinMarketCap. And even though the price of Dogecoin is down modestly today, trading volume is still relatively high.
News from AMC is but one factor driving Dogecoin volume these days. But transactions on the Bitcoin and Ethereum blockchains also appear to be increasing lately. Transaction volume varies greatly from day to day, but both Bitcoin and Ethereum volume has recently spiked above their six-month averages, as the chart shows.
Bitcoin Transactions Per Day data by YCharts
Coinbase makes money on cryptocurrency trading volume. In the second quarter of 2021, 88% of the company’s revenue was generated from charging transactional fees. And keep in mind that this revenue stream is extremely profitable. It recorded a whopping $1.1 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) on just $2.2 billion in total revenue.
Here’s the thing: Coinbase stock actually looks like a deep value stock, trading at just 19 times trailing earnings. The reason it trades at such a cheap valuation is because the market believes cryptocurrency trading volume is going to go down and the company’s gravy train will therefore grind to a halt.
However, there are signs that cryptocurrency trading volume is actually holding steady, if not increasing. Because of this, Coinbase stock could surprise investors when the company reports third-quarter financial results in a few weeks.
Now what
There’s one more thing that could be driving the price of Bitcoin higher in recent days, and it has implications for the future. According to CoinDesk, someone placed a $1.6 billion buy order for bitcoins last week. On the surface, this shouldn’t be too big a deal, considering Bitcoin is valued over $1 trillion. However, a buy that big actually clogged down the network temporarily and perhaps contributed to the increasing price in recent days.
Could we see more big-money players getting into Bitcoin and other cryptocurrencies in time, making more large purchases like what we saw last week? Yes, there’s reason to think so. For example, billionaire investor Bill Miller, chief investment officer for Miller Value Partners, recently said that he believes in Bitcoin today like he believed in Amazon.com after the dot-com bubble popped.
Interest from billionaires like Miller could lead to increasing demand. And with many investors and mining companies holding their bitcoins, there may not be enough liquidity in the market to meet this demand. That could send prices higher and sustain buzz for cryptocurrencies among retail investors, which is good for Coinbase’s trading revenue stream.
Of course, it’s not a foregone conclusion that trading volume for cryptocurrencies will continue rising, benefiting Coinbase. However, that does appear to be what’s happening right now and there are reasons to believe it could continue. This will be something worth watching in coming weeks, especially as Coinbase’s Q3 report approaches.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.