A large number of young Americans believe there’s some elusive shortcut to wealth. The cause could be any number of reasons – Hollywood drivel that’s peddled as entertainment, the 15-second TikTok attention span, or today’s financial pundit touting ten stocks under $10 – whatever the cause might be, the snake oil salespeople of crypto have had a heyday so far. Twenty percent interest rates? Where do I sign up?
Any lunatic who was crazy enough to throw down money on the above offer has eff all today. That’s because Luna is now trading at zero dollars, and everyone is posting suicide notes on Reddit, personal responsibility for poor financial decision making be damned.
Don’t say we didn’t warn you. Luna happens to be a stablecoin, and our piece last year on Why a Bitcoin Crash May Be Imminent specifically called out Tether as a financial product that’s almost too risky to believe. Ask yourselves this. In what other scenario would a handful of individuals be allowed to hold $75 billion and cite “attestations” because they refuse to be audited? As the company’s CTO posts tweets from Lugano, Switzerland talking about his favorite sport franchise, he’s also promised us that the commercial paper his firm holds – an unknown amount of which may be tied to China – is now being liquidated to prop up his stablecoin – Tether – that temporarily de-pegged itself from the dollar when that whole Luna problem hit.
The only thing keeping the price of Tether at $1.00 is investors who buy when it falls to 94 cents to arbitrage the price which they believe must hit $1.00 again because “it’s a stablecoin.” That only works if every dollar of Tether is backed by a U.S. dollar. Is it? Well, the attestation says so. More 20% interest rates, anyone?
While the markets are becoming increasingly volatile, and the entire cryptocurrency domain is starting to fracture around the edges, we’re left wondering what value there might be in owning shares of Coinbase as a pick-and-shovel play on blockchain.
The total value of crypto assets on our platform represented approximately 11.5% of the total market capitalization of crypto assets as of December 31, 2021.
Coinbase 10-K
About Coinbase Stock
The last time we checked in with Coinbase was in a January 2022 piece titled What You’re Investing in With Coinbase Stock which talked about how the company’s fortunes are heavily reliant on the sporadic behavior of retail investors. In 2021, 88% of Coinbase revenues came from retail investors dabbling in cryptocurrencies like bitcoin.
The latest earnings call from Coinbase shined a light on the risks of relying on retail. Revenue of $1.48 billion was expected, according to Refinitiv, yet Coinbase missed the mark with $1.17 billion, about a 21% miss. Transaction revenues fell 34% year-over-year with both retail and institutional taking a hit. Usage of the Coinbase platform fell in terms of active users (down 19%) and volume (down 43%). The company also recorded a net loss of $430 million, a trend that’s heading in the wrong direction as capital dries up. On their balance sheet is now over $1 billion in crypto investments, so they’re also engaged in speculation with their dry powder. Overall, it just raises more concerns around their reliance on crypto hype largely driven by retail investors.
Fair Disclosure
Before we continue, can we just get a quick round of applause for CEO Brian Armstrong who did the unthinkable by demanding that his firm not engage in politics? We can only hope every firm in America eventually realizes that playing politics only serves to erode shareholder value. Thank you Mr. Armstrong, for having a spine and demonstrating true leadership. Moving on.
Mr. Armstrong was recently on Twitter talking about how “it is possible, however unlikely, that a court would decide to consider customer assets as part of the company in bankruptcy proceedings.”
In other words, if Coinbase blows up, the assets we currently have on the platform could disappear. Usage of the term “however unlikely” provides little assurance. This just underscores how cryptocurrencies are fraught with regulatory uncertainty, perhaps because decentralization is its own worst enemy.
Should We Buy Coinbase Stock?
Whenever you invest in an asset, you should know what you’re getting exposure to. For Coinbase stock, 88% of today’s exposure comes from retail investors, many who think crypto trading is their ticket to a better zip code. If you want exposure to the volatile emotions of today’s crypto “investor,” then shares of Coinbase might be for you. At least you’ll feel better than someone who invests in Robin-the-hood which claims to be “democratizing access to wealth” while they fleece their clients – who have an average $240 account balance – using risky assets like options.
The bigger question is whether we would buy shares of Coinbase at any price. Until the company can dramatically reduce their reliance on retail investors, it’s not exposure we want in our tech stock portfolio. Why do institutional investors hold 76% of the platform’s assets while only driving 4.65% of the revenues? Is that because they’re not willing to pay the exorbitant fees that Coinbase charges retail clients? Who knows, but we’re not investing in Coinbase until the company can reinvent itself outside of solely relying on retail clients for their bread and butter.
Investing in Bitcoin
The “safest” way to play crypto right now is just by purchasing some plain old bitcoin using the Coinbase platform. According to a recent article by Barron’s, bitcoin has a 70% correlation to Coinbase stock, so you get exposure to a Coinbase-like investment without all the company-specific risk. We invested in a small amount of bitcoin at an average of $7,815 per coin based on ARK’s bull thesis which we find credible. To reduce risk, we recouped our entire investment with a 7% return at an average price of $41,907. We just now logged into our Coinbase account to verify these numbers and received the following reassuring message:
We can only attribute our strong crypto trading performance so far to the Romanian fortune teller we keep on staff who told us that Coinbase problem should be resolved within minutes (it was). For all the haters out there, just wait until the price of bitcoin climbs above $41,907 and then you can tell us what morons we are. But since we still have 1.01% of our assets in bitcoin, we’ll be happy regardless of what happens.
How to Get Rich Quick
Fidelity once audited their retail brokerage accounts to figure out what characteristics the best performers shares. Incredibly, the best performing accounts they had were owned by people who were either dead, or forgot they had an account. As it turns out, the quickest way to get rich needs almost no work or effort and takes about five minutes. Take all your savings, buy broad market index funds with 99.5%, then buy a few shares of Coinbase stock with the remaining 0.05%. Congratulations, you just joined the ranks of the rich. You’ll just need to wait 30-40 years to spend the money. You’re welcome.
Conclusion
While Coinbase remains the most promising pick-and-shovel play on crypto, we’re not going to cover the stock going forward until they can diversify revenues away from retail investor exposure. Today’s crypto investor is being driven by emotion and a “get rich quick at all costs” mentality that doesn’t consider the risks being taken. When it becomes that trading your way to a better zip code on Coinbase isn’t the way forward, how many of these crypto “investors” are going to stick around?
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