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Coinbase shares sink as Bitcoin plummets. Here’s what I’m doing

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Coinbase (NASDAQ:COIN) went public around a month ago. The IPO was one of the most anticipated launches in a long time. It was also the first major cryptocurrency exchange to go public, representing how far the industry has come in just a few years. Coinbase shares shot up over 50% in the first day of trading. I even noted at the time that the large and well respected intuitional investor Cathie Wood had gone in. So why are the shares slumping now?

Correlated to Bitcoin

It’s no surprise that Coinbase shares have a high correlation to the price of Bitcoin and most other major crypto coins. In fact, one reason why I think Coinbase shares are popular with stock investors is that they can get exposure to cryptocurrency without actually having to buy coins. The safety of buying a listed stock instead appeals to some people.

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The downside of this correlation has been seen this week. Over the past week, Bitcoin has been falling. Yesterday saw a sharp drop, with a fall of circa 40% at one point, before regaining a footing. Over the past week, Coinbase shares have also tracked lower. Last Thursday they traded at circa $280, but they’re now down to $225. This represents a fall of almost 20%.

What’s more painful for investors is that Coinbase shares now trade below the IPO level of $250. What initially seemed a great opportunity has turned somewhat sour. 

I’d also be concerned about the size of the correlation to Bitcoin. Consider that Coinbase makes money as an exchange. The more trading that happens, the more revenue is generated from commissions and fees.

Over the past week, the number of trades must has been at record levels. If anything, in the short run the crypto sell-off is good news for Coinbase shares. Yet this is clearly being outweighed by broader sentiment regarding the industry.

My outlook for Coinbase shares

Over the next week or so, I wouldn’t be surprised if Coinbase shares rallied back hard. I think a lot of investors will buy the dip in Bitcoin, given the extent of the recent fall.

This is just a short-term reaction to an asset being oversold. Looking past this, I think this tree shake will make investors more cautious going forward about being exposed to such a volatile stock. The drawdown over a week is more akin to AIM-listed penny stocks, not a NASDAQ heavyweight.

For larger institutional investors, I also think the recent move will put them off investing. They don’t want one stock to potentially wipe out the good work of the other hundred stocks within a pension or mutual fund.

I could be wrong, and the volatility might actually attract more investors who see this as an opportunity. Coinbase shares should also see a pick-up if results show higher revenues from this high volume of transactions going through. 

Ultimately, it’s not my kind of stock I feel comfortable buying, so I’m staying on the sidelines at the moment.

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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Bitcoin. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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