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Will Coinbase shares continue to sink?

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Coinbase (NASDAQ: COIN) shares closed 4% lower yesterday as prices continued to fall. After its IPO almost two months ago, the stock’s value has sunk more than 30%. With such strong hype around the crypto market, it may seem a surprise that share prices keep falling. Let’s have a closer look at what’s going on.

Coinbase reports positive earnings

Although Coinbase shares are falling in value, the company has posted some seriously encouraging Q1 results. The cryptocurrency exchange reported revenues of $1.8bn, up from $585m in the previous quarter. In addition to this, net profits for the quarter sat at $771m, 24 times larger than 2020’s Q1 profits. The massive jump in Q1 earnings was in line with the booming crypto market at the start of the year. And the fact the firm actually turned a profit was very encouraging as many early-stage growth stocks often operate with heavy losses.

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Another positive for Coinbase shares is that the firm makes 94% of its revenues from trading fees. This means that even when the markets aren’t performing well, the firm can still generate fees from buyers and sellers. Growth in users is encouraging too. Monthly transactions more than doubled from 2.8m to 6.1m for the most recent quarter, as total users reached 56m. Both these reasons give me long-term confidence for Coinbase shares, assuming the crypto industry is here to stay.

Crypto market crash

The recent crypto sell-off will likely have been a benefit for Coinbase’s revenues. However, this seems to have been outweighed by a more bearish attitude towards the industry. Bitcoin has almost halved in value since its April highs, with many other popular coins like Ethereum and Ripple following a similar trajectory. With Coinbase shares’ value so closely correlated to Bitcoin’s performance, a bearish crypto market doesn’t bode well for the firm.

What’s more, some volatility of Bitcoin can be linked to Elon Musk’s continuing market commentary. When he announced Tesla would no longer be accepting Bitcoin payments, prices plummeted. Former US President Donald Trump also commented he believes BTC “seems like a scam” in a recent Fox Business News interview. The fact that Bitcoin prices are so easily affected by individual comments, and Bitcoin is so closely correlated to Coinbase shares, are big red flags for me.

Coinbase shares: will they continue to fall?

Provided the crypto industry is here to stay, I think that Coinbase shares could yield some great returns in the future. I would have expected the stellar Q1 earnings report to have boosted the share value, but bearish crypto market sentiment seems to have outweighed the positives. In the current market climate, I don’t see Coinbase shares rising any time soon. In fact, I think they could fall further.

So, I’m keeping my eye on this stock. I do like the firm’s long-term positioning, but it’s so dependent on the wider crypto industry and I want to see some more stability prior to investing.  

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Dylan Hood owns shares in Tesla. The Motley Fool UK owns shares of and has recommended Tesla. 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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