Coinbase (NASDAQ: COIN) shares are down over 20% since the firm’s stock market debut earlier this year. But over the past month, the stock has risen by 15%. The reason for this jump is due to recent news flow, which I’ll cover shortly.
But should I buy Coinbase shares? Well, the stock is on my watch list. I’m not buying just yet though, and here’s why.
On Friday, the company announced that it will be investing $500m in a diverse portfolio of crypto assets. And going forward, it will also be allocating 10% of its quarterly profits to this same portfolio.
So this isn’t a one-off thing. It intends to continue investing in cryptocurrencies for the foreseeable future. The company said in its statement that it will “become the first publicly traded company to hold Ethereum, Proof of Stake assets, DeFi tokens, and many other crypto assets” in addition to Bitcoin on its balance sheet.
CEO, Brian Armstrong expects the portfolio to grow as the market matures. The firm is also doing this as part of its plans to diversify away from trading cryptocurrencies. But here’s my concern. While the portfolio will be spread across various crypto assets, they’re volatile in nature, especially Bitcoin. So it may have a portfolio that varies a lot in value.
Couple that with how it generates revenue from consumers trading cryptocurrency and if Bitcoin falls in value, then it’s most likely that the other cryptocurrencies will suffer too. The company’s revenue may be hit and the value of its crypto portfolio may reduce as well.
The firm reckons that more companies will hold crypto assets on their balance sheets. This may happen, but regulators are already clamping down on cryptocurrencies, so it could take some time.
I see plenty of positives though. Earlier this month, the business released its second-quarter results. And these were pretty impressive. Net revenue for the three months grew from $1.6bn in the previous quarter to over $2bn. It was a similar case for profits, net income increased to $1.6bn.
The company is in a financially strong position. It’s sitting on $4.4bn cash and could use this to weather any headwinds such as increased regulation. Quarterly trading volume and the number of monthly transacting users also improved.
Should I buy?
As I said, Coinbase shares are likely linked to the performance of Bitcoin. But the correlation between the stock price and the most popular cryptocurrency has only increased with the addition of the sizeable crypto portfolio. This makes me somewhat uncomfortable.
The industry is maturing but it still has a long way to go. What this portfolio has done is indicate that Coinbase is looking to further integrate the digital assets into its business. In time, it may even start paying its employees in cryptocurrencies. Of course, this is just me speculating so I’ll have to watch this space.
For now, I’d like to see how its pool of crypto assets will play out. Let’s not forget that it has said it’s the first public company to do this. Someone has to be the first and it happens to be Coinbase. I don’t think other listed firms will follow straight after, but I reckon they will be watching closely. I’m watching too, but I’m not buying yet.
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The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Nadia Yaqub has no position in any of the shares and cryptocurrencies 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.