As Bitcoin pushes to all-time highs, should I buy Coinbase shares?

Jonathan Smith notes the correlation between Coinbase shares and the Bitcoin rally this week, but sees fundamental drivers also at play helping here.

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This week has seen Bitcoin continue to push higher. In fact, it made fresh all-time highs by trading above $66,000. It currently has retraced slightly but has held on to most of the gains made. Mirroring this move, Coinbase (NASDAQ:COIN) shares are also up 12.5% over the past five days. Since the company’s IPO in April, the share price is up 20%. Based on this correlation, do I want to buy shares now?

An inevitable correlation 

Coinbase is one of the largest cryptocurrency exchanges in the world. It’s also rare as being one of the few exchanges that is actually listed. This gives it somewhat of a badge of honour, given the listing requirements and transparency needed for a company to go public.

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The fact that Coinbase shares are seen as a reputable stock to trade allows more investors to get exposure to the crytpocurrency space. Otherwise, some might not feel comfortable directly buying Bitcoin or other cryptocoins and holding them in a virtual wallet. Concerns around fraud and storage are valid.

Instead, these investors can buy Coinbase shares. As we’ve seen on several occasions, movements in the coins have a knock-on impact on the Coinbase share movement. The move this week is another example of this. Inherently, the fate of a cryptocurrency exchange will will be tied to the coins traded on the platform.

This also becomes a self-fulfilling prophecy. If investors see that Bitcoin is rising, they’ll rush to buy Coinbase shares as a perceived safer alternative. This will in turn push up the share price. 

Do Coinbase shares have fundamental value?

Putting the correlation with Bitcoin to one side, Coinbase shares should hold a value regardless of the coins. I think this value is growing, when looking at the latest financial results.

The Q2 2021 results showed incredible momentum. For example, net revenue for the quarter was $2,033m. A year ago it was just $178m! This is largely driven by the large increase in monthly trading users. It recorded 8.8m of these during the quarter, versus 6.1m last quarter and 1.5m a year ago.

The outlook is positive, especially given the relatively small client base Coinbase has. There is scope to add many more millions of users to the platform in coming quarters in my opinion.

The higher client numbers help to drive revenue by increased trading on the exchange. In fact, hype around Bitcoin and volatility helps to drive more client activity. 

So in my opinion, it’s not just as simple as saying that Bitcoin increasing in value will push Coinbase shares higher. This is part of the story, but the bigger part is the fact that higher client acquisition and activity helps to push Coinbase shares higher.

One risk in this regard is that the industry is still unregulated. A recent brush with the SEC has highlighted that Coinbase is still vulnerable to action from the authorities. Until some kind of middle ground is established, the company sits in no-mans land.

Overall, I think that Coinbase shares look attractive and I’m considering buying now.

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.

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Jonathansmith1 owns Bitcoin. 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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