It’s been a good month for the Coinbase (NASDAQ:COIN) share price. Since its IPO in April, the US stock hasn’t been the best performer. However, since the start of October, it’s climbed around 30%. And last week, this upward momentum continued, following news of a new partnership with Facebook. So, what’s going on? And should I be considering this business for my portfolio?
A new deal with new growth
Last Tuesday, Facebook launched its new Novi cryptocurrency wallet. This digital service enables users to send and receive money internationally instantly without paying any fees. Novi works by converting funds into a stablecoin, which can be converted back into a local currency of choice after the transfer is completed. In this case, the stablecoin is Pax Dollar, which mimics the US dollar price with very little volatility.
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Despite the cybersecurity benefits of operating on a blockchain, cryptocurrencies, including Pax Dollar, can still be stolen or misplaced. And that’s where Coinbase steps in. Using its proprietary technology called Coinbase Custody, the firm will provide a cold-storage solution for all coins stored within the Novi platform. In other words, Coinbase will be responsible for the contents of Novi users’ wallets. And will receive a substantial fee for doing so.
Based on the pricing listed on its website, Coinbase will charge 50 basis points of the total account balance each year. In other words, for every $1m stored, the firm will receive an annual fee of $5,000. That certainly doesn’t sound like much. But considering the fact that each year, around $1.25 quadrillion is transferred using legacy international payment solutions, the potential growth opportunities for both Facebook and, in turn Coinbase, are enormous. So seeing the Coinbase share price rise on this news is hardly surprising to me.
Taking a step back
As exciting as this partnership is, I think it’s important to keep things in perspective. Novi is still in its pilot programme. And there’s no guarantee it will turn into a success. Nor that Facebook will continue its partnership with Coinbase in a post-pilot world, as it may just develop its own cryptocurrency cold-storage solution.
Coinbase Custody does already have a roster of major customers. These include Silvergate Bank and even the NBA. However, despite its impressive line-up, this ancillary service only generated $31.7m of revenue, according to its latest quarterly earnings report. This is up 35% compared to the prior quarter. But it still represents less than 1.5% of the overall revenue stream. And this latest deal is unlikely to change that, at least in the short term. Therefore, the recent jump in the Coinbase share price, to me, looks like investors may be getting ahead of themselves.
Is the rising Coinbase share price a sign to buy?
As exciting as this deal sounds, Coinbase’s revenue remains dependent on transaction fees for cryptocurrency trading on its platform. This digital asset class has received a lot of attention in recent years. But historically, it has been highly cyclical. Therefore, Coinbase’s revenue stream seems to be mainly out of management’s control in its current form. That’s not a risk I’m interested in adding to my personal portfolio. So I’ll be keeping this stock on my watchlist for now.