There have been several large IPOs already in 2021. One of the most anticipated was Coinbase (NASDAQ:COIN). Its shares were listed under a month ago. It’s the second largest cryptocurrency exchange, and so carries forward the momentum of the industry in general. Over the past year, different virtual coins have seen big increases in value as investors have piled in. With Coinbase now being listed, is buying shares a smart way to get exposure to Bitcoin and other coins?
What does Coinbase do?
For some people, it might not be that easy to figure out what Coinbase does. It’s not a digital asset mining company, or a cryptocurrency. Rather, it’s an exchange platform. This means I could register on it to buy and sell cryptocurrency.
In some ways, it’s like the London Stock Exchange, but for digital coins instead of stocks. Now you might think that it would be odd to buy Coinbase shares to get exposure to digital coins. After all, I wouldn’t buy shares in the LSE Group simply because I want to get exposure to stocks!
Yet I think the correlation between Coinbase shares and Bitcoin (or other coins) is different. Coinbase at the moment is the only major listed cryptocurrency exchange. The vast bulk of revenue comes purely from trading fees from people buying and selling coins.
For the moment, the performance of Coinbase as a company is very much tied in to the amount of activity and trading on the exchange. Put another way, the more people who buy or sell Bitcoin, the more revenue Coinbase will make from trading commissions.
Will Coinbase shares mirror crypto moves?
I’ve established that more trading activity is good news for Coinbase as an exchange platform. So in theory, it shouldn’t matter whether Bitcoin moves higher or lower, as long as there is trading activity through Coinbase. This is because it makes money through activity, which could be buying or selling. In the short term, Coinbase shares wouldn’t logically track the direction of a particular coin.
This differs from the long-term view. If investors all sell out of Bitcoin and other coins, then over time, there will be very limited activity on the exchange, which would be negative for Coinbase shares.
Sometimes, the logical doesn’t always happen. This is because people buy stocks for speculative purposes. For example, I don’t believe that the surge in the GameStop share price was due to company-specific performance.
For Coinbase shares, if enough investors buy them speculatively for exposure to Bitcoin, then the share price will likely move in the same way as Bitcoin. There is nothing stopping investors buying and selling stocks regardless of a fundamental value.
In my view, Coinbase shares should have a good correlation to cryptocurrency (Bitcoin in particular) due to speculative investors. But I’m an investor who prefers to buy shares in companies whose product — and future — I really believe in, rather than reacting to speculation. Personally, it’s too early for me to consider buying after the IPO. Recent volatility is very high, so I’m going to sit out until things settle down and I can see how the company is developing.
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.