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Why did Coinbase lose 20.5 percent of its value in May

Why did Coinbase lose 20.5 percent of its value in May

Coinbase was hit by declining cryptocurrency prices

According to statistics from S&P Global Market Intelligence, shares of Coinbase Global (NASDAQ:COIN) plummeted 20.5 percent in May. In April, the ascending cryptocurrency exchange went public too with much excitement, but in May, it was hit by a twin whammy of declining cryptocurrency prices and investor pessimism of high-multiple growth stocks. Despite a first-quarter financial report that indicated strong revenue growth and profitability, this was the case.

What happened to Coinbase?

Coinbase announced some insane growth figures in the first quarter, despite high-profile crypto buy-ins from the likes of Tesla CEO Elon Musk, who acquired $1.5 billion in Bitcoin (CRYPTO:BTC) with Tesla’s corporate funds in February. Morgan Stanley, the investment bank, became the first significant U.S. bank to provide crypto funds to its wealth management clients in the first quarter. While the asset is exclusively available to Morgan’s rich clientele, it was another proof of Bitcoin’s potential as a legitimate institutional asset class to have a significant U.S. banking institution approve it.

Why did the stock decline in May, despite such great growth? Following the end of the quarter, the value of Bitcoin and other cryptocurrencies plummeted. Elon Musk revised Tesla’s policy on accepting Bitcoin payments on May 13, citing Bitcoin mining’s “crazy” energy consumption. As a result, from the time those comments were made to the end of the month, the price of Bitcoin fell by around 35%.

The great bulk of Coinbase’s revenue comes from commissions charged as a proportion of crypto assets traded, therefore when the value of crypto assets falls, so will the value of Coinbase’s commissions. It’s not a one-to-one comparison because Coinbase profits from trading volume and volatility as well, but decreasing crypto values have in the past tended to dampen interest in crypto.

What lies ahead for Coinbase?

Coinbase’s stock is currently trading around $229, down from its IPO price of $250. Some investors may view Coinbase’s drop as a huge buying opportunity, given its record-breaking first-quarter performance and lower share price. For example, after the price sank in May, Cathie Wood’s ARK Innovation ETF scooped up more shares, and Coinbase currently owns roughly 3.5 percent of ARKK, making it its 10th-largest stake.

Coinbase is profitable, unlike many other high-growth software-as-a-service stocks. The company is currently trading at around 30 times this year’s profit projections, which is an acceptable price assuming the stock continues to expand strongly.

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Coinbase’s future profit potential, on the other hand, is a large unknown. Estimates for 2022 vary from a $5.23 per share net loss to a $12.10 per-share net profit. Because Coinbase’s earnings are based on crypto interest and asset prices, both of which are extremely volatile, this is the case.

Furthermore, others are afraid that Coinbase’s commission rates, which are typically far higher than a conventional brokerage commission for equity trading, would be eroded by competition. Many brokerage firms currently provide free equity trading.

Like cryptocurrency, Coinbase has a wide variety of possible outcomes. That means investors should include Coinbase in their speculative portfolios and exercise caution when sizing such an investment.

Also read about: Coinbase is getting into NFTs

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