The market capitalization of the entire crypto ecosystem, as per data from CoinMarketCap, has lost over $1 trillion thus far as macroeconomic conditions have shifted in 2022.
For crypto stocks, a decline in the valuation of crypto assets is bad news as this directly impacts their top-line performance regardless of the role these companies play in the industry.
Pure-play crypto exchanges like Coinbase are among the most directly affected by a drop in the price of crypto tokens as their primary source of revenue is transaction-based fees.
This explains why the value of Coinbase stock has dropped nearly 80% since 2022 started, moving from $252 to $55 per share as of this morning and effectively evaporating billions of dollars in the process.
What is the outlook for Coinbase stock in the context of a crypto winter? Can the company thrive – or even withstand – during such an event or is the stock poised to fall precipitously to fresh all-time lows?
In this article, we share some relevant insights about Coinbase’s fundamentals, the relationship between the business’s performance and the value of cryptos, and what the price action might be foretelling for the near and mid-term.
Your capital is at risk.
The Value of Coinbase Stock is Highly Correlated to Bitcoin (BTC)
Even though Coinbase stock has only been listed for a year or so, that is a sufficiently long period to analyze the correlation between this equity instrument and that of the most relevant crypto asset – Bitcoin (BTC).
According to the chart above, the lowest weekly correlation between the two instruments since the company went public has been 0.7 while the highest reading has been nearly 1 during that same period.
Statistically speaking, a sustained correlation above 0.7 is strong enough to indicate that the value of one asset can be easily predicted if one knows the value of the other.
Coinbase discloses this close relation in its S1 filing with the US Securities and Exchange Commission (SEC), in which it states: “All of our sources of revenue are dependent on crypto assets and the broader cryptoeconomy. Due to the highly volatile nature of the cryptoeconomy and the prices of crypto assets, our operating results have, and will continue to, fluctuate significantly from quarter to quarter in accordance with market sentiments and movements in the broader cryptoeconomy”.
Meanwhile, the company also states that the bulk of its net revenues comes from Bitcoin (BTC) and Ethereum (ETH) transactions. In 2021, the two assets accounted for 45% of the company’s total trading volume while they accounted for 46% of the company’s transaction-based revenues in that same year.
Coinbase’s elevated dependency on both the value and trading activity of these two tokens makes the firm’s market capitalization highly susceptible to changes in both the price and trading volumes of the two assets.
Therefore, if the crypto winter pushes the value of BTC and ETH to extremely low levels, the financial performance of the company will be poised to suffer significantly.
Other Factors to Consider that May Affect Coinbase’s Performance
The previous crypto winter started in December and lasted at least 2017 and lasted at least 2 or 3 years depending on when we define that it was officially over.
During that period, the value of BTC dropped as much as 80% from its peak and stood near those low levels for at least 6 months. After that, the price progressively recovered but then collapsed again.
It took the digital asset three years to fully recover to that peak of around $20,000 per coin and, during that period, alt-coins traded at cents on the dollars.
For Coinbase, BTC and ETH volumes are important as that is the bread and butter of the business. If the value of the two assets declines as much as 80% as it happened back then and stays the same, revenues and earnings will suffer tremendously.
However, considering that other coins made up 54% of the company’s trading volumes in 2021, a drop in the value of alt-coins is also detrimental and it may take those assets longer to recover as confidence in the crypto ecosystem is typically regained after a strong positive move in the price of top assets – i.e. BTC and ETH – and then progressively, and often slowly, positive sentiment starts to spill over other corners of the market.
In summary, the outlook for Coinbase is bearish as long as the crypto market remains in winter mode and there is no way that the company can thrive or perform similarly to how it has in the past couple of years in a depressed crypto market.
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