This article on Coinbase is for education purposes only, and not to be taken as advice to buy/sell. Please do your own due diligence before committing to any trade/investment.
Coinbase stock: Invest for exposure to cryptos (the easier way)
Coinbase just went “IPO” last week and there were some discussions as to what would be a plausible profitable action. For instance, if one should invest in Coinbase stock (ticker symbol: COIN) at the moment.
My honest thoughts are that one should wait for the hype surrounding this block-buster listing to die down before investing in this rather controversial stock. Purchasing Coinbase stocks is an easier way to get indirect exposure to the crypto market.
The shares made a rollercoaster debut on Wednesday, opening at $381/share and rose as high as $429 in a matter of minutes, briefly valuing the company north of $110bn before ending the session at c.$328/share.
The implied market cap of coinbase at $85bn eclipsed that of traditional exchange operators who are much more profitable, as can be seen from the chart below.
For Coinbase, this is not a usual IPO where the company goes public by issuing shares to new shareholders, raising funds in the process.
Instead, they opt for a direct listing where they do not need to pay to investment banks like a traditional IPO for all the “marketing work” but they also don’t raise any money in the process. That is because the company’s current investors sell their existing shares to the public rather than the company offering new shares.
The man-in-the-street investors are typically not too concerned if this is a traditional or direct IPO since most will not be able to get their hands on shares based on the “discounted” IPO price that is usually reserved for high-net-worth and larger institutional players.
So, this manner of listing levels the playing field a little.
The more important question is: Should you be partaking in cryptocurrencies through Coinbase?
As controversial as it may sound to some: Yes, for investing. But wait for the hype to die down or at least not go ALL-IN at the moment. I will explain more on the rationale in a bit, but first, let me highlight some key salient points on Coinbase which you should be aware of as well as point you to the key risks of investing in this newly “minted” listed company.
Some thoughts on Coinbase
For those who are interested, you can check out its prospectus listed over here where the company showed some interesting charts which I will summarize below.
The platform allows you to invest directly in more than 40 different cryptocurrencies, with the ability to also store more than 90 different cryptocurrencies in their digital wallet.
While its prospectus showed 43m verified users as of the end of 2020, the latest figure as disclosed on their website is 56m+ users, a more than 20% growth on a QoQ basis which is the strongest the company has seen since 2018. This is likely in direct relation to the strong performances of cryptos in 2021.
Assets on platform
Likewise, their assets on the platform are no longer the $90bn figure as at end-2020 but a mind-boggling $223bn as of the latest figure.
Coinbase’s platform model is simple. They look to create a platform that is safe, trusted, and easy to use.
At the same time, they look to increase their product offerings on their platform, and with an increasing variety of crypto assets made available for trading, that enhances users’ experience and the value of their platform, in turn attracting more users onto Coinbase.
This creates a powerful flywheel for their business.
How does Coinbase make $$$
According to WSJ, 96% of Coinbase’s net revenue in 2020 came from transaction fees when its users bought or sold cryptocurrencies, which means that the company benefited when there is substantial volatility, both up or down.
This is exactly what is happening to cryptos at the moment which is a boon for Coinbase. Moving forward though, increasing competition could undermine its traditional revenue source which is transactional fees.
However as can be seen from the table above, the company is increasing not just the number of cryptos on its platform available for transaction, it is also enhancing its service offerings to generate recurring subscription and service revenue in areas such as “Borrow & Lend” and “Stake” etc.
At some stage, commission fees will trend lower, just like what is happening to the traditional brokerage industries where every major player is on a ZERO commission structure and makes the bulk of the revenue through the provision of margin facilities.
Risks in investing in Coinbase
There is no doubt several risks are involved in investing in Coinbase. The fortunes of the company are significantly intertwined with that of bitcoin prices and if bitcoin prices do plummet for whatever reasons, it is also a certainty that Coinbase’s share price will take a huge knock.
Competition is intense, with other major players such as Kraken, Bitstamp, etc having much lower transactional fees than Coinbase and there are few barriers to entry when it comes to administering trades. Anyone can set up “low-cost” platforms to allow retail investors to transact in cryptos. Whether those platforms have gotten the necessary regulatory approval might be secondary.
They would also have to deal with more established fintech/financial firms such as PayPal and Square setting up their crypto platforms.
In addition to direct competition, there is also the uncertainty of indirect competition in the form of bitcoin ETFs where consumers might find it easier to transact through ETF vs. the hassle of direct crypto ownership. Can Coinbase diversify and enhance its service offerings fast enough to ensure the “stickiness” of its platform?
Why you should consider investing in Coinbase or some other crypto products
I have provided a quick big-picture summary of Coinbase above. Those who are interested in this new listing can check out its prospectus for more information.
Even if you don’t yet have a good understanding of cryptocurrencies, perhaps you should still consider investing in Coinbase or cryptocurrencies such as Bitcoin or Ethereum in general, but just with a small portion of your money.
Whether or not you are a crypto bull, I think it makes sense to allocate a small portion of your capital, say 5%, to your “DIY” portfolio and “ride it to the moon” along with millions of other investors.
But do also be prepared for a potential “crash landing”.
Let me elaborate more.
Having a “cheat day” in investing
Most people who stick to a strict dieting regime tend to “surrender” and give up before any substantial results are evident.
As humans, we are flawed in many ways, and having the discipline to stick strictly to a particular regime is not something that we are “hardwired” to succeed in. Most of us do not have that discipline to “soldier on” when the going gets tough.
That is why 90% of people fail in their dieting regime without a “cheat day” to refuel and motivate them to continue on their dieting regime.
There is always that “cheat day” to look forward to and when that is incorporated into a dieting regime, the chances of success increase substantially.
The same can be said of a “cheat day” in investing. There are no guarantees when it comes to investing in the stock market but your highest chance of success comes from thinking and acting long-term, being disciplined to invest consistently, and keep your fees low by not over-trading.
For most retail investors, the best way to invest is a passive, automated (dollar-cost averaging) manner with a long horizon in mind.
The problem is as “flawed” humans, we cannot be expected to perform like a robot: no emotions and just follow a certain procedure or protocol. Most of us would likely perform better as a robot but there is always that emotional element that gets in the way of our success.
Most retail investors tend to “FOMO” (fear of missing out) when they see their peers achieving short-term successes in their investments. Greed starts to creep in and they begin “over-investing” in the latest fad (Gamestop perhaps?) They don’t know when to call it quits and the ending typically isn’t a pretty one.
If you are one of those who cannot invest like a robot, then the next best solution would be to carve out a small portion of your capital as your “DIY” portfolio. This is where your investments in “high risk” products such as Coinbase and cryptos can be made.
Your “DIY” Cheat day portfolio
Just like a nice ice cream acting as a “catalyst” to motivate you in maintaining your dieting regime, a DIY cheat day portfolio can also have the same effect when it comes to your investing regime.
Recognize that your core and the bulk of your portfolio need to be invested routinely with a long horizon in mind. This allows the power of compounding to work its magic. Leave the core portfolio alone without meddling with it every other day.
A small portion of your portfolio, say 5-15%, can then be allocated as your “DIY” slice, one where you are free to test your mettle and convinced or “cheat” yourself that you are the next Warren Buffett (if you lean towards value investing) or Catherine Woods (if you favor growth investing).
Just like having the same effect an ice cream does on your diet, the DIY portfolio “motivates” you and satisfies your inner “craving” to go wild on some of your capital for that “lottery windfall”.
With a small allocation to your DIY portfolio, it will not “break the bank” when you realize that you are no Warren Buffett or Catherine Woods. Nowhere near, but at least you get a front-row seat to experience how difficult it is to beat the market.
If it does substantially outperform your core portfolio, congratulations but don’t take the “leap of faith” and become a full-time investor. That is a whole new ball game, to begin with. Stay the course and continue to have “fun” with your DIY portfolio but leave the rest of your portfolio alone. Your future self will thank you for that.
No better time to start your DIY portfolio
So you can start to invest in Coinbase as one of your holdings in your DIY portfolio and monitor how its performance measures up to your core portfolio. My best guess is that it is going to be a volatile ride, but a fruitful one for those who can withstand the counter’s volatility, in the long run.
There has also never been a better time in all of history to be an individual investor. Commission fees have never been this low and multiple options allow a retail investor to get started on their DIY portfolio quickly and hassle-free.
But be mindful that these positives can quickly turn into negatives as a result of FOMO and one cave into the temptation of excessive trading and speculation. Instead of sticking to a strict investing plan and potentially caving into these negatives (and failing as a result), lean into them and have fun with your DIY portfolio.
Even if that does not turn out to be a pretty picture, at least you satisfy your cravings for action while knowing that your core portfolio is working hard and smart for you in the background.
I talk about the potential benefits of investing in Coinbase stock or engaging in active portfolio management yourself. This is to satisfy most investors’ or human beings’ inner cravings for some action. Doing it the right way helps ensure that you keep your emotion “in check” when it comes to investing and protecting the well-being of your long-term portfolio from YOURSELF.
Whether you choose to invest in Coinbase or any other individual stocks that you are familiar with, make sure that you have formulated a plan to invest consistently in a core portfolio with a long investing horizon in mind.
If you enjoyed reading this article and various other investment + personal finance articles, do visit New Academy of Finance. Royston has more than 10 years of buy and sell side experience as a financial analyst. He constantly posts interesting, valuable and actionable articles.
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