Coinbase (COIN) seems to be down in the dumps since its record-setting IPO from late April 2021. The weakness in Coinbase has much to do with the valuation of BTC, and its heightened exposure to digital gold.
Bitcoin (BTC/USD) continues to struggle on the week, dropping from $60K per coin to $45k per coin in the span of 7 trading sessions. The inevitable volatility of this asset class may finally catch-up to COIN stock holders.
By the numbers, Coinbase reported that it had $335B in trading volume (Bitcoin represented 39%, and Ethereum represented 21% of traded volume). Basically BTC and ETH represent about 60% of Coinbase’s traded volume.
However, Bitcoin is down -25% from its $60K peak, and Ethereum is also down by -15% from its $4K peak. This is typical of the beginning stages of a cryptocurrency meltdown. Usually, the bigger coins tend to sell off, and the rest of the alts tend to get carried away on stretchers.
Bitcoin has reached a key threshold in terms of BTC dominance in relation to market cap, and the same could be said for ethereum as well. Typically, the BTC market tends to correct at around 35%-40% market dominance, with ethereum peak market dominance hovering at 20% (equivalent from the prior market high in 2017).
We are currently at those levels
At this point, it would be safe to assume that Bitcoin dominance will begin to trend higher as the price of alts continue to decline. We think there could be a couple weeks at most before a wave of alts sell-off.
What’s offsetting the 2017 episode could be the accessibility of alt coins on a number of exchanges, but more particularly Coinbase. Though the dominance patterns in terms of BTC/ETH market cap to alts have re-emerged, the availability of alt coins with direct currency trading pairs has also increased. Basically, there’s more onramps, so it could be a while longer before frothy valuations start to deflate, and in turn more negative headlines continue to put pressure on the most recent wave of crypto mania.
Don’t be surprised if, and when, your favorite pundits push out a bunch of “to the moon, or lamborghini comments.” Heck, we expect a negative and harsh response from members of the cryptocurrency community upon publication.
What about Coinbase stock?
Well, if we witness another wave of fear-based selling like 2017-2018 all bets are off. Mainly because surviving through a negative cycle is much more difficult than many of the motivational survivors from past fear-bust cycles will admit publicly.
That being said, the stock’s valuation will deteriorate on the basis of weakening trading volumes. Initially, a sell-off may trigger a lot of volume, which could in turn boost business metrics. But, because the value of assets are trending lower, and lower, the average value of transactions will drop as well.
In other words, Coinbase is just as exposed to a BTC/ETH price meltdown. Both, because revenue, and value of assets on platform will respond poorly to a market rout in the price of both. Keep in mind, 76% of assets on Coinbase platform are valued in Bitcoin or Ethereum terms, which means that if the price of Bitcoin and Ethereum were to drop by 50%(which is certainly plausible), the value of Coinbase assets would drop from $223B (as of Q1’21 figures) to $108B (but perhaps less with withdrawals factored in).
Keep in mind, roughly 3% of Coinbase’s assets are measured in fiat terms, so the remaining 97% of assets are in cryptocurrency terms. These assets would weather a -50% to -80% pullback pretty poorly, and the underlying exchange (Coinbase) would likely report a combination of asset outflows, asset value losses, diminished trade fees, and weakness in volume metrics.
The cryptocurrency markets tend to revolve in cycles, and investors in Coinbase aren’t immune to what could occur. If the risks outweigh the implied upside, it’s because you’re buying near the…