Investors in cryptocurrencies are on a wild ride, and so are the stocks that belong to this highly volatile asset class.
Coinbase Global (NASDAQ 🙂 closed at a low on Wednesday after a wild trading session with the price fluctuating by about $ 10,000. The largest US cryptocurrency exchange fell a whopping 13% before making up for the loss by closing 5.9% at $ 224.80 amid a broader rout in cryptocurrencies. Yesterday, Coinbase gained about 3.8% to close at $ 233.39.
Since its IPO last month, Coinbase has lost more than a third of its value. The fall in this magnitude has prompted some proponents of this asset class to jump in and buy these precipitated stocks.
Cathie Wood of Ark Invest doubles her Coinbase bet and takes over more shares of the cryptocurrency exchange as the value falls. According to the company's trade packaging, Wood has bought more than $ 90 million worth of Coinbase since Monday.
The head of Ark Investment Management said in an interview on Bloomberg TV that she still expects the cryptocurrency to hit a price of $ 500,000.
She said:
"We go through times of soul searching like this one and scrape the models, and yes, our belief is just as high."
Sharp moves in cryptocurrencies should not deter investors from Coinbase's strong underlying business, according to investment firm Wedbush. Analyst Moshe Katri, who initiated coverage of the stock this week, awarded it an "outperform rating" with a price target of $ 275 per share.
According to the note:
"We view COIN as a" one stop shop "platform, enabling approximately 56 million retail users, 8,000 institutions and 134,000 ecosystem partners in more than 100 countries to participate in the crypto economy."
Bitcoin Bubble Nearly Bursting?
These bullish calls have some rationale, but retail investors should note that Coinbase's earnings are based almost entirely on Bitcoin's performance and are showing signs of a spike in the current cycle. And if this is the start of a bubble bursting, then we still have a long way to go.
Bitcoin has experienced two crashes of more than 80% in its short history. Another such crash means diminished profitability for Coinbase, which generates most of its revenue from trading fees. The extreme volatility this week suggests a crash of this magnitude is still possible.
The recent price drop accelerated after Elon Musk, who has a cult-like following in the speculative trading community, said Tesla (NASDAQ 🙂 would stop accepting Bitcoin as a payment option for its electric cars, noting environmental risks in mining. process. That sudden turnaround came after months of optimistic comments he made about Bitcoin and other digital currencies, making him one of the biggest market movers.
After Musk's shock came the People's Bank of China statement reiterating that digital tokens cannot be used as a means of payment. China has enacted other restrictions on cryptocurrencies in the past, but the new ban and response show that the crypto market is still sensitive to regulatory efforts.
Adding to the regulatory issues is U.S. Treasury Secretary Janet Yellen's statement in January during her confirmation hearing that many cryptocurrencies are being used & # 39; primarily for illegal funding, and I think we really need to explore how we use it. can limit it. . "
Bottom Line
Coinbase stock has become attractive after a sharp downturn, giving long-term investors the chance to buy this name at a much lower price than a month ago when the stock was trading above $ 400.
But continued market volatility and the possibility of regulatory action could adversely affect the company's future earnings. These uncertainties associated with the crypto market make Coinbase only suitable for investors with a very high risk tolerance and deep pockets to absorb large losses.
