The Coinbase (NASDAQ:COIN) IPO this week was one of the most eagerly anticipated listings so far this year. For many, it represented another test of whether cryptocurrency (and what it stands for) would be accepted by investors. The first day of trading went very well, with Coinbase shares up 52%. Not only this, but news also came through that Cathie Wood’s Ark Investment Management bought $246m worth of Coinbase shares. So should I follow suit?
Coinbase shares for cryptocurrency exposure?
For several years, I was sceptical regarding cryptocurrency in general. Having been a traditional investor for many years, certain coins seemed more like penny stocks to me. This was due to the volatility exhibited, and also the lack of fundamental information that moves were based on.
Although my view hasn’t changed completely, the recent move of some companies (like Tesla) to embrace Bitcoin does soften my position. With PayPal also integrating cryptocurrency on the payment side, I’m more open to consider the fact that the industry does have a mainstream future.
I still wouldn’t buy coins directly, but then along comes Coinbase as a tradable stock. For those not familiar, Coinbase is a digital currency exchange. I think of it as being like the London Stock Exchange (LSE), but for cryptocurrency. On Coinbase, I can buy and sell various coins. It also acts as a custodian, as well as having other spin-off services, such as a Coinbase debit card.Â
I think Coinbase shares provide investors like me exposure to cryptocurrency without actually having to buy coins directly. It should to some extent mimic the broader moves in cryptocurrency markets.
Personally, I don’t know which coins from the hundreds available are the best to buy. So by having one NASDAQ-listed stock representing them all, I think Coinbase shares offer a lower-risk alternative to buying coins directly.
A promising stock worth considering
The fact that Cathie Wood has bought Coinbase shares also gives me confidence that this could be a good play. She’s a prominent and well respected investor, thanks to strong returns driven by the likes of Tesla.Â
In terms of fundamentals, Coinbase makes money like a traditional exchange via the fees charged when customers buy and sell. It also makes money from the interchange between fiat and digital currency. Last year, Coinbase had an average spread of 0.57% on every transaction. This generated $1.1bn in trading revenue on $193bn in trading volume, accounting for a vast majority of overall revenue.Â
I think this is impressive. It’s quite a generous spread given the volume that’s being bought and sold. However, as investors become more savvy with this market I think one risk could be falling revenues as spreads are forced to tighten. Another risk is potential reputational damage from hackers or other security-related breaches that exist within the digital network.
Personally, I do like the idea of buying Coinbase shares as a proxy for cryptocurrency in general. However, I don’t buy during an IPO’s volatile first couple of weeks (with very few exceptions). So I’m going to let this one settle down, and revisit it in a month.