For all the hubbub about the legitimacy of crypto, stock in crypto exchange Coinbase (NASDAQ:COIN) stock is matching the market.
Over the last year, the S&P 500 is up 8.5%. Coinbase stock is up 10.4%.
On the other hand, COIN stock has been a wild ride, trading at $50 in mid-June and at $100 barely more than a month later. Today it trades at $83.
This is good news for traders who like action. It’s a migraine for long-term investors who want stability. But is stability possible?
The Bull Case for COIN Stock
Our Louis Navillier insists there is a bull case to be made for COIN stock.
The company’s losses are coming down, even faster than analysts anticipated. Acquiring a stake in Circle, which runs USD Coin (USDC-USD), could improve profitability.
The main task for CEO Brian Armstrong this year has been to seek a profit by downsizing and turning down the regulatory heat. He has compared cryptocoins to Beanie Babies, while seeking to dismiss the SEC’s lawsuit. He has also set up a pro-crypto trade group.
If Coinbase can find regulatory certainty, he feels it can grow with the market. Analysts like Navillier agree. If either judges or Congress reins in the SEC, COIN stock will fly.
The Bear Case
Stability can be tough to find when the Securities and Exchange Commission (SEC) is saying you’re an unregistered securities exchange. The SEC’s lawsuit came after Coinbase threatened to move outside the U.S. and filed its own suit against the SEC, saying it lacks jurisdiction over its operations.
Even while claiming the SEC told it to stop trading everything but Bitcoin, Coinbase has sought regulations and legislation to let it stay in business. It has also suspended trading in six tokens under regulatory pressure.
The SEC suit represents an existential threat, but one many investors are taking in their stride. Coinbase has many supporters in Congress, and a legal decision favoring rival Ripple’s XRP (XRP-USD) gives them more reasons for optimism.
Growing Competition
While business as usual would be welcome, it wouldn’t take all the pressure off Coinbase.
A key market is “stablecoins,” tied to existing currencies like the dollar, allowing direct transactions of value on the blockchain. Stablecoins could become, in theory, the legal use case that legitimizes the whole industry.
Stablecoin use has been increasing, leading Paypal (NASDAQ:PYPL) to launch one.
Then there’s Tesla (NASDAQ:TSLA) CEO Elon Musk, as there always is. Musk, a cryptocurrency fan, has said he wants to make X, formerly Twitter, into a “super app” supporting financial transactions. This might legitimize Coinbase’ business model, but it could also create real competition.
Finally, there’s Fidelity Investments. They have been experimenting with Bitcoin for years, developing a deep pipeline of crypto industry talent. While it passed on becoming a Coinbase competitor almost a decade ago, it’s now seeking a license to trade Bitcoin and could quickly spin-up competition to Coinbase.
The Bottom Line
Coinbase is the ultimate belief stock.
If you believe in crypto as a competitor to “fiat currencies” like the U.S. dollar, you want to put some Coinbase in your investment wallet and leave it there.
If you believe (as I do) that crypto lacks a functional business model and is a scam, then you want to avoid the stock.
There seems to be little middle ground here, or maybe there is. If you have a sizable portfolio, so that losses in Coinbase won’t be missed, buy some as a hedge.
If Coinbase gets through the regulatory maze, you’ll be well positioned. Just remember that failure remains an option.
As of this writing, Dana Blankenhorn did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
