Summary Coinbase faces significant volatility and regulatory challenges, with potential impacts from the upcoming election and evolving crypto market dynamics. The integration of crypto payments with A.I. robots presents a futuristic growth avenue, highlighting Coinbase's innovative product development. Institutional demand for crypto is rising, evidenced by BlackRock's ETFs, but investors should be cautious of portfolio holdings and expense ratios. Despite sound fundamentals and product innovation, Coinbase's high valuation and income statement volatility pose substantial risks for investors. When you come for the throne, you better not miss. This goes both ways for Coinbase (COIN). The crypto leader is under constant warfare when it comes to regulatory and market forces. So before investing in the stock or community, there are a few things investors need to be aware of. First, there is tremendous volatility priced in. But also a ton more volatility, which has not been discovered. Bitcoin (BTC-USD) and the alts are very liquid, so the market can move quick in either direction. Second is the upcoming election. Now, an election year tends to be very positive for all investors. Irrespective of your industry niche. But if you choose the right industry, you will earn alpha. In Coinbase's specific case, a new Trump administration would be very positive for the industry. While a Harris administration could increase regulatory hurdles. Below, I break down the different outcomes and what crypto investors need to focus on. How Crypto Will Be Used To Pay A.I. Robots An unsuspected but necessary development. I have been using every single A.I. tool. The new applications are exciting and have thousands of use cases. However, one use case I hadn't seen mentioned was the integration with robots. For example, Figure AI has integrated OpenAI into their humanoid robot. But what is not mentioned often is how we will interact with robots. Specifically, when it comes to delivering commands. Money, or crypto in this case, is one simple way to interact with computers. Via hardware and software. Which is why I was impressed when Coinbase's CEO, Brian Armstrong, published his first X article on the topic in late August. Robots (X.com) Before diving into A.I., Coinbase has one of the best product development teams in crypto. They move quick, experiment often and release fantastic products. I recommend following their other developments. The recent innovations in commerce are impressive too. Now back to robots. In the future, I think we will have 3-4x as many robots as we do humans. This includes cars, humanoids and robots. Many of these bots will have different A.I. software embedded into their hardware. They will be in multiple jurisdictions with a lot of moving parts. So to communicate effectively with them, we will need a more efficient command interface. The old banking architecture won't be effective here. The primary reason is fiat currency cannot deliver instructions. But crypto is embedded directly into some software applications. Giving many crypto infrastructure apps the upper hand here. I don't know if Coinbase will lead the effort, but it is great to see Armstrong publish his thoughts here. Coinbase is so large now that A.I. crypto payments will be only one of many new transactional revenue streams. An Electoral Impact on Crypto The most unexpected crypto event for me this year has been Trump's support of the community. He's taken two notable steps for the industry this year. First was speaking at the largest Bitcoin conference in Nashville this July. Initially, I think his plan was to gain exposure to an underrepresented crowd. At that moment, the Biden/Harris would not provide any support or opinion on the industry. So Trump got the first-movers advantage. Even Trump was surprised to learn the roaring support he received from the community. Especially when he announced the pledge to fire Gensler. Trump at Bitcoin 2024 (WSJ.com) Second was his recent X Spaces with a notable crypto investor, Farokh . Over 1.2m people listened in. Trump announced the launched of World Liberty Financial, a new crypto initiative. You don't need to listen to the two-hour podcast interview. But it is worth noting that Trump is bullish on the industry. X Spaces (X.com) If you are in the crypto community, you are familiar with the regulatory backlash the SEC has delivered. Most of it comes in the form of unclear and uncertain guidelines. Even as a former MIT Blockchain professor, Gensler refuses to provide clarity on regulatory security. Meaning he will not define what is or what is not a security. However, Coinbase is playing offense here. The team has a fantastic legal team led by Paul Grewal. Paul is working day and night looking regulatory contradictions between the courts. Below is one recent example. Paul Grewal posting (X.com) I am grateful Coinbase's legal team is doing this. Not only for shareholders but for the crypto community as a whole. In this particular case, the community needs an institutional leader like Coinbase to charge. The primary problem is, nobody has the firepower to combat with multiple regulatory agencies. It has bankrupted other companies in the past. Even in this case, Coinbase has spent ~$20 million on legal costs during the first six months of 2024. This keeps me bullish on Coinbase, even though there continues to be a dark cloud over the industry. BlackRock's Crypto ETF Performance One interesting point worth noting is the institutional demand for crypto has become real. BlackRock has two iShares ETFs I have been following this year: IBLC and IBIT. IBIT YTD Prices (Google Finance) But like many other ETFs, be careful what you purchase here. The portfolio holdings and expense ratio have a direct impact on your portfolio performance. For example, iShares Blockchain and Tech ETF ( IBLC ) and iShares Bitcoin Trust ( IBIT ) are constructed very differently. I'll come back to why I like Coinbase most. But first let's look into these ETFs. IBIT is most aligned with the underlying holdings. It only has two positions: Bitcoin and Cash. Many institutions cannot buy crypto direct. Buying and managing positions on-chain has too much risk if you are not a savvy investor. However, it is worth comparing this Bitcoin only fund to their iShares Blockchain ETF. The holding structure and expense ratios are very different. First, IBLC has almost double the fee ratio of IBIT. And a very diverse stock portfolio. Many of the names like IBM and AMBA don't provide direct blockchain exposure. Investors are overpaying for misaligned allocations. iShares ETF holdings (Blackrock.com) Also, if you want to learn more about how Coinbase settles institutional crypto trades, read this post by Brian Armstrong. Coinbase post (X.com) Watch for New Regulatory Updates this Week If you are active in the crypto community, I recommend following a few of the accounts Eleanor mentions below. This session is happening offline on Wednesday, Sept 18th. You can find more updates from Robinhood and other experts on X.com later this week. Your Entry Point is Everything Although $COIN is nearing its YTD low, investors need to look beyond this. Coinbase has doubled since last September. Coinbase stock price (Google Finance) So far, I've highlighted a few bullish statements for the stock. However, not everything is rosy in the crypto economy. The number one risk for investors is your entry point. Specifically, when it comes to buying Coinbase. The real risk here is the volatility in the income statement. Coinbase income statement (Google Finance) Since 2019, Coinbase has made and lost billions of dollars. Fiat, not crypto. And today this stock at a $40b market cap with only $3b in revenue. Investors are paying a lot for future growth. A significant premium, to say the least. The number one problem here is the high likelihood investors will have a permanent loss of capital. In five years, the stock has dropped 52%. Even though revenue is up. And more importantly, the balance sheet is showing positive growth. Particularly, the custody assets which are reaching $200b now. Coinbase balance sheet (Google Finance) For me, this has become a conflicting story. Coinbase has built sound fundamentals compared to other crypto institutions and exchanges. Investors love the stock and continue pushing it upwards. Yet, the overvaluation is clear. In the last month, the stock dropped 21%. It will probably continue hovering between $160-180 per share up until the election. But the reality is, there are more reasons for the price to go down than up. Risk on, risk off. I am bullish on product development and expansions. But I think the price is too rich at the moment. Even if it dropped $40-50, investors will be overpaying this type of exposure. And remember, crypto is not in season right. A.I. has all the hype at the moment.
