Coinbase has taken cryptocurrency legitimate. At least, that’s the position of many in the cryptocurrency community who see the company’s IPO as proof that digital assets have arrived as mainstream investment products. Investors are excited about crypto, even if many don’t quite know what it is. Regulators haven’t made up their minds about how to treat this product, which creates both risks and opportunities. For investors who want to participate in this market, Coinbase has emerged as an option. Here’s what you need to know. Check with a financial advisor before diving into cryptocurrencies or related assets.
What Is Coinbase?
Coinbase is what’s known as a cryptocurrency exchange. In layman’s terms, this means that it’s an online marketplace where you can buy and sell cryptocurrency tokens such as Bitcoin and Ethereum. Like any other major marketplace, the company offers several services which facilitate this trading floor. It publishes realtime pricing information, operates digital storage for traders’ tokens, and acts as the third-party middleman to all trades that take place across its platform.
In particular, by directly facilitating trades across its platform an exchange makes cryptocurrency trading far more viable than it would be otherwise. While not playing quite the same role as a clearinghouse in an equities market, a cryptocurrency exchange like Coinbase, one of the world’s largest such entities, holds funds in escrow during an exchange to make sure that each trader delivers their promised assets. This lets cryptocurrency investors trade with confidence, reduces the bid/ask spread on popular assets, and makes the exchange’s pricing information more accurate.
How Can You Buy Coinbase Stock?
In early April 2021, Coinbase launched its IPO. It launched at more than $328 per share, with a total valuation of $85.5 billion. This qualified it for the S&P 500 the day that it hit the stock exchange.
You can buy Coinbase on the NASDAQ, where it has been listed since launch. It is traded under the stock symbol COIN.
Mechanically, you can buy Coinbase stock by opening an account with any brokerage that allows you to trade stocks on the NASDAQ exchange. You should be able to make these trades on any mainstream trading platform, as NASDAQ is one of the standard markets in which U.S. brokerages operate.
Should You Buy Coinbase Stock?
There is no way to tell you whether Coinbase is a wise investment. However, there are a few things to consider. At time of writing Coinbase traded at approximately $224 per share. Like all high-value stocks this makes it somewhat more difficult to trade, as investors have to spend considerably more money or can afford to buy considerably fewer shares. However, that also suggests that investors strongly believe in this company’s long- and short-term value.
Investors should consider how accurately Coinbase has been valued. This company had the seventh-largest debut listing in U.S. history and it boasts profits and revenues to support this valuation (with $1.8 billion in revenue during 2021’s first quarter alone). On the other hand, since its IPO the stock has fallen by roughly a third.
The drop doesn’t mean that Coinbase is a bad investment. It might indicate a simple period of volatility, making now a good time to buy if Coinbase was originally fairly valued. On the other hand, it also might mean that the company debuted too aggressively. If so, Coinbase will likely continue to fall until it hits an equilibrium.
Investing in Coinbase is a good way for you to side-invest in cryptocurrency as an asset class. The company’s profits will rise and fall with the cryptocurrency market as a whole, since its profits come from the commissions and fees that users pay on the Coinbase platform. However, it will come without the speculation that investing in a pure cryptocurrency brings. As a company, Coinbase will give you exposure to the market without quite the wild highs and lows of a Dogecoin or Bitcoin. This can be a good thing or a bad one, depending on your interest.
Finally, investors should be careful about the regulatory status of cryptocurrency and the platforms that trade in it. In the long run, arguably nothing will affect a cryptocurrency investment (including one in Coinbase) more than how the Securities and Exchange Commission (SEC) decides to regulate this market.
The SEC has been slow to act on the status of cryptocurrency. While the agency has been clear that it considers some crypto assets securities for the purpose of regulation, it has not created unambiguous categories, black line tests, nor even outlined specifically which major tokens are regulable products. In this silence the cryptocurrency market as a whole has continued to grow, booming to more than $2.5 trillion at time of writing.
Rather than making a clear statement, SEC officials tend to refer investors back to the agency’s Howey Test for whether a product is a security subject to regulation. The Howey Test is a four-point legal test with 38 individual factors and several subheadings. It is also a “balancing test,” meaning you have to subjectively determine which factors outweigh which others. This makes it almost impossible for an industry to regulate itself, as a subjective test can at best provide guidance for how a regulator will rule. It cannot give a binding answer.
Adding to the confusion is the likelihood that virtually all cryptocurrencies do meet the Howey standard. For lawyers and investors this has created significant uncertainty. While the SEC has chosen not to act, creating great freedom in the market, if the agency does choose to act there is good reason to believe that its regulation will be sweeping.
The cryptocurrency industry is well aware of this danger, which drives its often-contradictory stance on the issue of whether cryptocurrency assets are financial products. When speaking to the market, cryptocurrency firms seek investors and speak in the language of initial coin offerings, returns and capital gains. When speaking to regulators these firms insist that crypto tokens are a technology product, no more worthy of SEC oversight than a Word document.
The SEC has been unusually opaque on this issue. The closest that agency officials have come is the occasional non-binding public statement. Yet even Coinbase itself flagged this danger in its investment filings.
The Bottom Line
Coinbase is one of the world’s largest cryptocurrency exchanges. It is traded on NASDAQ under ticker symbol “COIN” and has enjoyed a world-historic IPO. But keep this in mind, especially if you are a long-term, buy-and-hold investor: The regulatory status of the cryptocurrency industry is entirely unsettled right now. How the SEC chooses to classify digital assets going forward will define the value of these investments, and that is a very open question.
Tips on Investing
- Before you buy cryptocurrency, take a step back and make sure that you understand exactly what this product is. Although blockchain is, in a nutshell, ultimately a just a data storage format, this market and the products it creates are far more complicated than that simple summary.
- Cryptocurrency is a wild ride and it very well might have a place in your portfolio, but proceed with caution. Like all speculative assets, cryptocurrency is very risky. Fortunately, SmartAsset’s matching tool can help you connect in minutes with a financial professional in your area to talk through risk management, asset allocation and just how many dogecoins you can afford to hold. If you’re ready, get started now.
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