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Coinbase follows bitcoin lower, but stock could provide amplified view of crypto sphere

Coinbase on the back foot after bitcoin sell-off, but could the company provide a more volatile reflection of crypto pricing?

Coinbase IPO coincides with market downturn

Last week saw Coinbase provide the latest step in legitimising cryptocurrencies after years of skepticism from the traditionalists. In a realm full of volatility, the $76 billion listing provided markets with another means to invest in the crypto sphere without the dangers associated with holding the assets themselves.

However, despite optimism that this listing would bring greater confidence and legitimacy, its Wall Street inception instead brought a sharp downturn in bitcoin which ended up losing 19% from its peak a week ago.

There are a number of reasons why this could be the case. Firstly, the Coinbase initial public offering (IPO) also saw a huge unloading of shares from prominent employees, with chief executive officer (CEO) Brian Armstrong selling $292 million of stock on day one. While that only accounted for 1.5% of his holding, it perhaps signalled to markets that he saw the current lofty valuations as a place to take profits.

Another issue to note is the fact that while Coinbase provides a worthy proxy for crypto prices, the fact is that funds redirected towards their stock could cannibalise demand for cryptocurrencies themselves.

Perhaps some traders will see Coinbase as a means to invest in crypto with additional safety, tax, and dividend benefits. Nonetheless, it is worthwhile noting that bitcoin daily trade volume is estimated at $22.3 billion, which means that the market cap of Coinbase is traded every few days.

Nevertheless, while this IPO does provide the benefit of bringing cryptocurrencies further towards the mainstream, the long awaited bitcoin exchange traded funds (ETFs) would perhaps provide greater benefit as it would be backed up by the asset itself.

Coinbase valuation not only driven by bitcoin prices

The Coinbase share price has been fluctuating alongside movements in bitcoin, with the company benefitting from growth in valuations as it grows the assets of their clients.

However, while the price of bitcoin is going to play a crucial role in determining Coinbase performance, the company will also rely of increased trading activity going forward.

The lack of diversification and the correlation between all assets mean that the company provides an investment which has the potential to enhance any market moves.

With that in mind, many investors will be wary of another capitulation in crypto prices, akin to the moves seen in 2014 and 2018. However, we also have the possibility of further upside to continue the ongoing push into record highs.

For traders it makes sense to understand that higher prices bring higher revenues thanks to increased trade size, it is also brings more potential traders to the table.

Conversely, a dramatic collapse in prices served to scare off many of the less strong-willed crypto investors, while a steep drop in client assets will also mean their positions are progressively smaller.

Thus while this stock provides a proxy for crypto movement, the fact that prices will impact volumes will potentially create a stock that is more volatile than the underlying assets many had been expecting it to mimic.


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