Investor Essentials Daily

This exchange offers high-risk/high-reward exposure to the crypto market

April 4, 2024

Bitcoin ETFs started trading on major stock exchanges in January 2024 after the SEC approved the first Bitcoin ETFs, offering new exposure to cryptocurrency for stock market investors. 

Prior to this, exposure was mainly through stocks of cryptocurrency exchanges like Coinbase Global (COIN), which went public in April 2021. 

As the largest U.S. cryptocurrency exchange, Coinbase earns most of its revenue from transaction fees and offers services like margin trading and facilitating ICOs. 

The company’s stock has been a high-risk/high-reward option for investors seeking indirect exposure to cryptocurrency fluctuations. 

Despite a significant drop in crypto prices in late 2022, Coinbase stock surged almost 700% since early 2023, driven by renewed interest in cryptocurrencies amid inflation and traditional stock sell-offs. 

The market expects Coinbase to achieve even higher returns going forward, although this outlook is optimistic given the volatile nature of cryptocurrencies. 

Investors should be aware of the significant risks involved, including potential future crashes that could affect Coinbase’s business and stock price.

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Bitcoin ETFs only began trading on major stock exchanges in January 2024, with the approval of the first United States spot Bitcoin ETFs by the Securities and Exchange Commission (“SEC”).

Stock market investors previously had limited ways to gain exposure to cryptocurrency markets. One such avenue was through the publicly traded stock of major cryptocurrency exchange platforms.

Coinbase Global (COIN), which operates the Coinbase cryptocurrency exchange, was one of the first major platforms to go public via a direct listing on the Nasdaq stock exchange in April 2021.

As the largest cryptocurrency exchange in the United States, Coinbase generates the majority of its revenue through transaction fees and commissions charged on cryptocurrency trades made on its platform.

It also offers other services correlated with overall crypto demand, such as margin trading where investors can borrow funds to amplify their trades, as well as facilitating initial coin offerings (“ICOs”) for new cryptocurrency projects.

Due to its direct tie to cryptocurrency trading volumes, Coinbase stock provided a higher risk/higher reward way for mainstream investors to gain indirect exposure to fluctuations in the prices of digital assets like Bitcoin and Ethereum without having to purchase the cryptocurrencies themselves.

When crypto prices surged in 2021, Coinbase saw massive growth in its user base and revenues.

However, the crypto markets experienced a sharp crash in late 2022, with Bitcoin falling over 70% from its all-time high set in November 2021. This decline spooked many individual investors who had lost money.

But with inflation continuing to rise and traditional stocks also selling off, some investors have once again turned to high-risk, high-reward plays in 2023 like cryptocurrencies and related stocks. Coinbase stock rebounded strongly, gaining almost 700% since the start of 2023.

Our Embedded Expectations Analysis indicates that the market currently expects Coinbase to achieve even higher Uniform returns on assets (‘‘ROA’’) going forward compared to historical levels.

Take a look…

This suggests investors are betting on sustained high crypto prices and trading volumes fueling Coinbase’s revenues and profitability.

However, it remains optimistic to assume cryptocurrency valuations and speculation will continue rising indefinitely, given their highly volatile nature versus traditional assets. As such, Coinbase stock still entails significant downside risk if the crypto bear market resumes.

Investors who purchase Coinbase shares should do so with the understanding that cryptocurrency prices may continue fluctuating wildly or potentially crash again, taking the company’s business and stock price down with it.

Coinbase may not be a suitable holding for those lacking a strong long-term conviction that digital assets like Bitcoin can retain their value in the future.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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