The common shares of public companies that operate exchanges usually rise and fall with the popularity of the stuff that trades on them. Coinbase Global Inc. takes that correlation to a whole other level.
For the biggest U.S. cryptocurrency exchange, that means looking at Bitcoin, specifically, the largest digital asset's weekend moves, which can give investors an insight into how Coinbase might open for trading on the Nasdaq any given Monday.
Take, for instance, the second weekend in July, when the price of the token fell 2%. That following Monday, Coinbase lost 2.4%. The weekend after that, Bitcoin retreated 3%. Coinbase? Down 2% that Monday. It's not that it happens every day or every weekend, but enough that Coinbase's correlation -- a gauge of how much the two are moving in tandem, where a reading of 1 indicates lockstep moves -- with Bitcoin clocks in at 0.86 over the past seven weeks.
"It's a very rough proxy but I can understand why it would be a proxy," said BTIG's Mark Palmer, who has a buy rating on Coinbase and a $500 price target. "We have seen, at least historically, strong correlations between Bitcoin and some of Coinbase's most important operating metrics," including its monthly transacting users, he said.
This is possible to glean because Bitcoin trades 24/7, including on weekends, in contrast to most traditional assets, which are typically limited to weekday trading hours. And it's a pattern that's unique to crypto given that very few other assets trade frequently on Saturdays and Sundays.
"Whatever happens in the cryptocurrency market is going to affect Coinbase and the market is pretty effective at correlating those two together and arbitraging those differences to get the right opening price," said Jerry Braakman, chief investment officer of First American Trust in Santa Ana, California, which manages $2 billion.
It might come as no surprise to those who have been following Coinbase's trajectory since its public debut earlier this year.
"When you look at Coinbase, of course it's correlated to the price in Bitcoin and Ethereum, because that's where the majority of the asset-value is in crypto, in those two," said Braakman. "And Coinbase, the business model is basically leveraging that value for revenue. That perfectly makes sense."
Still, BTIG's Palmer says Coinbase's dependency on Bitcoin as a source of revenue has been declining. The coin represented roughly 44% of the exchange's transaction revenue last year, down from about 60% in 2019. "What we fully anticipate is that as Coinbase continues to diversify its platform by adding additional coins, which it's been doing at a much quicker pace of late, and builds out its institutional prime brokerage platform, that correlation should recede," he said.
Investors may want to take an even closer note of Bitcoin's weekend warriors tomorrow to see if that is the likely scenario with Coinbase set to report quarterly results on Aug. 10.
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)