When I get a crazy idea in my head – and believe me, I have a lot of them – I usually like to have at least one semi-reputable source to back up my thesis, however loosely. Recently, I printed a whopper of a concept for Coinbase (NASDAQ:COIN), the popular though controversial cryptocurrency wallet and exchange. Fortunately, my take on COIN stock wasn’t left stranded in the ideological spectrum for too long.
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Better yet, it was none other than the global equities research arm of Bank of America that came to my rescue. On Aug. 13, BofA Securities initiated coverage of COIN stock with a neutral rating and a price target of $273.
Though it’s not raving with confidence, BofA mentioned in a note to investors that “COIN has established an asset-agnostic platform to facilitate activity within the crypto-economy, among a wide range of retail and institutional participants.”
Further, the financial institution added that it could make a bullish case for COIN stock “if we assume that the company will be successful in diversifying its revenues streams away from crypto trading (95% of net revenue in 2Q21) and into other subscription and services (S&S) offerings. Some of these products (staking, lending) are starting to gain more traction, but are still a small part of the business.”
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I couldn’t have said it better myself. In my July article about Coinbase, I stated that I would be a buyer of COIN stock if the underlying company made one change: transition its narrative from being a growth play into a dividend-bearing one.
Now, the mechanics of such a transition is above my paygrade. Nevertheless, there’s a lot of potential for COIN stock if the crypto exchange can move away from its speculative image as BofA suggested.
COIN Stock Can Benefit From Normalization
Of course, the big challenge of shifting Coinbase’s business from crypto trading to anything else is that the former is so darn sexy. You’ve heard the stories about virtual currency bros suddenly becoming millionaires due to their speculative activities.
You’re just not going to get that kind of impact buying dividend-bearing blue chips that yield 2% a year or whatever. But for the sake of COIN stock, the issuing company really needs to think about being as boring as Clorox (NYSE:CLX), or any other snooze-inducing investment.
You see, outside of the pandemic, CLX is something that very few people think about. But no matter what goes on in the economy, people need household goods. Therefore, the company is able to consistently pay out dividends and rising ones at that. According to Dividend.com, Clorox enjoyed 45 consecutive years of dividend increases.
That’s really the target for Coinbase – 45 consecutive years of dividend increases as opposed to selling the idea that investors can make 45x their money. Yes, 45x is undoubtedly sexier than 45 years of dividends. But here’s the thing: 45X rarely happens. And if it’s going to happen in a steadily maturing (relatively speaking) industry like cryptos, investors will have to rely on some seriously scatological digital assets.
The other problem with Coinbase relying on crypto trading per BofA is that as Bitcoin (CCC:BTC-USD) goes, so goes the rest of the blockchain market. That does not happen in the equities sector, which exposes the vulnerability of COIN stock.
Imagine if your profitability potential in the Nasdaq composite rested on one stock traded in the technology-centric exchange. That would probably scare a lot of people away from the equities sector. So, why would Coinbase be any different?
Where Are the Shorts?
Finally, here’s the kicker and it’s an incredibly ironic one: without an easy way of shorting Bitcoin and other cryptos, it’s going to be incredibly difficult to get anyone excited about COIN stock. Like BofA stated, 95% of Coinbase’s net revenue in the second quarter of 2021 came from crypto trading. But is it really trading if you can only go one way?
And that’s the issue – even as a trading platform, Coinbase stinks. By the way, that’s not Coinbase’s fault but rather, the nature of cryptos and crypto exchanges.
But that’s also where the opportunity is. Yes, competition is rife for COIN stock but everybody’s doing the same thing. Since Coinbase has the mainstream name recognition advantage, it should give the mainstream what it wants: diversification.
Don’t abandon the crypto trading element. Instead, Coinbase just needs to be accretive in its approach. For instance, if there was a way for the company to expand its interest-bearing programs, that would bring in the baby boomers and their money.
Imagine, big interest payouts and the protection of a custodial service. Again, I’m not entirely sure about how the mechanics will work but it all begins with an attitude shift. For Coinbase’s sake, I hope management considers what BofA is saying.
On the date of publication, Josh Enomoto held a LONG position in BTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.