S&P500 and Nasdaq trading at overbought levels

It's not just stocks that are on a tear this year. Cryptocurrencies are experiencing a massive upswing too, with Bitcoin, the leading cryptocurrency, surging over 60% year-to-date. This rise isn't just due to investors being more willing to take risks. It's also driven by the historic approval of the first-ever Bitcoin exchange-traded funds (ETFs) by U.S. regulators in January. These ETFs saw a staggering $5 billion flow in on their very first day of trading. Riding this wave is Coinbase, a world-renowned cryptocurrency exchange and wallet provider. Year-to-date, Coinbase shares have increased with roughly 55%.

Coinbase's revenue saw a significant boost in the first quarter, more than doubling year-over-year to reach $1.59 billion. This growth was largely driven by a surge in transactional revenue, which nearly tripled.  Since Coinbase generates roughly two-thirds of its income from trading spreads, this suggests a significant increase in trading activity. However, the story wasn't just about the Bitcoin ETF launch. Coinbase also highlighted a 30% growth in market capitalization of USDC, a prominent stablecoin pegged to the US dollar. This indicates increased demand for this type of cryptocurrency, which likely contributed to overall trading volume.

In addition to transactional revenue, Coinbase also saw a 41% increase in subscription and service revenue year-over-year to $510.9 million. This growth can be partially attributed to the increasing popularity of Coinbase One, the company's consumer subscription plan. The Coinbase One offers benefits such as zero trading fees and higher interest rates on USDC holdings for a monthly fee starting at $29.99. The programme has performed well, surpassing 400,000 subscribers in the first quarter.

A significant portion of Coinbase´s growth is attributable to altcoins, referring to smaller cryptocurrencies. Altcoins have been a breeding ground for speculation, which is good news for Coinbase in the short term, as these assets come with wider trading spreads that generate a significant portion of their revenue. Over half of Coinbase's transactional revenue in Q1 came from trades that weren't Bitcoin or Ethereum. This highlights the dominance of altcoins in their trading volume. However, there's a potential risk on the horizon. Many believe the cryptocurrency market will eventually consolidate, with only a select few winners remaining. If this happens and speculation around altcoins dries up, it could lead to a decline in the trading spreads that Coinbase relies on for much of its revenue.

While Coinbase has enjoyed a significant run-up this year, its current valuation raises concerns. At a share price near $245, the company boasts a market cap of $60.0 billion. However, factoring in its $7.1 billion cash holdings and $4.2 billion debt, Coinbase's enterprise value sits at $57.1 billion. Meanwhile, analysts on Wall Street predict revenue of $5.96 billion for Coinbase in fiscal year 2025 (FY25). This represents a 2% year-over-year decline, suggesting an expectation that the current surge in trading activity won't be sustained. With this estimate, Coinbase trades at a ratio of 9.6x EV (Enterprise Value) to FY25 revenue. Furthermore, Coinbase generated $1.0 billion in adjusted EBITDA in Q1. Even assuming Q1's trading volume is maintained and annualizing the company's EBITDA to $4.0 billion, the stock would still trade at a price-to-earnings ratio (P/E) of 14.3x EV/adjusted EBITDA. These figures suggest a substantial portion of Coinbase's potential growth might already be priced into the stock. Given the surge in the share price so far this year, Coinbase might trade at more risk than reward at these levels.

Coinbase (in USD), one-year daily chart