Coinbase (COIN) along with bitcoin (BTC) saw their prices surge briefly at the end of August as the U.S. Court of Appeals for Washington D.C. sided with the former in the ongoing Grayscale vs. SEC tussle over Grayscale’s proposal to convert the GBTC Trust (GBTC) accredited into a spot exchange-traded fund. COIN gained 15%, GBTC 19% and BTC 7.3% on the news. However, those gains have largely receded in this gloomy macro climate and continued resistance from the SEC to approve any spot bitcoin ETF.
Shortly after the Grayscale ruling, the SEC punted again on decisions regarding similar applications from the likes of BlackRock
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Even if the ruling stands on an SEC appeal, it still wouldn’t mean immediate conversion of trust units into ETF units. However, it would make that eventuality much more likely. In the event that such conversion is actually triggered by the SEC’s nod, current GBTC holders wouldn’t have to do anything or be exposed to any tax event.
This article will explain how this ruling could impact the cryptocurrency market, specifically Coinbase
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Coinbase Stock: Key Metrics
Key metrics to be aware of if you are considering investing in COIN:
- Coinbase Global (COIN) has a market cap of $19 billion.
- COIN is trading on Nasdaq at around $70 per share (52-week range: $31.55 – $114.43).
- The stock has a three-month average trading volume of 13.8 million shares.
- Coinbase’s trading platform sports a $92 billion quarterly volume in cryptocurrency trade.
- The platform manages about $128 billion in total assets currently.
Coinbase has done well for investors so far this year, up more than 140% year to date. However, a long-term review reveals that COIN is trading way below its October-November 2021 highs above $350 per share. During the period of November 2021 to May 2022, COIN declined to nearly $60. The initial 2021 rally was fueled by, to a large extent, exceptional business metrics reported through 2021 by Coinbase. Monthly Transacting Users (MTU) amounted to $11.4 million in transaction value in 2021 as compared to $2.8 million in 2020. Trading volume surged from $193 billion in 2020 to $1.6 trillion in 2021, and assets on the platform increased from $90 billion in 2020 to $278 billion in 2021.
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Other broader crypto market factors that also fueled the boom included:
- Bitcoin
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- An NFT boom
- Large corporate purchases of Bitcoin by the likes of MicroStrategy
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- Investor optimism around Bitcoin’s Taproot upgrade, as miners signaled their support for the upgrade with a 90% consensus on June 12, 2021 – an upgrade that was finalized in mid-November 2021
- The total value locked on DeFi increased 7-fold with the ether competitors, avalanche
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Coinbase is now recovering, albeit at a slow pace. A spot ETF approval could be bullish for Coinbase since it is the chosen custodian for virtually all the spot-ETF applications with the SEC so far. Additionally, a growing price of bitcoin could increase trading volume for the exchange for existing customers. However, investors must also keep in mind that since spot ETFs would be exchange-traded on NYSE Arca, first-time investors, resistant to the hassle of signing up at Coinbase may choose to buy them directly through their brokerage account. So, some demand retraction could be expected to that end.
Does A Bitcoin ETF Exist?
A Bitcoin ETF is an exchange-traded security that provides exposure to securities that trade on bitcoin’s price movements. They provide investors who are not comfortable investing directly in cryptocurrency, an option to trade in them. Through the ETF route, investors needn’t have a crypto wallet or register on a crypto exchange. They can buy and/or sell a bitcoin ETF just like other traded securities.
Currently, ETFs pegged on spot bitcoin prices haven’t been approved by the SEC. However, futures-based Bitcoin ETFs were approved in 2021 and we now have a couple of active Bitcoin futures ETFs trading on U.S. exchanges. These offer exposure to bitcoin futures contracts trading on the Chicago Mercantile Exchange (CME). Among the handful of Bitcoin futures ETFs trading in the U.S., the ProShares Bitcoin Strategy ETF (BITO) clearly dominates the market (90% of it!) with about $890 million in assets under management and an expense ratio of 0.95%. The VanEck Bitcoin Strategy ETF (XBTF) with $44 million in AUM and an expense ratio of 0.76% comes next, while the Valkyrie Bitcoin Strategy ETF (BTF) offers a third option to investors. BTF currently has about $25 million in AUM and its expense ratio is as high as BITO at 0.95%.
As I mentioned earlier, Grayscale Investments currently has a Grayscale Bitcoin Trust that’s traded on the OTC markets. Per regulation, these trust units can only be offered to accredited investors, are subject to a six-month holding period and are not redeemable. Grayscale is currently trying to get the SEC’s nod on spot crypto ETFs, to convert GBTC into an ETF.
What Was The Recent Bitcoin ETF Ruling?
The market for cryptocurrencies gained on August 29, as a three-judge panel in the U.S. Court of Appeals for Washington D.C. sided with Grayscale and ruled that the SEC was wrong in rejecting Grayscale’s proposed spot bitcoin ETF. Per the ruling, the SEC did not adequately explain its reasoning behind the disapproval (in June 2022) and hence, should review its decision. The SEC now has 45 days to appeal the ruling.
This is positive news for the cryptocurrency market. Bitcoin gained nearly 7% on the news to touch $27,910. Apart from Grayscale, other asset managers that have also applied for a spot Bitcoin ETF approval include BlackRock, Fidelity and Invesco
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Grayscale’s assertion is that the bitcoin spot and futures markets are 99.9% correlated, so the regulator must explain the reasons behind the differential treatment between Bitcoin futures ETFs and spot Bitcoin ETFs.
Getting the SEC’s approval for a spot Bitcoin ETF would be net positive for the entire cryptocurrency market–the currencies, as well as the exchanges that facilitate trading in them like Coinbase.
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What Is The Outlook For COIN?
The consensus price per market analysts for Coinbase stock is currently $88.29 per share with consensus revenue in the range of $2.21 billion to $3.63 billion.
COIN is currently trading near about $70 per share. Revenues for fiscal year 2022 stood at $3.1 billion. Another estimate of analyst ratings provided over the past three months, states a $80.65 per share as the 12-month price target for COIN stock. This is an average based on 23 analyst recommendations with targets ranging from a low of $27 per share to a high of $145 per share.
Is Coinbase A Buy?
Earnings and consequently EPS at Coinbase are currently in the negative territory, rendering valuation on a P/E basis redundant. And, a quick look at the sales multiples for Coinbase with its sector median doesn’t lead to positive results either. COIN stock is currently trading at a forward enterprise value-to-sales multiple of 6.09 vs. a sector median of 2.97 and a forward price-to-sales multiple of 6.67 vs. a sector median of 2.28.
From a valuation perspective, it appears this may not be the best time to enter COIN stock. This is partly because, historically, Coinbase’s business revenue has largely been a function of trading volume. Investors must note that this is changing.
Coinbase has already been making efforts towards diversification of its income stream. It is now also into custody and staking services. About a quarter of its revenues in Q2 2023 were attributable to interest income. A majority contributor to that is its stablecoin USDC
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Additionally, in February 2023, Coinbase also launched its L2 Network. Base is a secure, low-cost, developer-friendly Ethereum
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However, once positive events like a probable spot Bitcoin ETF approval by the SEC come into effect, which should lead to an increase in bitcoin adoption and trading and serve as a catalyst for Coinbase business, investors may want to reevaluate the stock for its future potential.
Finally, it must be mentioned that Coinbase is currently facing a lawsuit from the SEC claiming that it is operating as an unlicensed national security exchange. The complaint was filed in early June and Coinbase has taken a strong public stance that it disagrees with the regulator’s perception and intends to vigorously defend itself in court. A case as complicated as this could take years to adjudicate itself, and it could even become moot if Congress passes legislation that outlines when a digital asset is a security (and thus falls under the regulator’s purview), and when it is not. Coinbase will largely continue to operate as normal until then.
First Trust SkyBridge Crypto Industry & Digital Economy ETF (CRPT), Global X Blockchain ETF (BKCH), Fidelity Crypto Industry and Digital Payments ETF (FDIG), iShares Blockchain and Tech ETF (IBLC), Bitwise Crypto Industry Innovators ETF (BITQ) and ARK Fintech Innovation ETF
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