Coinbase’s Cloudy Future Being Obscured By Bitcoin ETF Frenzy

Sentiment around Coinbase Global Inc. is rising as the long-anticipated debut of an exchange-traded fund that invests directly in Bitcoin appears imminent. That’s fueling expectations for a widespread increase in demand, and apparently prompting some investors to disregard the uncertainty surrounding the largest US crypto exchange.

A spot Bitcoin ETF launch in the US could potentially bring in more business, but it may also push investors away from the platform, analysts argue. And the Securities and Exchange Commission lawsuit filed in the first half also continues to cloud Coinbase’s outlook.

Even with the overhang, the company’s financial performance is expected to improve when it releases third-quarter results later Thursday. While trading volume has likely fallen by more than 50%, analysts surveyed by Bloomberg are expecting revenue of $654.7 million, up from $590 million in the year-ago period. Coinbase’s top line is being helped by greater contributions from its partnership in the USDC stablecoin, which is earning more interest income on its reserves thanks to higher interest rates, and by higher fees Coinbase receives from its trading customers, said John Todaro, an analyst at Needham & Co, who has a “buy” rating on the shares.

Coinbase’s quarterly loss likely narrowed to around $130 million from $544.6 million in the year-ago period, estimates show. It would still be a seventh consecutive quarterly loss as the collapse in crypto prices from the highs seen in late 2021 continues to weigh on the sector.

Shares of Coinbase have jumped about 120% this year to around $78. Even with rally, the stock is well off a record high of more than $400 reached when the company first listed on the Nasdaq in April 2021.

A lot of the stock gain can be attributed to the optimism around Bitcoin ETFs, but investors are overlooking potential regulatory developments, said Stephen Glagola, an analyst at TD Cowen, who has an “underperform” rating on the shares. “This is a business that has existential overhang of whether or not it will be able to still continue to exist as is, pending this litigation with the SEC.” If Coinbase loses the SEC case, it could potentially be broken up into an exchange, retail brokerage and a custodian, he said.

The company has been accused by the SEC of running an illegal exchange, among other allegations. Coinbase is fighting the charges. 

ETF mania could boost Coinbase’s retail business, as more mom-and-pop investors pour money into Bitcoin, including through Coinbase’s platform. While the combined custodial and institutional trading revenue is a fraction of its retail trading sales, the business is a potential growth catalyst with several proposed spot Bitcoin ETF funds planning to use its custody services.

“The larger impact to COIN revenue would come from a Bitcoin ETF raising BTC prices and on the back of that growing retail volumes broadly,” Todaro said.

There’s also the expectation of benefits from the next so-called Bitcoin halvening, in which the number of new coins issued will drop in half in the first half of next year. Past halvenings have typically resulted in rallies, and those have attracted more retail investors — Coinbase’s bread-and-butter customers — into the market. Bitcoin has doubled since the beginning of the year, and jumped recently, on the ETF exuberance.

Already, there are glimpses of a possible turnaround in trading volumes.

For the third quarter “we expect another declining quarter for volumes, but this is starting to look up as October will outpace September, which hit a cycle low,” Todaro said. Coinbase’s spot trading volume in the third quarter was likely the lowest since the company went public, and was down 52% from the year-ago period, according to researcher CCData.

At the same time, there remains concern that ETFs could make Coinbase shares less of a proxy for the crypto market.

“Is the offset that people don’t need to trade Bitcoin on Coinbase because they can just buy the ETF in a typical brokerage account?” said Benjamin Budish, an analyst at Barclays, who has an “underweight’ rating on the shares. “That would be negative for Coinbase.” 

This article was provided by Bloomberg News.