Cryptocurrency broker
Coinbase Global
has made big gains this year, rising in volatile trading alongside
Bitcoin,
but it may be time for caution on the stock given increasing regulatory headwinds. One analyst thinks a major U.S. enforcement action is coming soon.
Shares in Coinbase (ticker: COIN) were down 2% in Tuesday’s premarket trading, but have soared more than 70% so far this year. The stock has been buoyed by a surge in digital asset prices despite evidence that the core crypto brokerage business has yet to see much of an improvement from the Bitcoin bear market and an increasingly unfriendly regulatory backdrop in the U.S.
The regulatory environment, in particular, is what drove Berenberg analyst Mark Palmer to initiate coverage of Coinbase on Monday with a rating of Hold and a target of $55 for the price. Bitcoin closed just shy of $61 on Monday.
Berenberg believes the Securities and Exchange Commission will soon bring an enforcement action against Coinbase, likely mirroring one against Kraken earlier this year for offering unregistered securities. That action led to Kraken ceasing its interest-bearing “staking” services—a type of lucrative business that Coinbase has also entered as it seeks to diversify.
Coinbase disclosed in March that the SEC had sent it a so-called Wells notice, a warning that the agency may sue the exchange.
Coinbase has maintained that it doesn’t offer unregistered securities and that its staking service differs critically from the one offered by Kraken. Nevertheless, “investors should believe the SEC when it says it views all crypto tokens other than Bitcoin as unregistered securities,” Palmer wrote in a note.
The risks to Coinbase go beyond staking, too, Palmer said. While Bitcoin trading remains a steadfast revenue driver at Coinbase, trading in smaller tokens has become an increasing part of the business. These smaller cryptos or altcoins, along with staking and revenue from the USDC stablecoin, “likely would be targeted by the SEC in the enforcement action that we expect the commission to file soon,” Palmer said.
Coinbase didn’t immediately respond to a request for comment from Barron’s on Palmer’s remarks about a looming enforcement action.
The exchange has telegraphed that it would consider moving overseas if regulatory clarity doesn’t come within the next few years, but doing that successfully “would be a tall order,” Palmer said, given its focus on U.S. investors.
“We believe Coinbase has positioned itself to outlast the ‘crypto winter,’” Palmer said. “However, we also believe investors should be focusing on whether the company would have the ability to successfully pivot its business model and geographic focus if it were forced to curtail or cease a large portion of its activities in the U.S. as a result of an SEC enforcement action that appears likely to occur soon.”
That said, investors shouldn’t necessarily pile into trades against Coinbase, which, along with other crypto-exposed names, have been among the most heavily shorted U.S. stocks.
Shorting Coinbase “is too risky of a proposition,” Palmer said, citing the relatively high amount of the company’s shares that are shorted, which can lead to volatile price dynamics. A short trade involves borrowing a company’s stock and then selling it, with the hope of repurchasing shares later, at a lower price.
Palmer’s mixed view may be a common one on Wall Street, where Coinbase has an average rating of Hold among analysts surveyed by FactSet. Though the stock has an average price target among analysts that implies a gain of 14% from current levels, it might be time to pause for air, especially after the rally this year.
Write to Jack Denton at jack.denton@barrons.com
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