Coinbase Stock Has Soared Since BlackRock’s Bitcoin ETF Move. It May Not Last.

BlackRock’s filing is meaningful not only because it represents a major move in crypto from one of the biggest players in finance, but also because the application includes a new market surveillance mechanism that crypto bulls hope regulators will like. While Bitcoin futures ETFs have been approved in the past, a fund that holds Bitcoin itself has yet to be waved through by the Securities and Exchange Commission.

Coinbase stock has advanced, just like
Bitcoin,
amid a new wave of digital asset bullishness, but “enthusiasm for Coinbase may prove short-lived,” Berenberg analyst Mark Palmer wrote in a Wednesday note. He rates Coinbase Hold, with a price target of $39 on the stock. The shares closed above $70 on Wednesday.

“We believe investors looking at Coinbase as a play on increasing engagement by institutions with the digital asset ecosystem should first consider the risks the company is facing that could give rise to negative headlines in the near future that would trigger a reversal of the stock’s recent gains,” Palmer said.

His cautious stance boils down to the fact that the broker has been charged by the SEC in a lawsuit that threatens its core business.

Coinbase has said previously that it would continue operating and that it would defend itself against the SEC charges in court.

It’s likely that cease-and-desist orders on Coinbase’s interest-bearing “staking” services—a moneymaker for the broker and a subject of both SEC and state regulatory scrutiny—are coming, Berenberg believes.

Coinbase declined to comment on its financials, citing a quiet period ahead of its next quarterly earnings release.

If Coinbase has to halt its staking service, this potential loss of revenue is much more than any upside from the broker’s role as a custodian for the potential BlackRock ETF, which has yet to be approved by regulators, Palmer said.

“We believe investors looking to invest in Coinbase based on the potential revenue impact from this role should first assess the math around that arrangement, which may not move the needle as much as they think it would,” Palmer said.

The view from within Coinbase is different, according to a person familiar with the matter; for one: the person says Berenberg overlooks the value that Coinbase can deliver to ETF providers beyond custody services, including selling market data. 

The person also says the Berenberg analysis does not appear to account for the distribution of staking revenue across states. The cease and desist orders would only come from individual states that have taken action against Coinbase.

The company—which does business across the U.S.—faces suits from 10 states, including California and New Jersey, so even if all those states were successful with their cease and desist orders, Coinbase might still to be free to offer staking services in other jurisdictions.

Either way, it’s enough to give investors pause for thought amid the pile-on in Coinbase stock.

Write to Jack Denton at [email protected]