NEW YORK, July 20 (Reuters Breakingviews) — Coinbase Global (COIN.O) stock has risen from the ashes of last year’s cryptocurrency market fire. But the rise of digital exchange defies gravity and logic. Not only does Coinbase’s value hang on factors that are almost impossible to predict, but even at best, it’s a mystery why the market believes the company run by former software engineer Brian Armstrong is worth anything like its current value of $25 billion.
Shares in Coinbase got a big boost after money management giant BlackRock (BLK.N) filed to launch a Bitcoin-backed exchange fund this month with Coinbase as its custodian. For an industry still in its infancy, alliances with old-school names on Wall Street are a big win. The extra exuberance came from the legal win for Ripple, the creator of digital tokens that — like Coinbase — have been accused by the Securities and Exchange Commission of selling unregistered securities. Coinbase shares are up nearly 54% in July, handily outperforming the Nasdaq Heavy Composite (.IXIC), which is up 4%.
Coinbase’s coin valuation is a bit like the boiling of the ocean. Its finances are difficult to predict — it made a profit in 2021 but is currently incurring losses, which analysts believe will remain so until at least 2025, according to Refinitiv. But it also faces existential risks. The Securities and Exchange Commission has filed a lawsuit requiring Coinbase to stop trading at least 13 digital assets. While SEC Chairman Gary Gensler has suggested in the past that bitcoin and ethereum, which made up about half of Coinbase’s $2.4 billion in revenue, might not qualify as securities, there’s still no official clarity.
This may explain why analysts covering Coinbase use myriad techniques, and come up with myriad answers. Goldman Sachs (GS.N) estimates the company using projected sales multiples; Citigroup (CN) uses the complex discounted cash flow method; A medium-sized investment bank, Coin, uses the price-to-book method that is often used when evaluating banks. Pricing targets range widely: Analysts polled by Refinitiv believe Coinbase’s valuation ranges from $8 billion to nearly $50 billion.
However, it is easy to see how excited the outcome of the Ripple lawsuit was. Prior to last week, the Securities and Exchange Commission (SEC) had a solid track record in the cases it brought against cryptocurrency companies. But a judge ruled on July 13 that Ripple’s XRP token was just a security — and therefore should have been registered with the SEC — when it was sold to institutional investors, not when it was transferred to retail investors on exchanges. Coinbase primarily makes money by taking fees from individuals, not institutions. The catch is that Ripple’s decision only applies to that specific case, and there is no guarantee that the court will apply the same reasoning to tokens sold on Coinbase.
So it would be unwise for Coinbase investors to rely on the judge which Coinbase wins. That’s why Armstrong has been pressing lawmakers in Washington to craft legislation that would limit the SEC’s ability to regulate cryptocurrency by delegating much of that power to the CFTC instead. This will essentially invalidate the SEC’s case against Coinbase. But the whims of a sluggish and poorly deployed Congress are no easier to predict than the whims of court justices. There are more than 15 proposals to regulate cryptocurrencies in Congress, none of which have come close to becoming law. Memories of intense lobbying by disgraced FTX founder Sam Bankman-Fried still hang in the Washington air.
As a thought experiment, imagine that everything went well. If approved, BlackRock’s application to launch a Bitcoin ETF would give Coinbase a pivotal role in an exciting new investment class, bolstered by its association with the world’s largest asset manager and its influential boss, Larry Fink. The US stock market gives an indication of the size of the market: BlackRock estimates that ETFs own about 13% of equity assets in the US. Given Bitcoin’s current market cap of $584 billion, this suggests that $74 billion ETFs wouldn’t be too stretched.
The problem is that incubation is not a very profitable business. Coinbase earned a fee of about 0.1% of assets held on an annual basis, according to first-quarter filings. So, if it were the custodian of all the bitcoin ETFs launched in the US, it could make about $88 million every year. The value of that is in the same multiple that mega-custodian Bank of New York Mellon (BK.N) is currently trading at, meaning that Coinbase’s custodial business is worth $176 million. If bitcoin prices were to rise when the ETFs hit the market, that would increase Coinbase’s take as well — but it would still barely move the needle.
This makes Coinbase look like a whole lot of value. After discounting net cash of about $1 billion, the $24 billion institution is worth nearly 7 times projected revenue for next year, according to the median forecast of analysts — about trading venues for large, well-established brokerages like Charles Schwab (SCHW.N) and Interactive Brokers (IBKR.O). This is extra generous given the other threats to her business. For example, part of its revenue comes from offering rewards to customers who “share” their bitcoin with Coinbase — an activity the company stopped last week in five US states amid claims by some regulators that it might be illegal.
Investors may think that the tacit thumbs-up from Larry Fink means Coinbase is somehow likely to prevail in their various skirmishes. Or the skeptics could have sold everything long ago, leaving only the faithful to prop up the stock. However, given the current situation, Coinbase’s increased valuation looks as speculative as the digital assets its clients trade, and then some.
He follows @tweet on Twitter
(The author is a columnist for Reuters Breakingviews. Opinions expressed are her own)
context news
Cryptocurrency firm Ripple Labs did not violate securities laws by selling its token to the public on exchanges, a US federal judge ruled July 13.
Ripple is the first cryptocurrency company to win a lawsuit filed by the Securities and Exchange Commission.
However, the judge ruled that Ripple had violated securities laws when it sold $729 million worth of its token, XRP, to institutional buyers.
Shares of cryptocurrency exchange Coinbase Global, itself embroiled in a legal battle with the SEC over whether or not it sells unregistered securities, rose 24% on the day of the Ripple ruling.
Editing by John Foley and Streisand Neto
Our Standards: The Thomson Reuters Trust Principles.
The opinions expressed are those of the author. They do not reflect the opinions of Reuters News, which is bound by the trust principles of integrity, independence, and freedom from bias.
[ad_2]