Problems Are Piling Up For Coinbase Stock

Wall Street experts are turning against Coinbase Global COIN -5.41% as the cryptocurrency broker experiences increasing regulatory and financial difficulties. Given that the shares have nearly doubled in value since 2023, investors could also want to take another look.

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After plunging 86% in 2022, shares have now up 97% since the beginning of January. The price of Bitcoin BTCUSD -2.92% has increased, and investors are now more ready to take risks, which has boosted the stock. Yet, the same factors that caused Coinbase stock to plunge last year still exist.

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Retail investors, the company's major customer base, are discouraged from trading as regulatory headwinds are intensifying and the cryptocurrency markets remain historically depressed.

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After a ferocious rise, Christopher Brendler, an analyst at D.A. Davidson, said, "We're taking a break on shares of Coinbase." In a report published on Thursday, Davidson downgraded the stock to Neutral. Despite the stock's nearly doubling in value thus far this year, threats are still rising.

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Brendler's caution is largely a result of the legal context. Last year, as a result of cascading values, multiple alleged frauds, and a run of high-profile bankruptcies, regulators and lawmakers focused more on cryptocurrency. The Securities and Exchange Commission has been adopting a harsh approach with numerous measures in recent days; the collapse of FTX in November seems to have only enhanced scrutiny.

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Brendler stated that although "we still think Coinbase is the long-term winner, the SEC is definitely taking a more confrontational attitude on crypto." He pointed out that the SEC has targeted Coinbase's three business segments—stablecoins, staking services, and custody—in recent weeks, including measures against rivals Paxos and Kraken.

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A representative from Coinbase declined to comment on Brendler's or other analysts' opinions regarding regulation, but instead directed Barron's to comments made by the company's chief legal officer, Paul Grewal, who claimed that the recent SEC actions are "about bringing the rest of the industry to the standard Coinbase has set for itself."

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There is also the question of whether price increases in Coinbase stock are due to technical or evolving fundamental share demand. The latter is more likely, and therefore undermines the argument that the stock has more upward potential.

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On Wall Street, betting against or shorting crypto equities is a common practice. As of the beginning of this month, short sellers had borrowed more than 25% of Coinbase's shares, which is much more than the industry average. When heavily shorted equities increase, traders who have bet against them are under pressure to cover their bets by purchasing the shares.

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And it may result in additional gains, giving everyone who has bet that prices will decline even more motivation to purchase.

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Brendler is one of many analysts who believes Coinbase's ascent, which has featured numerous days of double-digit changes, is indicative of a stock that has been severely shorted. Investors should exercise caution since purported short squeezes can quickly fizzle out.

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Analyst Dan Dolev from Mizuho 8411 -0.54% Securities, which rates Coinbase as Underperform, has revised his financial projections for the business and restated his belief that the stock still had a lot of room to fall.

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Dolev has a core point of view. The "crypto winter" that has kept Coinbase out of the market is still going on, despite the fact that they still rely significantly on trading fees from regular investors. Transaction revenue for the first quarter is anticipated to be 10% to 20% lower by Mizuho than what Wall Street anticipates.

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"In the beginning of 2023, Coinbase's extremely successful retail investors are not active. Volumes for institutions are all that are left. The income gap created by declining retail engagement, however, does not appear to be filled by their low take rates, Dolev wrote in a note on Thursday. We anticipate more gloom and disaster.