Wall Street seems to have determined that Coinbase (NASDAQ:COIN) will be more hurt than helped by the new Bitcoin (CCC:BTC) spot ETFs. Meanwhile, COIN’s valuation remains extremely high, and the potentially ruinous lawsuit against the firm by the Securities and Exchange Commission will soon be prominent in investors’ minds.
Most law-abiding COIN users will probably invest in Bitcoin ETFs, while those seeking to evade the law will no longer be able to use COIN’s services to hide from authorities. As a result, COIN’s U.S. business will probably be doomed. Given these points, I advise investors to sell COIN stock.
The Bitcoin ETFs Will Hurt COIN Overall
Coinbase’s shares ran up tremendously in anticipation of the launch of many Bitcoin ETFs. In fact, the shares soared from $70.78 on Oct. 27 to a peak of $186.36 on Dec. 28.
The huge gains assumed the value of Bitcoin would jump tremendously because of introducing the ETFs; a scenario that played out. But the bulls also thought that COIN would get a boost because it would be the custodian for many of the ETFs i.e. hold the Bitcoin that they buy.
It turns out, however, that Coinbase charges over 1% commission on “many” of its Bitcoin trades, while several ETFs charge 0% fees (for now). When they collect fees, they will charge 0.3% or less.
As for the custodial revenue, Barron’s reported recently that “providing services to ETF providers is likely a low-margin business for Coinbase.”
Mizuho, a prominent Japanese bank, estimated that Coinbase’s total annual windfall from the ETFs would max out at around $230 million. That would make up less than 10% of the company’s revenue for the 12 months that ended in September.
The SEC’s Case Against COIN Is Moving to the Serious Stages
The SEC has sued Coinbase for illegally selling securities without registering them with the agency. The agency contends that all cryptos except Bitcoin are securities, and it is arguing that COIN’s staking service, from which it derives a great deal of revenue, is also illegal.
The SEC and Coinbase will present oral arguments for Coinbase’s motion to dismiss on Jan. 17. I expect the judge will dismiss the motion and schedule a trial for spring or summer. Investors may need to consider the possibility of COIN losing the case.
Coinbase opposes registering its coins as securities because it benefits from tax evaders and criminals. Exchanges must provide customer information to Washington for securities trading. COIN’s customers, would obviously not accept that.
If COIN loses its case against the SEC, users who like to invest in coins other than Bitcoin are likely to put their funds elsewhere. Plus, the lucrative staking business will be terminated.
And even in the (unlikely) event that Coinbase wins the case, I believe Washington will find ways to ensure that Coinbase has to divulge the names of its customers and their transactions to the federal government. The U.S. government will probably also find a means of forcing the company to give up its staking business.
Valuation and the Bottom Line on COIN Stock
COIN has a huge trailing price/sales ratio of 10.9. Meanwhile, the company is likely to lose a high number of its law-abiding crypto users to the Bitcoin ETF and all of its criminal users as a result of the SEC’s lawsuit or other actions by Washington.
Before most of Wall Street sees the writing on the wall, it’s time to sell COIN stock.
On the date of publication, Larry Ramer held a short positions in COIN and put options on COIN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.