• Coinbase shares rose more than 470% in 2023.
• Court battle with SEC remains a key risk.
• Bitcoin ETFs – a tailwind or a headwind?

The bulls were back with vengeance in 2023

Coinbase has been one of the best-performing stocks in 2023 with the price appreciating more than 470% over the year, as the business was recording strong financial results amid a huge rally in crypto assets.

From the start of 2024 the share price took a hit, declining 37% on an intra-day basis as of last Friday. After gaining investors’ interest in 2023, traders are wondering if the stock would extend its rally this year, or the selloff from the onset of the year would continue.

For Coinbase to continue to rise in 2024, from a fundamental perspective, crypto currencies must continue their bull market. In such favourable environment, the company could benefit from increased investors interest and potentially attract more users and thus generate higher revenue. However, Coinbase would also need to increase its transaction revenue as big part of the company sales come facilitating digital currency sales.

Coinbase has lowered its cost in 2023 with operating expenses dropping significantly, as the company reduced employee headcount. While the business is at a net loss, it is getting close to breakeven.

While the lower interest rates which the market expects in 2024, are generally beneficial for risky assets, this could potentially have a negative impact on the company. In 2023 stablecoin revenue more than doubled and was the biggest contributor of subscription and services revenue in the last quarter, which was helped by the high interest rates.

From a technical perspective, the chart of the share price clearly exhibits a bull market, which remains firmly intact at this juncture in time, despite the recent deep pull back. The current price is approaching a previous key resistance level of $116.00, where the decline could start losing momentum.

The Relative Strength Index (RSI) so far is firmly in the bull market range, suggesting the current pull back is a normal correction within the overall up trend. As long as the 50% Fibonacci retracement ratio crossing at $109 holds support in the coming month, the bull structure is intact, and a rally in the range between $160 and $170 could follow. A break below $109 would have bearish implications and would signal that the up trend is over.

Source: TradingView

Bitcoin ETFs a headwind or a tailwind?

The spot bitcoin ETFs launch was the main catalyst driving crypto currencies significantly higher in the second half of 2023: however, it may disappoint investors in 2024. Coinbase has fallen in price since spot bitcoin ETFs were approved, dropping 27%.

Most of the spot bitcoin ETFs which were launched on the 11 ^th of January has attracted strong investor interest and has registered big inflows with a combined volume of $2.9 billion by the 18 ^th of January. Despite the impressive performance of the new spot bitcoin ETFs, Bitcoin itself is down 20% since the launch.

Before the 11 ^th of January investors could only gain exposure to bitcoin by directly purchasing the cryptocurrency on an exchange like Coinbase. Now investors can buy shares of the new spot bitcoin ETFs through traditional brokers, raising concerns that Coinbase could lose some of its sources of income.

Most of the spot bitcoin ETFs offer fees lower than 0.4%, while Coinbase charges between 1.5% to 4%. Therefore, investors may prefer to gain exposure to bitcoin via an ETF, which could cause Coinbase’s revenue from bitcoin transactions to decline. Bitcoin transaction fees are around 17% of Coinbase’s total revenue.

However, Coinbase could benefit from these ETFs as the company is a custodian for 8 from the 11 new bitcoin ETFs. As the ETF providers transact in bitcoin, Coinbase will receive 0.2% fee and charge additional fees for storing the bitcoins.

While is difficult to quantify the impact of the spot bitcoin ETFs on Coinbase’s revenue in the early days of their listing, over the long-term, the company is likely to be a beneficiary. As Coinbase charges custodial fees based on the total value of each account, not the number of bitcoins, the price of bitcoin is one of the determinants of the value of the funds held in custody.

Overall, the spot bitcoin ETFs approval is an important milestone in the evolution of crypto currency, which could accelerate its market adoption among investors over the long-term. The U.S. crypto exchange is a global leader with a dominant position and could be one of the beneficiaries of the crypto evolution.

Coinbase and SEC court battle

In June 2023, the U.S. Securities and Exchange Commission (SEC) sued Coinbase for facilitating the trading of unregistered securities in the form of some digital currencies such as Solana and Cardano. The SEC has also targeted Coinbase’s staking program, suggesting it should be registered as an offering of securities.

Coinbase’s request for a dismissal of the SEC’s case was not granted on the hearing on the 17 ^th of January. Nonetheless, the chances of victory for Coinbase are growing. During the hearing, judge Katherine Failla criticized the SEC using a 90-year old legislation for the regulation of new technology such as crypto and voiced scepticism over the SEC’s claim. After the hearing investors are a lot more confident that the judge is likely to grant the request of Coinbase to dismiss the case.

The case seems to be leaning in favour of Coinbase, considering Ripple’s XPR token success in July 2023, where XRP was not classified as a security. The legal battle between Coinbase and SEC is closely watched as it has far more reaching implications beyond Coinbase, and its outcome would affect the entire crypto industry. A favourable ruling would bolster the market, providing stability and regulatory clarity.

In the case of an adverse ruling Coinbase would face significant operational challenges as it will have to restructure its multifaceted functions of exchange, broker, and a clearinghouse, which in security markets are separate businesses. If SEC’s demands are granted, Coinbase could lose a big chunk of its revenue.