NEW YORK, July 20 (Reuters Breakingviews) – Coinbase Global’s (COIN.O) stock has risen from the ashes of last year’s cryptocurrency market conflagration. But the digital exchange’s ascent defies both gravity and logic. Not only does Coinbase’s value hang on factors that are almost impossible to predict, but even in the best case, it’s a mystery why the market would think the firm run by former software engineer Brian Armstrong is worth anything like its current $25 billion.
Shares in Coinbase got a major boost after money management behemoth BlackRock (BLK.N) applied to launch a bitcoin-backed exchange-traded fund this month with Coinbase as its custodian. For an industry still in its infancy, alliances with old-school Wall Street names are a big win. Extra exuberance came from a legal win by Ripple, a creator of digital tokens that – like Coinbase – had been accused by the Securities and Exchange Commission of selling unregistered securities. Coinbase shares are up nearly 54% in July, handily beating the tech-heavy Nasdaq Composite Index (.IXIC), which rose 4%.
Valuing Coinbase is a bit like boiling the ocean. Its finances are hard to predict – it made a profit in 2021 but is currently loss-making, and analysts think it will remain so until at least 2025, according to Refinitiv. But it also faces existential risks. The SEC has filed a lawsuit calling for Coinbase to stop trading at least 13 digital assets. While SEC Chair Gary Gensler has suggested in the past that bitcoin and ethereum, which made up around half of Coinbase’s $2.4 billion of transaction revenue, might not qualify as securities, there’s still no official clarity.
That might explain why analysts who cover Coinbase use myriad techniques, and come up with myriad answers. Goldman Sachs (GS.N) values the firm using a multiple of forecast sales; Citigroup (C.N) uses the intricate discounted cash flow method; mid-sized investment bank Cowen uses the price-to-book method often deployed when valuing banks. Price targets range widely: analysts polled by Refinitiv think Coinbase is worth anywhere from $8 billion to nearly $50 billion.
Still, it’s easy to see how the outcome of Ripple’s lawsuit sparked excitement. Before last week, the SEC had a perfect track record in cases it brought against cryptocurrency firms. But a judge ruled on July 13 that Ripple’s XRP token was only a security – and thus should have been registered with the SEC – when it was sold to institutional investors, not when it was funneled to retail investors on exchanges. Coinbase makes money primarily from taking fees from individuals, not institutions. The catch is that the Ripple decision only applied to that specific case, and there is no guarantee a court would apply the same logic to tokens sold on Coinbase.
Coinbase investors would therefore be unwise to count on a judge delivering Coinbase a win. That’s why Armstrong has been lobbying lawmakers in Washington to craft legislation that would limit the SEC’s ability to regulate crypto by delegating much of that power to the Commodity Futures Trading Commission instead. That would essentially nullify the SEC’s case against Coinbase. But the whims of a sluggish, thinly-spread Congress are no easier to predict than those of court judges. More than 15 proposals to regulate crypto are floating around Congress, none close to becoming law. The memories of heavy lobbying by disgraced FTX founder Sam Bankman-Fried still hang in the Washington air.
As a thought experiment, imagine everything went right. If BlackRock’s application to launch a bitcoin ETF is approved, it would give Coinbase a pivotal role in an exciting new investment class, bolstered by the association with the world’s biggest asset manager and its influential boss Larry Fink. The U.S. equity market gives an indication of how big the market could be: BlackRock estimates that ETFs hold around 13% of equity assets in the United States. Given bitcoin’s current $584 billion market capitalization, that suggests $74 billion of ETFs would not be much of a stretch.
The trouble is that custody is not a very lucrative business. Coinbase took fees of around 0.1% of assets held in custody on an annualized basis, judging by its first-quarter filings. So if it served as the custodian for all bitcoin ETFs launched in the U.S., it could make some $88 million each year. Value that at the same 2-times multiple at which mega-custodian Bank of New York Mellon (BK.N) currently trades, and that suggests Coinbase’s custody business is worth a paltry $176 million. If bitcoin’s price spikes when ETFs hit the market, that would increase Coinbase’s take too – but it would still barely move the needle.
That leaves Coinbase looking pretty fully valued. After deducting net cash of roughly $1 billion, its $24 billion enterprise value is roughly 7 times its forecast revenue for next year, according to the average of analysts’ forecasts – about where large, established brokerages like Charles Schwab (SCHW.N) and Interactive Brokers (IBKR.O) trade. That’s extra generous given the other threats to its business. For example, a portion of its revenue comes from offering rewards to customers who “stake” their bitcoin with Coinbase – an activity that the firm last week halted in five U.S. states amid claims by some regulators that it may be illegal.
It may be that investors believe that the implicit thumbs up from Larry Fink means Coinbase is somehow more likely to prevail in its various skirmishes. Or it could be that doubters sold out long ago, leaving only the faithful to buoy up the stock. As things stand, though, Coinbase’s surging valuation looks as speculative as the digital assets its customers trade, and then some.
(The author is a Reuters Breakingviews columnist. The 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 U.S. federal judge ruled on July 13.
Ripple is the first crypto firm to win a lawsuit brought by the Securities and Exchange Commission.
The judge ruled, however, that Ripple had violated securities laws when it sold $729 million worth of its token, XRP, to institutional buyers.
Shares in cryptocurrency exchange Coinbase Global, which is itself embroiled in a legal fight with the SEC over whether or not it sold unregistered securities, rose 24% on the day of the Ripple judgment.
