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Coinbase stock rose around 9.8% to $89.15 on Tuesday.
Gabby Jones/Bloomberg
Shares of
Coinbase
Global soared nearly 10% on Tuesday on news that the crypto-trading platform has a role in attempts to launch a Bitcoin exchange-traded fund, but investors should think twice before pursuing this. which is probably a short press.
cboe
BZX Exchange has filed amendments to five spot Bitcoin ETF applications confirming that it has entered into supervisory sharing agreements with
Coinbase
(ticker: COIN) to identify fraud and manipulation on the Coinbase platform.
The deal is seen as a big boost to ETF launch efforts, as the Securities and Exchange Commission cited the potential for fraud in dismissing earlier efforts.
On Tuesday, Coinbase shares rose around 9.8% to $89.15, giving it a staggering 76% return for the month.
The deal could indeed be a boon for apps, paving the way for a Bitcoin fund that attracts institutional investors and bolsters token prices. But the revenue opportunity for Coinbase is less clear and could even ultimately damage the stock.
Although Coinbase and the Cboe have not released terms of the deals, they are unlikely to significantly increase Coinbase’s revenue, said Ryan Coyne, an analyst at Mizuho.
“The first thing Coinbase needs is to spin the flywheel of retail activity,” Coyne said. With successful ETF deals, “Coinbase could probably get more institutional volume, but it’s not bringing in meaningful revenue.”
The reason for this is the big difference between what Coinbase does on retail transactions and those done by institutions. More recently, the company was able to collect fees amounting to about 1.68% of retail transaction volume versus 0.02% for institutional ones, said Coyne, whose firm rates Coinbase “under -efficient”.
The fees it charges for the custody of institutional assets are also relatively paltry. That means a potential Bitcoin ETF could even eat away at Coinbase’s revenue if it causes retail traders to turn to the new products, he said.
Coinbase declined to comment.
The underlying reason for Tuesday’s rise could be the massive bets investors have placed against the stock. Short sellers have borrowed about 22% of Coinbase’s available shares, according to FactSet. This means that even a small piece of news or a move in the stock can cause a rush of investors looking to buy back shares before their losses pile up. Coinbase has already seen such phenomena in recent weeks, Coyne said.
Investors may get a better sense of the size of the ETF trading opportunity when Coinbase releases its second quarter results in early August. In past earnings calls, company executives said they are trying to diversify the company’s revenue away from retail so Coinbase can make money even when traders are less active. , as they have been recently.
But until then, investors should beware. Snaps are fun while they last, but dangerous to chase.
Email Joe Light at joe.light@barrons.com