The stock price of crypto broker Coinbase Global has experienced an impressive 98.5% increase over the past month. However, analysts caution that this surge may be exaggerated, especially considering the high level of short positions on the shares, which could contribute to its volatility.
Coinbase has benefited from two significant catalysts leading to these gains. Firstly, investment management giant BlackRock applied for a Bitcoin exchange-traded fund (ETF) in partnership with Coinbase as the custodian. This development has generated considerable enthusiasm among investors. Secondly, there was a recent court ruling in a closely-watched crypto securities case. A federal judge determined that Ripple’s XRP token does not meet the definition of a security, contrary to the allegations made by the Securities and Exchange Commission (SEC). This ruling provided a substantial boost to Coinbase’s stock, resulting in a 24.5% gain in Thursday’s trading.
Many investors interpreted Judge Torres’ ruling as a rejection of the SEC’s arguments against Coinbase in their lawsuit. However, analyst Mark Palmer from Berenberg suggests that a closer examination of the ruling reveals that the judge did not explicitly reject the SEC’s position. Consequently, Palmer believes that the extent of Coinbase’s stock rally may be unwarranted.
Despite the recent gains, it is essential to approach Coinbase’s stock with caution due to the existing short positions and potential volatility. Berenberg rates Coinbase as a Hold with a price target of $39, significantly below its current closing price of $107.
In summary, while Coinbase has experienced significant growth driven by partnerships and regulatory developments, analysts believe that the current surge in stock price may not be fully justified based on the recent court ruling. Vigilance is advised when considering investments in Coinbase due to its volatile nature and the prevalence of short positions.
The Ripple Ruling and its Impact on Coinbase
The recent ruling on Ripple has sparked a complex and highly debated discussion. The focal point lies in the classification of security status, which is determined by the nature of the transaction rather than the token itself. While the Securities and Exchange Commission (SEC) continues to review the decision, concerns about Coinbase stock have also been voiced by analysts.
One such analyst, Benjamin Budish from Barclays, expressed his reservations about the recent surge in Coinbase shares. In a note published before the Ripple ruling, Budish downgraded Coinbase stock to Underweight from Equal Weight. Despite this, he raised his price target to $70 from $61, acknowledging some grounds for a higher multiple.
Budish highlighted several factors contributing to his cautious stance. Although Coinbase has shown impressive revenue and cost performance in recent quarters, depressed volumes and USDC market cap, along with a lingering regulatory overhang, pose near-term challenges. Additionally, a significant increase in share value further diminishes the likelihood of immediate positive catalysts from a fundamental perspective.
There are other reasons to exercise caution when considering Coinbase stock. The company has attracted considerable short selling on Wall Street, with over 20% of its shares being sold short or borrowed in anticipation of a decline in stock price. Consequently, this could result in highly volatile trading and potentially trigger a short squeeze similar to what was witnessed with GameStop (GME), AMC (AMC), and other “meme stocks” in 2021.
Prior to market opening on Friday, Coinbase stock experienced a slight decrease of 1.1%, settling at $105.80.