Coinbase: Stock of the Week

This may be a bigger problem than the SEC right now for Coinbase.

Andrew Willis 17 April, 2023 | 4:29AM
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Andrew Willis: Coinbase (COIN) got a little scare from the SEC recently, known as a ‘Wells Notice’. It’s essentially a preliminary recommendation that enforcement action against the Company be taken for alleged violations of securities laws. But the crypto company may have bigger problems right now.

Holders of this crypto stock are right to price in the threats ahead, including the SEC’s notice, which has a pretty wide scope, including company’s spot market business, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet. The immediate implications of the notice have us adjusting our fair value for the company down 3 dollars – but blend in the impact of interest rates, and we see another seven dollars’ worth of reductions.

Equity analyst Michael Miller says that interest income has been a significant positive for Coinbase in an otherwise grim 2022, helping to balance the collapse in Coinbase's transaction revenue. Since the decline in crypto prices and retail interest, the company is no longer profitable and relies on a stablecoin for most of its revenue, through a partnership with Circle.

And that main source of revenue for Coinbase, the interest income? A portion of it was held in Silicon Valley Bank, causing panic around the stablecoin and driving it below its peg as clients reclaimed their contributed capital.

Looking ahead, we still see a multi-trillion dollar crypto market by 2030, and interest income may improve, but in the long term, the company may need to restore its positioning as a safe and fully compliant exchange.  

For Morningstar, I’m Andrew Willis.


bulls Bulls Say

  • Coinbase has established itself as the leading U.S. cryptocurrency exchange and established a strong reputation for security in an industry filled with risk for traders.
  • Coinbase's partnership with the issuer of USDC, Circle, has allowed the firm to benefit from rising interest rates, with interest income providing more than 10% of revenue in 2022.
  • There is a global market for cryptocurrency. Regulatory approval from international regulators will allow Coinbase to expand its operations and increase its footprint globally.

bears Bears Say

  • Cryptocurrency markets have historically been deeply cyclical with long periods of low prices and depressed trading volume. This adds considerable volatility to Coinbase’s revenue flow.
  • Coinbase’s sterling reputation would be heavily damaged if it were to become a victim of theft, an ever-present risk for cryptocurrency exchanges.
  • The regulatory landscape and long-term viability for cryptocurrency remains unclear, with regulators becoming more aggressive in the aftermath of the high-profile fraud and failure of FTX.


Editor's Note: All images are courtesy and APImages. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Coinbase Global Inc Ordinary Shares - Class A207.60 USD4.23Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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