The strange case of soaring Coinbase stock – after SEC charged the crypto exchange

Open this photo in gallery:

Share prices are near a high for the year for Coinbase Global Inc., COIN-Q despite the charges it is facing from the Securities and Exchange Commission.

Back in June, the SEC had accused the biggest U.S. cryptocurrency exchange, which also operates in Canada, of a litany of violations, including operating without proper registration and the illegal sale of securities. Coinbase stock was down 12 per cent on the news.

And now, at nearly US$80 per unit, the company’s shares have more than recovered. They are up more than 50 per cent for the month.

This stands in stark contrast to the fate of Binance, the biggest crypto exchange in the world and Coinbase’s comrade in arms in being targeted by the SEC. Binance – founded by a Canadian, but which has said it would leave the domestic market – was charged just a day before Coinbase.

While Binance is a private company, we can see the effects of the SEC charges on its user outflows. For roughly the month of June, Binance’s share of dollar-denominated crypto trading has tumbled to just about 1 per cent, down from a high of 27 per cent. Meanwhile, Coinbase’s actually grew in the same period, to 56 per cent from 46 per cent – it had clearly scooped up lots of ex-Binance users.

Coinbase’s good fortunes lately are the clearest sign that the two platforms are not the same. For investors who can take the risk, Coinbase should be a stock to note.

The main reason for the company’s appreciation: A long list of players, including fund managers BlackRock Inc. and Fidelity Investments, as well as the exchange operator Cboe Global Markets, are all separately partnering with it for proposed bitcoin exchange-traded funds in the United States.

This product, a bitcoin ETF, already exists in Canada. Like a gold ETF, it allows people to bet on the underlying commodity without actually owning it. It would allow you to effectively hold bitcoin in the American version of the registered retirement savings plan.

These current ones being proposed in the United States would be the first spot bitcoin ETFs there. (Existing ones are based on futures contracts, a derivative, and not actual bitcoin.) A spot bitcoin ETF, observers say, would usher in a wave of new investor interest in the cryptocurrency.

What really speaks to Coinbase’s strength in the markets is that it rallied when bitcoin itself barely moved. Bitcoin did go up by a little on the news of the proposed ETFs, but not by much, and at around US$30,000 currently, it has surrendered nearly all of its measly gains.

What this means is that Coinbase wasn’t simply going up and down with its sector. It was rallying based on factors specifically to it, namely that it has apparently established itself as a de facto crypto partner for big mainstream finance players such as BlackRock, Fidelity and Nasdaq.

Coinbase’s good fortunes lately also make sense when we consider that it faces fewer charges than Binance from the SEC, and that Coinbase’s founder and chief executive, Brian Armstrong, is not personally charged, unlike his counterpart at Binance, Changpeng Zhao.

The caveat to all this is that a bet on Coinbase right now is essentially a bet on the successful application of a bitcoin ETF by one of the three contenders. While names such as BlackRock, Fidelity and Cboe do carry some heft, it is worth remembering that lots of other big names have applied for spot bitcoin ETFs in the past, and none has succeeded.

Moreover, Coinbase has already rallied so much: Are the potentially nonexistent gains from an uncertain ETF application already baked in? And let’s not forget this is a company with a negative price-to-earnings ratio, meaning that it is losing money. No, it can’t exactly be called a buy.

But Coinbase’s recent performance and its partnerships with mainstream finance have earned it some consideration. If it can resolve its SEC charges, there is potential for the company to warrant a second look in the future.