Berenberg expects Coinbase to encounter regulatory challenges similar to those faced by Bittrex and Kraken.
In a recent research report, Berenberg has revealed that the Securities and Exchange Commission (SEC) is preparing to take enforcement action against leading cryptocurrency exchange Coinbase (COIN). This action is expected to parallel the regulatory measures taken against other crypto exchanges, including Bittrex and Kraken. Berenberg, which initiated coverage of Coinbase with a hold rating, set a price target of $55.
Coinbase shares closed at $60.77, marking a 6% increase
According to Berenberg's estimates, approximately 37% of Coinbase's first-quarter net revenue, totalling $736 million, was derived from transaction fees, spreads on non-Bitcoin crypto tokens, and staking services. Analyst Mark Palmer warned that these revenue sources would likely be targeted by the SEC during the anticipated enforcement action.
Additionally, Palmer suggested that Coinbase's other income streams, such as interest income from USD Coin (USDC) and custody services, could potentially become entangled in the SEC's broader scrutiny of the crypto industry.
The report highlights the significant challenge Coinbase would face if it attempted to pivot away from its U.S. operations.
Around 86% of Coinbase's net revenue over the 12 months ending March 31 originated from its U.S. business. Successfully transitioning away from this dominant market would be a formidable task for the exchange.
Berenberg cautioned against shorting Coinbase shares, citing the high risk associated with the trade. Currently, approximately 23% of the exchange's free float is already sold short. Shorting involves borrowing security with the expectation of its price declining, allowing the borrower to repurchase the security at a lower price and profit from the difference.
Adding to the concerns, Wall Street giant Citi downgraded Coinbase from buy to neutral and lowered its price target from $80 to $65 earlier this month, citing the prevailing regulatory uncertainty.
Coinbase is facing the prospect of enforcement action from the SEC, mirroring actions taken against other major cryptocurrency exchanges. The potential impact on Coinbase's revenue streams, particularly those associated with non-Bitcoin crypto tokens, staking services, and other sources, could be significant.
As the company heavily relies on its U.S. operations, successfully navigating away from this market presents a substantial challenge. Traders are advised to approach shorting Coinbase shares with caution due to the considerable risks involved.
The regulatory uncertainty surrounding Coinbase has also prompted a rating downgrade and a reduction in price targets from prominent financial institutions like Berenberg and Citi.
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