Sunday, February 25, 2024

Will these crypto stocks get a boost from new Bitcoin ETFs?

Key Points

  • Bitcoin-related stocks Coinbase, MicroStrategy, Marathon Digital and Riot Platforms traded lower as new spot Bitcoin ETFs went live.
  • Large-cap Coinbase acts as the custodian for Grayscale’s Bitcoin ETF, although regulatory and legal challenges persist.
  • Bitcoin miners Marathon Digital and Riot Platforms have been showing volatile trade recently, reflecting investor indecision about valuation.
  • 5 stocks we like better than Coinbase Global

Are Bitcoin-related stocks like Coinbase Global Inc. NASDAQ: COIN, MicroStrategy Inc. NASDAQ: MSTR, Marathon Digital Holdings Inc. NASDAQ: MARA and Riot Platforms Inc. NASDAQ: RIOT set to rise now that the Securities and Exchange Commission gave the nod to spot Bitcoin exchange-traded funds?

All those stocks were trading lower on January 11, even as the Grayscale Bitcoin Trust OTCMKTS: GBTC, which was converted to an ETF, gapped up at the open with more than 1.9 million shares traded in the first few minutes. 

However, the new ETF rallied to an intraday high of $43.50 25 minutes into the session, then reversed lower, and three hours into the session was showing a loss. 

In addition to the Grayscale product, newly minted spot Bitcoin ETFs include funds launched by Invesco, Wisdom Tree, Valkyrie, ishares, Fidelity, ARK and Hashdex. Those spot Bitcoin ETFs will hold the underlying cryptocurrency, not stocks like Coinbase, MicroStrategy or Riot Platforms.

But what are the bull and bear cases for cryptocurrency stocks like Coinbase? 

Coinbase retreats after late 2023 rally

Coinbase, which operates an SEC-registered trading platform and asset manager for cryptocurrencies, ran up 90.02% in the past three months, far outpacing broader market returns. In the build-up to the expected approval of spot Bitcoin ETFs, investors were excited about the potential, but took profits as the calendar rolled over to 2024.

In January, the stock is down 13%. Big sellers include Cathie Wood’s ARK ETFs, which were unloading Coinbase shares as recently as January 5. 

Other institutional investors must be selling, though, because Coinbase traded lower in heavy volume on January 10 and January 11.

But there’s room for Coinbase to make money from these new ETFs. For example, it’s the custodian for the Grayscale ETF, meaning that Grayscale parks the Bitcoin at Coinbase. Those custodial arrangements are required by regulators for greater transparency. 

Coinbase was listed as the Bitcoin custodian on several of the ETF applications.

Regulatory and legal challenges remain

However, the launch of the spot Bitcoin ETFs doesn’t mean regulatory and legal challenges have disappeared for the crypto industry. 

For example, in June 2023, the SEC charged Coinbase with operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency. The agency also charged Coinbase with failing to register the offer and sale of its crypto asset staking-as-a-service program.

Staking cryptocurrencies involves investors committing their crypto assets to support a blockchain network. It’s also a means of verifying transactions. Coinbase customers can earn money through the staking process.

Nonetheless, some company or companies have to serve as the custodian for the Bitcoin ETFs’ assets, so there’s money to be made there, which could help those custodians’ stocks.

Wall Street expects Coinbase to earn 23 cents a share in 2023, which the company reports on February 1. That would mark the company’s first profitable year. 

Will custodial revenue lift Coinbase stock?

This year, analysts see Coinbase profit skyrocketing by 265% to 70 cents a share. The boom in custodial fees are part of that, but as with just about everything crypto, the situation could be murky.

Take a look at the Coinbase analyst forecasts. On December 22, Mizohu analyst Dan Dolev boosted his price target to $54 from $35, but maintained his “underperform” rating on the stock. 

In his research note, Dolev wrote, “With the hype around Bitcoin ETFs likely to reach a climax in the coming weeks, COIN bulls could experience a rough awakening when they realize how minimal the revenue impact is.”

Analysts’ consensus view of Coinbase is “hold,” with a price target of $92.91. That’s a downside of 34.88%, indicating that Wall Street expects things could get worse before they get better. The February 1 earnings report may offer a catalyst for a move in either direction. 

MicroStrategy: Analysts see upside 

The erstwhile software analytics specialist, now known primarily as a Bitcoin holding company, is down 10.44% in January after rallying 66.15% in the past three months.

The company has been loading up on Bitcoin in recent days, profiting as the cryptocurrency rallied sharply since January 7. 

MarketBeat’s MicroStrategy analyst forecasts show a rating of “buy” on the stock with a price target of $607.75, an upside of 11.78%. That suggests analysts are upbeat about profiting from Bitcoin itself, rather than being a service provider to the industry.

Bitcoin miners trading lower 

Bitcoin miners Marathon Digital and Riot Platforms were down 10% and 13.50%, respectively, on January 11. 

That might seem counterintuitive, but some analysts believe the stocks’ prior rallies reflected the expectations for an uptrend due to the launch of the new ETFs. 

Marathon Digital rallied 202.96% in the past three months. In January, the stock is up 9.11%. A look at the Marathon Digital chart shows trading has become more volatile in recent sessions, reflecting some investor uncertainty, at least for the moment.

Marathon Digital’s analyst forecasts also indicate some doubt about the stock; Wall Street has a consensus view of “hold” with a price target of $13.61, a downside of 41.24%.

The Riot Platforms chart also shows a sudden shift to volatility, beginning in late December. The stock is up 53.05% on a three-month basis, but is less than 1% higher in January. 

Riot Platforms analyst forecasts show a price target of $17.09, an upside of 26.79%. Analysts have a consensus view of “moderate buy” on the stock, showing some confidence in its upside, once this bout of rocky trading passes.    

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