Shares of Coinbase Global soared nearly 10% on Tuesday following news that the crypto-trading platform has partnered with Cboe BZX Exchange to launch a Bitcoin exchange-traded fund (ETF). However, investors should exercise caution as this surge may be a result of a short squeeze.
In an effort to combat fraud and manipulation on Coinbase’s platform, Cboe BZX Exchange has filed amendments to five spot Bitcoin ETF applications, establishing surveillance-sharing agreements with Coinbase. This development is particularly significant, as the Securities and Exchange Commission had previously cited concerns about fraudulent activities when rejecting similar proposals.
Coinbase’s stock price experienced a remarkable increase of around 9.8% on Tuesday, closing at $89.15. Over the course of the month, the stock has delivered an astonishing 76% return.
The agreement between Coinbase and Cboe has the potential to greatly benefit the ETF applications, making way for a Bitcoin fund that will attract institutional investors and bolster token prices. However, the revenue implications for Coinbase are uncertain and could even negatively impact the stock in the long run.
Although specific terms of the partnership have not been disclosed, Mizuho analyst Ryan Coyne believes that the deal is unlikely to significantly contribute to Coinbase’s revenue. Coyne explains that retail trading activity remains paramount for Coinbase’s success, and while successful ETF deals could potentially increase institutional volume, they may not offer substantial revenue upside.
In summary, Coinbase’s involvement in Bitcoin ETF initiatives has driven up its stock price considerably. While this partnership holds promise for the ETF applications, it remains to be seen how it will impact Coinbase’s revenue and overall value.
Coinbase’s Earnings Disparity between Retail and Institutional Trades
It is worth noting the significant difference in earnings for Coinbase between retail trades and institutional trades. According to Coyne, an analyst at a firm that rates Coinbase as “Underperform,” the company has been able to earn approximately 1.68% of the retail transaction volume in fees, whereas for institutions, the fees amount to a mere 0.02%.
Furthermore, the fees collected for custodying institutional assets are also relatively insignificant. This poses a potential threat to Coinbase’s earnings if the introduction of a Bitcoin ETF leads retail traders to shift their focus to these new products.
Coinbase has chosen not to provide a comment on this matter.
Tuesday’s surge in the stock price might be attributed to the immense amount of short positions taken by investors. FactSet data reveals that about 22% of Coinbase’s available shares have been borrowed by short sellers. Consequently, even the slightest news or movement in the stock price can trigger a rush of investors looking to repurchase shares before suffering further losses. Coyne affirms that Coinbase has experienced similar phenomena in recent weeks.
Investors can gain a clearer perspective on the significance of the ETF deals once Coinbase releases its second-quarter earnings report in early August. During previous earnings calls, company executives expressed their efforts to diversify revenue streams away from retail trading. This strategy aims to ensure profitability for Coinbase even during periods of less active trading, such as the recent lull in market activity.
However, until then, investors should exercise caution. While short squeezes can be exciting, pursuing them can also be perilous.