A year ago, the financial pundits were worried about Coinbase (NASDAQ:COIN). The Bitcoin (BTC-USD) price was wobbling and flailing, and Securities and Exchange Commission (SEC) Chairman Gary Gensler was seemingly on the warpath against Coinbase. That was actually the right time to buy COIN stock. Now that the sentiment is overwhelmingly bullish, I don’t recommend investing in Coinbase.
Emotionally and psychologically, it’s easy to buy Coinbase stock when everybody and his uncle predict higher prices. Yet, the crux of contrarianism is to do what’s not easy. Always remember that every publicly available piece of news is already baked into asset prices. Consequently, overeager Coinbase investors need to reconsider their positions before it’s too late.
COIN Stock Needs to Take a Breather
Momentum-focused traders will probably like the fact that Coinbase stock rallied 400% (and even slightly more than that) in 2023. That’s not a typographical error. Believe it or not, Coinbase shares started off the year at $33 and change and ended 2023 at around $174.
Yet, momentum can only carry a stock so far. If you’re just now considering investing in Coinbase because of an upcoming spot Bitcoin exchange-traded fund (ETF), you’re extremely late to the party. The party-goers already ate all the food and drank all the liquor, and you’ll be left to clean up the mess.
Bartosz Lipiński, CEO of Cube, a cryptocurrency trading platform, observed that last year’s wild crypto rally already started to fizzle out in early 2024. “Volatility is increasing over the prospect of whether or not the SEC will approve a spot Bitcoin ETF,” Lipiński warned.
“Markets were a bit overbought,” Lipiński added. I’d say that’s the understatement of the year. I was bullish about COIN stock in early November in anticipation of a Bitcoin ETF. Now that Bitcoin and Coinbase are front-page news, however, it’s time to take profits and prepare for a pullback.
Coinbase’s Revenue Boost Might Disappoint Wall Street
There are other red flags I could mention about Coinbase. One expert cautioned that Coinbase is playing a “dangerous game” against the SEC with the company’s dollar-pegged stablecoin. Also, Cathie Wood’s ARK Invest reportedly sold around $27.6 million worth of Coinbase stock.
Those issues might not be deal-breakers for you, but now consider this. Coinbase might not actually get the massive revenue boost from an anticipated spot Bitcoin ETF that many people are assuming.
That’s the scenario that Mizuho Securities analyst Dan Dolev evidently wants to prepare investors for. “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,” Dolev explained.
According to Dolev’s complex calculations, Coinbase may generate around $25 million to $30 million from custody-fee revenue. On top of that, Coinbase could take in approximately $200 million to $210 million of additional revenue related to increased trading activity. “This represents just mid-to-high single-digit percentage upside vs. current 2024 consensus,” Dolev clarified.
“The potential upside to COIN revenue from Bitcoin ETF [approval] may be far less than what the stock indicates,” the Mizuho analyst concluded. Given the ultra-efficient tendencies of today’s market, investors should take Dolev’s argument seriously. And by the way, Dolev reiterated his “underperform” rating on COIN stock and gave it a $54 price target.
Hold or Sell Coinbase Stock? It Depends on Your Timeframe.
Last year’s 400% rally in Coinbase stock was, in my estimation, overdone. Still, if you’re using Coinbase shares as a Bitcoin proxy and your time frame is a decade or longer, it’s probably fine to just keep holding those shares.
On the other hand, if you’re a short- or medium-term trader, it’s a good time to take profits on COIN stock. In the near term, get ready for a drawdown in the Coinbase share price. The hype phase of 2023 will most likely give way to a disappointment phase in 2024.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
