Thirteen months ago, Sam Bankman-Fried and Changpeng Zhao sat atop the world of cryptocurrency. They were rivals running two of the biggest and fastest-growing digital asset exchanges—FTX and Binance, respectively—and pulling away from rivals such as
Coinbase Global.
Today, both Bankman-Fried and Zhao are felons. FTX filed for bankruptcy in November 2022 in a market-melting collapse that led to Bankman-Fried being found guilty of criminal fraud this month, putting him at risk of decades in prison. On Tuesday, Zhao pleaded guilty to federal anti-money-laundering violations, stepping down from Binance, which also pleaded guilty and agreed to pay $4.3 billion in fines as well as accept five years of third-party monitoring.
Coinbase
(ticker: COIN) is still standing, with its stock up 200% this year and a market value above $25 billion. Co-founder and CEO Brian Armstrong has seen two of his greatest competitive threats hobbled. He’d be forgiven for gloating.
“We couldn’t always move as quickly as others. It’s more difficult and expensive to take a compliant approach,” Armstrong said in a post on social media platform X on Tuesday. “[The Binance] news reinforces that doing it the hard way was the right decision.”
Coinbase has long been viewed as the blue-chip, safe-ish way to play crypto—and it’s true that the company has seen slower growth as a result. Ultimately, the Binance bombshell may give Coinbase a long-term boost, removing pressure from a larger rival whose freewheeling and dominant days are likely over under the thumb of third-party monitoring.
Binance has been losing market share for months—recording the biggest drop in market share for derivatives, its bread and butter, among any major exchange last month, according to analytics group CCData—and that could continue.
“The settlement agreement between U.S. authorities and Binance marks the end of an era,” said Yiannis Giokas, senior director of digital assets at Moody’s Analytics. “With digital currencies becoming more mainstream and institutional players entering the space, regulations and enforcement will become stricter to ensure compliance and consumer protection.”
Indeed, the ability of U.S. law enforcement to nab Binance—which has long been an amorphous, offshore corporate entity—reinforces that the future of crypto is regulated. And while Coinbase is a winner, it isn’t even out of the woods itself.
The Securities and Exchange Commission sued Coinbase earlier this year, alleging that it operates as an unregistered securities exchange and deeming its core business fundamentally illegal. Coinbase has said that it will fight the SEC charges in court and has maintained that it doesn’t offer unregistered securities. The crux of the legal case lies in the existential question of whether or not—or which—digital assets are securities, and the suit between Coinbase and the SEC is existential in nature.
Nevertheless, Coinbase stock has been on a tear, up triple-digits this year in tandem with the price of
Bitcoin
and other tokens. The shares gained 2.5% on Wednesday, a welcome boost, but not atypical for the volatile stock and likely reflecting that the consensus view is one of Coinbase as a survivor that will manage regulatory risks.
The SEC also targeted another rival, Kraken, this week, with similar charges of operating an unregistered securities exchange, which could also be helping Coinbase shares.
But that doesn’t mean the stock is a buy. There remains a compelling bear case, including regulatory threats and competition from elsewhere. The stock also looks overbought, with an average rating among analysts surveyed by FactSet of Hold but a consensus price target almost 20% higher than current levels.
The key issue for Coinbase is the health of the overall crypto market—and that’s one way Binance might help, with the settlement this week removing some tail risk that the world’s largest crypto exchange might meet a more chaotic end.
“This settlement puts to rest one of the long-lingering questions for crypto in 2023. Ultimately, the sentiment among traders is that the industry is finally turning a corner, looking past the chaos of 2022/23 and believing that growth is on the way,” said Michael Safai, managing partner at crypto hedge fund Dexterity Capital.
The next major catalyst is the prospect of a spot Bitcoin exchange-traded fund (ETF) being approved by regulators, which would be expected to usher in a fresh wave of investor interest—and looks increasingly likely. Hopes of ETF approval have driven Bitcoin and Coinbase’s rally in recent months, with shares in the exchange more than doubling since it was announced that
BlackRock
(BLK) had filed for one such fund with Coinbase as custodian.
“This settlement and a potential ETF approval will help set the stage for a nice run,” said Safai.
Write to Jack Denton at jack.denton@barrons.com
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