To The Moon

JPMorgan’s North American equity team is lowering its price target for shares of Coinbase Global from $78 to $60 for December.

The publicly listed crypto exchange draws the majority of its revenue from U.S. crypto trading levels, meaning its third and fourth quarter earnings hinge on crypto trading interest.

“We think pressure on Coinbase revenue from falling cryptocurrency markets will pressure the stock price,” JPMorgan analysts wrote.

Shares of Coinbase Global sold down from their $72 high Wednesday to $62 Friday. Still hanging above its June lows, the stock has fallen 11% over the past five days and 75% year to date.

Analysts said Coinbase is expected to see low trading volume by U.S. retail crypto investors through December with the expectation that activity will pick up at the beginning of the first quarter of next year.

According to crypto volume indexer, Nomics, current volumes for Coinbase have fallen 15% over the past month to $48 billion. The figure is only half of the volume Coinbase’s trading business received at the beginning of the year.

As of its second-quarter earnings, Coinbase's revenue depends heavily on trading volume over the near term. Its business strategy aims to reduce trading as a profit mix by growing subscription and services products, which made up 18% of revenue in its second quarter.

Staking is the Coinbase subscription service that’s recently received the most attention from customers. Critical for proof of stake blockchain protocols, staking rewards investors who pledge capital with a percentage yield.

Regulation of businesses offering staking services has become less certain in recent days with the Securities and Exchange Commission (SEC) alleging the activity may trigger U.S. securities laws.

Coinbase provides staking services for ETH, ADA, SOL, ATOM, ALGO, XTY.

Notably, staking interest earned through Ethereum has gained growing momentum with the Ethereum protocol’s Merge transition to proof of stake, which some analysts have projected to increase interest payouts over the coming months.

Both staking and interest income earned from holding the stablecoin USDC is part of the company’s subscription services revenue which are deemed as having lower volatility than trading.

In the second quarter, Coinbase reported two-thirds of its customers were engaged in what it calls these “non-investing activity” and that was largely due to staking Coinbase’s chief operating officer, Emilie Choi, said at a Goldman Sachs conference.

Based on the assumption that 20% to 40% of ether held by Coinbase is staked, Goldman Sachs projected earlier this month that Coinbase could generate $250 to $600 million in staking revenues from ether alone, partially offsetting its decline in trading volume during crypto’s bear market.

Though considered a less volatile revenue stream, JPMorgan’s equities team cut back their near-term expectations for Coinbase’s staking business, saying it “has less upside given the selloff in crypto” according to the note.

Holding a nearly 14.5% market share according to data published on Dune Analytics, Coinbase already represents a major player in ether staking.

Yet the activity also comes with “lockup risks” according to the note. Investors cannot withdraw staked ether until the Ethereum protocol implements its Shanghai upgrade set for sometime in the second quarter of 2023.

Though crypto trading volumes remain low, JPMorgan isn’t anticipating “much in terms of writedowns” for the third quarter based on cryptocurrency prices held on the company’s balance sheet.

“Although the quarter is not over and some tokens did see 3Q lows slightly below 2Q lows,” the team added.