To The Moon

$Coinbase Global, Inc.(COIN)$ has shown strong performance recently.

After several asset management institutions, including $BlackRock(BLK)$ , had their applications for a Bitcoin spot ETF rejected by the SEC, Nasdaq resubmitted its 19b-4 form and announced that it had reached an agreement with Coinbase, the largest cryptocurrency exchange in the United States, to jointly sign a monitoring sharing agreement.

In addition to BlackRock, other companies such as $Invesco(IVZ)$ $WisdomTree Investments(WT)$ , Cathie Wood's Ark Funds, Bitwise Asset Management, $ARK Innovation ETF(ARKK)$ and Valkyrie have also applied for similar ETFs.

Previously, the SEC filed a lawsuit against Coinbase in June, claiming that it was an unregistered securities exchange. Although Coinbase objected to this claim, investors are more concerned about the regulatory risks associated with it.

However, with Nasdaq's endorsement and the designation of Coinbase as a spot Bitcoin Surveillance Sharing Agreement (SSA) exchange, suspicions of market manipulation, which the SEC is concerned about, may be alleviated.

Why Coinbase rise?

From the perspective of stock momentum, in addition to the reduction in regulatory risks, it can also be attributed to the rise of cryptocurrencies such as Bitcoin and Ethereum.

Historically, Coinbase's stock price has a strong correlation with the price of Bitcoin. Although it is not the company with the highest correlation among publicly traded cryptocurrency-related companies, it is clearly much more correlated with Bitcoin than with the S&P 500. This is also why changes in cryptocurrency prices can dominate the company's stock price. The following graph shows the correlation between major publicly traded cryptocurrency companies, such as $Marathon Digital Holdings Inc(MARA)$ $Riot Blockchain, Inc.(RIOT)$ $Bit Digital, Inc.(BTBT)$ , as well as the S&P 500.

Of course, in terms of performance, the price of Bitcoin is closely related to the company's performance. As of the recent first quarter of 2023 (23Q1), Coinbase had 8.4 million monthly active users and a total trading volume of $145 billion, which is lower than the peak values of 11.2 million users and $547 billion in 21Q4. Due to the current bullish trend in cryptocurrencies, it is highly probable that Coinbase will see accelerated revenue and profit growth in 23Q2.

Advantages and disadvantages at the corporate level

In addition to the volatility of trading assets, Coinbase, as a company, can also increase its profitability through effective operations. As cryptocurrencies declined from their peak in 2021, the company began to focus on cost reduction and restructuring its cost structure to achieve higher operational efficiency, including but not limited to expense reduction and layoffs, resulting in a sharp decline in expenses over the past four quarters. The proportion of trading expenses to net revenue decreased from 24% in 22Q1 to 13% in 23Q1.

Periodic profitability not strongly correlated with economic cycles.

Coinbase's profitability is essentially unpredictable because its potential primarily depends on the health of the cryptocurrency market. The rise in asset prices often attracts more capital, and if the recent ETFs are approved (a highly probable event), capital will continue to flow back into the industry, and the return of retail traders will increase the platform's trading revenue.

The biggest risk faced by Coinbase and other cryptocurrency trading platforms is regulation. Investors are more hopeful for progress in regulation rather than performance, but this matter is more like a game of chance.