CZ/SBF collapsed, Coinbase benefited, and its stock price rose by 60% that month

In a month that saw two crypto industry leaders "fall or exit," Coinbase shares surged more than 60%, the cryptocurrency exchange's second-best monthly performance since its 2021 listing, highlighting investor optimism about the largest U.S. cryptocurrency exchange.

COIN, which trades on the Nasdaq, hit $128.46 this week, its highest price this year, surpassing the $110.15 set in July and far above analysts' average target price of $84. The stock has more than tripled in 2023, driving Coinbase's market value up by $12 billion.

CZ/SBF collapses, Coinbase benefits

Spurred on by Sam Bankman-Fried’s fraud conviction and Binance’s hefty fine from the Justice Department, traders rushed to buy Coinbase shares, betting that the platform could capture a bigger piece of the pie.

This month, Sam Bankman-Fried, the founder of former Coinbase competitor FTX , was found guilty of seven counts of criminal fraud related to the exchange’s collapse and theft of customer funds. He was convicted on November 2 after a month-long trial. Less than three weeks later, on November 21, Binance founder Changpeng Zhao pleaded guilty to violating the Bank Secrecy Act for failing to implement an effective anti-money laundering program and for willfully violating U.S. economic sanctions.

SBF could face life in prison and is expected to be sentenced in March, while CZ 's sentencing is scheduled for February next year. While legal documents suggest a sentence of 12 to 18 months, the U.S. Department of Justice may push for a longer sentence.

"Coinbase is in a better position today as a public company than any other company," said John Todaro, an analyst at Needham & Co. He added that 2022 and 2023 will be "shakeout years" for the industry and "those companies that survive will become stronger, and Coinbase is one of them."

Oppenheimer & Co. analyst Owen Lau said the silver lining is that Binance can continue to operate, removing the crypto industry’s pending regulatory risk and providing a positive benefit to Coinbase.

“The health of the industry is good for Coinbase, while the sudden exit of a large player is not,” he wrote in a recent report. “This settlement will likely maintain high compliance standards for cryptocurrency exchanges and force major players to invest in internal controls and make better disclosures.”

Coinbase is the world’s fourth-largest exchange by daily trading volume, according to Coingecko , and is the only publicly traded company in the U.S., with a market capitalization of nearly $30 billion.

Mizuho analysts noted in a note to clients this week that Coinbase shares are up about 20% since the CZ settlement, a rise that could be “due to the widely anticipated outflow of funds from Binance, the industry’s largest exchange, and the potential rise in COIN’s share price.”

But the stock remains well below its all-time high of $342.98, a peak seen during the November 2021 bull run that saw the global cryptocurrency market cap reach $3 trillion.

Leading ETF Custody

The U.S. Securities and Exchange Commission (SEC) is also gradually giving the green light to spot Bitcoin ETFs listed in the United States, and Bloomberg analysts expect approval as early as early January.

In response to the news, Bitcoin has surged nearly 130% so far in 2023, including a gain of about 9% in November. In contrast, investors who shorted Coinbase stock have accumulated paper losses of $1.3 billion in the past 30 days, according to data from S3 Partners LLC.

Custody services are an important part of Bitcoin ETF applications, and Coinbase has been selected as a custodian by nine of the 12 potential issuers, including BlackRock , Franklin Templeton and WisdomTree , a level of concentration that has made some in the community uneasy.

“Having so much Bitcoin concentrated in the hands of one custodian is not entirely ideal, and I think it would be beneficial for other high-quality exchanges to participate as ETF custodians,” said Brian D. Evans, founder and CEO of BDE Ventures.

But he said it was difficult to find other competitors given the lack of clarity in U.S. regulation, so there weren’t many suitable companies.

James Seyffart, ETF analyst at Bloomberg Intelligence, said: "I think using Coinbase as a custodian is the obvious and most common solution."

JPMorgan analysts wrote in a report last week that crypto ETFs could be good for Coinbase in the short term, but problems will grow over time. The longer-term concern is that fewer people will need Coinbase accounts, leading to pricing pressure.

“We see many novice investors who never hold these flagship tokens and therefore never need Coinbase’s services,” the analysts wrote. “We also believe the ETF market is more transparent, efficient, and has lower execution costs, and we see the potential for migration to ETFs for cheaper exposure and trading, driving Coinbase to lower fees.”

There is also the question of whether the bulls can maintain their momentum. Wood's Ark Investment Management LLC has been buying and selling COIN regularly throughout the year, buying high and selling low along the way. Just last month, Ark sold $5.8 million worth of Coinbase and Grayscale Bitcoin Trust shares. In mid-July, the company sold another $26 million worth of Coinbase shares after buying $21 million of Coinbase shares earlier in the same month. It also adopted similar strategies in June, March and February of this year. Ark remains the fourth largest shareholder in Coinbase shares.

More than 40% of Wall Street analysts have a hold rating on Coinbase, according to data compiled by Bloomberg. Needham’s Todaro, who has a buy rating on Coinbase with a $120 price target, said: “I wouldn’t be surprised if the crypto market consolidates a little bit. But overall, we are still in the early stages of a new bull cycle.”