Dj The Crypto Casino Is Booming. Coinbase Is The Winning House. - Barrons.Com

By Joe Light

Bitcoin has gained 37% since Oct. 31 but Coinbase Global is beating it. Shares of the crypto brokerage and exchange are up 52% on hopes that Donald Trump will make America the "crypto capital of the world."

Coinbase is the largest U.S.-based crypto trading platform with $185 billion in trading volume last quarter. Yet it aspires to be much more than a brokerage like Robinhood Markets. Coinbase has bigger dreams: to be the Amazon.com of crypto, an empire of infrastructure, trading, payment services, and financial products.

Those dreams no longer look far-fetched with a friendlier White House and Congress coming to town. "We're about to see the most pro-crypto Congress in history take office in January combined with the most pro-crypto presidential administration that you could possibly imagine," says Coinbase Chief Legal Officer Paul Grewal.

The industry spent wisely this election cycle, pouring more than $170 million into races, helping flip seats in Congress and get Trump elected. More than 80% of pro-crypto candidates won their races, while critics like Sen. Sherrod Brown (D., Ohio), who chaired the Senate Banking Committee, lost reelection.

Coinbase is taking a victory lap. "We were able to have elections that drove a number of new Congressmen and Senators that have a very pro crypto stance," chief financial officer Alesia Haas said earlier this month at a conference. "That leaves us very optimistic that we're going to be able to get the regulatory clarity and comprehensive crypto legislation we have long sought."

Coinbase's wish list includes a bill in Congress that would regulate and legitimize stablecoins, a token typically pegged to the dollar and backed by reserves. Coinbase co-sponsors one such coin called USDC, which brought Coinbase more than $850 million in revenue in the past 12 months. It's still much smaller than foreign rival Tether, worth more than three times USDC, but Coinbase sees growth coming from uses beyond trading, such as cross-border remittances and payments.

The company is also pushing for a bill that would take most token trading out of the Securities and Exchange Commission's purview and hand it the Commodity Futures Trading Commission, which is seen as a softer regulator.

Coinbase executives say momentum is on their side. New House Financial Services Chairman French Hill (R., Ark.) and Senate Banking Chairman Tim Scott (R., S.C.) both say moving forward on digital-asset legislation is a priority. Policy analysts think a crypto bill might be on the back burner as Congress works on tax legislation and confirming Trump's cabinet appointments, but could be back on the docket in 2026.

The industry, meanwhile, notched a big win with the end of Gary Gensler's tenure as Chair of the SEC. Gensler was hostile to crypto, filing enforcement actions and court cases against token providers and companies, including Coinbase.

Paul Atkins, Trump's pick to helm the SEC, is a crypto beneficiary; his consulting firm, Patomak Global Partners, advised the Chamber of Digital Commerce, a crypto trade group, and Atkins co-chaired the Token Alliance, a Chamber of Digital Commerce initiative to promote growth in token and digital asset issuances.

At stake for Coinbase is its core business and future plans. The SEC sued Coinbase in June 2023, alleging the company operated an unregistered securities exchange. A court earlier this year allowed most of the case to proceed; if it stays on track, the discovery process would wrap up in the middle of next year with a jury trial soon afterward.

The case is crucial to Coinbase's goal to trade alt-coins — tokens like Solana, Cardano and Polygon which make up a $1.1 trillion market. The SEC has long contended that many of these tokens are securities that need to be registered with the agency. That interpretation, if upheld by the courts, would effectively kill off much of the alt-token market in the U.S., partly because it would be functionally impossible for brokerages and issuers to adhere to all the registration rules.

Giving up on tokens other than Bitcoin and Ether would be a major blow to Coinbase. Alt-coins made up nearly half of Coinbase's $2.4 billion in trading revenue in the first nine months of 2024, according to its quarterly report filed in October.

Coinbase also wants to expand "staking," a service that lets investors earn a yield on tokens that are posted to blockchains for various purposes. The SEC has been hostile to that idea. In its lawsuit against Coinbase, the SEC alleged that the company's staking program amounts to a security offering that needs to be registered with the agency or shut down. While staking is still dwarfed by trading revenue, Coinbase executives have pointed to the product as key to earning profits even when crypto prices fall and traders run for the hills.

Ideally for Coinbase, the SEC will back off its contention that the company's business structure violates securities rules and practices; Coinbase combines the functions of a broker, exchange, market maker and custodian into one entity. No major Wall Street firm typically performs all those functions because of legal requirements and conflicts of interest.

Coinbase executives are growing confident that Atkins could bring a swift end to the agency's litigation against the firm, which could happen through dropping the case or a settlement with light penalties.

Ordinarily, the SEC wouldn't drop cases or interpretations of securities rules because of a change in administration. But things could go differently this time, says former SEC enforcement attorney John Reed Stark, a longtime crypto critic. Trump ran on the promise of stopping the SEC's crypto crackdown and chose a Chair with industry ties in Atkins. He's also appointed a "crypto and AI czar" in venture capitalist David Sacks who also has significant industry ties.

"Never in the history of the SEC has there been such a mandate for change in a specific program area," Stark said. "I can't envision a scenario where that litigation doesn't somehow go away." The SEC could do that either through dropping the case or coming to a settlement with Coinbase that results in a small penalty but doesn't restrict it from continuing business-as-usual, Stark said.

Atkins and the SEC did not respond to requests for comment.

Without the regulatory roadblocks, some analysts see a path for Coinbase to ramp up growth. "The big threat to Coinbase was that the SEC was just going to say they can't offer a lot of these assets and products. That seems very much de-risked at this point," says Needham analyst John Todaro, who has a Buy rating on the stock.

Coinbase is moving quickly to capitalize. A few days after the election, the company said it would list the PEPE token, a coin based on a cartoon frog. Earlier this month, Coinbase put the "Peanut the Squirrel" token on its listing road map.

Such tokens, known as meme coins, often start as a joke, but can be quite lucrative for trading platforms. Meme coins tend to have trading volume that are three to five times that of major cryptocurrencies like Bitcoin, adjusting for market value, says Todaro. And trading those smaller tokens is critical; Bitcoin has a market value of $2 trillion, 56% of the market. But Bitcoin only accounts for 37% of trading on Coinbase.

Other tokens are also more profitable for Coinbase. While assets other than Bitcoin and Ether were involved in 51% of trading in the first nine months of the year, they brought in 53% of transaction revenue.

If the SEC's stance changes, Coinbase will likely offer more tokens, staking products and perhaps services that let investors leverage their crypto assets and borrow against holdings, Grewal says.

Granted, the stock trades at a steep valuation with highly volatile earnings. Coinbase's sales are estimated to grow about 6% to $6.1 billion in 2025 while earnings per share drops 28% to $4.25, according to consensus forecasts compiled by FactSet. The company's stock trades as a price-earnings multiple of 73, based on 2025 estimates, and has a market value of $70 billion, making it larger than Nasdaq and Cboe Global Markets combined. Coinbase's average price target of $285, according to FactSet, only slightly above recent prices around $274.

The bull case is that the crypto pie will keep growing, led by Bitcoin, investors buying more ETFs, and a flood of institutional money lifting stock and token prices. Coinbase won't have it all to itself, though.

Mizuho Securities, which rates Coinbase "Underperform," estimates Coinbase lost retail trading volume to Robinhood in October and November, despite Robinhood offering 10% as many tokens. A push by Robinhood to list more tokens could cut into Coinbase's market share further, along with other brokerages angling in.

Coinbase stock still hinges on whether crypto will be more than a trading vehicle for speculators. The twist now — with Trump and Republican lawmakers soon to be in charge — is whether that even matters anymore. For customers eyeing "Peanut the Squirrel," now worth $650 million, up from $50 million before the election, let the good times roll.

Write to Joe Light at joe.light@barrons.com

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Frederick Ernest Ehrsam III, 10% Owner, Director, on December 23, 2024, sold 15,228 shares in Coinbase Global for $4,187,294. Following the Form 4 filing with the SEC, Ehrsam has control over a total of 10,417 shares of the company, with 10,417 shares held directly.

SEC Filing:

www.sec.gov/Archives/edgar/data/1679788/000141588924030157/xslF345X05/form4-12262024_091228.xml