Coinbase Stock: Look Out Below (Rating Downgrade)

Summary Coinbase was sued yesterday by the SEC. Legal risk is always present in cryptos, and Coinbase is now under even more significant scrutiny. Bitcoin looks weak at the moment, COIN stock is nowhere near cheap, and I'm looking for a break below $47. Bitcoin-related stocks have been on a wild ride recently, and for good reason; the coin itself is on the verge of a major technical breakdown, and the regulatory authorities in the US are on the prowl. Bitcoin has been weak since mid-April when it hit a relative high, but has drifted lower ever since. That’s (rightfully) put pressure on crypto-related stocks, but this week’s news flow has introduced a more pointed headwind for crypto companies. On the 5 th , the SEC sued Binance for violating US securities regulations, and on the 6 th , Coinbase ( COIN ) had a similar fate befall it when the SEC sued it for operating an unregistered securities broker . To be clear, none of these things are bullish for crypto or crypto-related stocks, which is a far cry from my last update on Coinbase a few months ago. At that time, COIN was flying and had a nice uptrend in place; that’s all gone and we appear to be on the verge of a breakdown. In this article, we’ll explore why I’m downgrading Coinbase on this news. Coinbase stock - A tenuous hold for the bulls We’ll begin with a daily chart, and as you can see, the stock has a precarious hold on the prior relative low. Given the price action we’ve seen, I’m not sure this is going to hold. StockCharts We have a lower high put in at the beginning of June, and yesterday, the stock moved below the prior relative low at $47. It recovered to close at $51, but this chart has a significant amount of damage on it. On the more bullish side, the PPO is trading near the centerline, and should the low from yesterday hold, it would mark a positive divergence. However, given the high-volume selling yesterday, it looks to me like the bears are in control of this one for the time being. Should the low from yesterday break, I think there’s downside to the double bottom the stock put in at $31 a few month ago; that’s 33% lower from the low set yesterday if it were to occur, so watching that level is critical. If you insist on owning this stock right now, I would cut losses and run if yesterday’s low is violated, because it could get really ugly after that. The final panel shows Coinbase’s performance relative to Bitcoin itself, and we can see this ratio has been in a steady downtrend for the better part of the last year. This argues that if you want crypto exposure, you’re much better off just owning Bitcoin than Coinbase. Something to consider given the recent news flow. Speaking of Bitcoin, I think we’re at a crossroads here, and we’re on the verge of a potentially big move. StockCharts Bitcoin is putting in a rather bearish descending triangle right now, but I’ll note that critical support continues to hold. We’re nearing the point where Bitcoin is either going to breakout higher, or break down lower, as the triangle closes up. My bias right now, and it’s just a bias, is that we see Bitcoin break lower. Descending triangles like this one generally resolve with a break lower, and the PPO on this one suggests lower is the path of least resistance. None of this is a guarantee, but my preferred scenario for Bitcoin right now is a break lower. However, I’m open to either resolution, and I’ll wait for the chart to tell me which direction it’s going. If I’m right and the next move is lower in Bitcoin, that’s yet another headwind for Coinbase. But more immediately, Coinbase faces legal headwinds, which we’ll touch on now. Legal woes plague crypto sector We all know that crypto is subject to legal headline risk. That’s been the case for years, and it will probably remain the case until cryptos are regulated like stocks and commodities are today. This week’s news flow seems to support that as the SEC has made it clear it is not backing down on regulating this corner of the finance world. Coinbase was sued by the SEC this week as the regulator alleges that Coinbase is operating as an unregistered securities broker. The SEC says that Coinbase has “unlawfully facilitated the buying and selling of crypto asset securities” since at least 2019. Further, the SEC says Coinbase commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions, which are to be separated according to securities regulations. The SEC is thereby alleging that cryptos are securities – not currencies – and should be regulated as such. As ugly as that is, Binance’s SEC suit was much worse, alleging fraud and inappropriate usage and movement of customer funds. To be clear, Binance is essentially being charged with fraud while Coinbase is more of a regulatory play. However, having a major crypto player like Binance being charged with some pretty nasty stuff is not a good look for cryptos or other crypto-related companies. I think that more regulation of cryptos and the companies that support them would ultimately be good for the space. While this is the exact opposite of what crypto enthusiasts want – which is total freedom and lack of regulation – making crypto more mainstream by having it regulated by the SEC would open up enormous sums of money to invest in it. So, while these new flows are short-term headwinds, I think at some point down the road this will all be good for crypto and the companies that are running legitimate businesses to support them. However, in the short term, these are significant headwinds for Coinbase, and I think the stock was rightly punished yesterday on the news. And as we’ll see below, even with the move lower, shares aren’t even really that cheap. Estimates continue to move lower Let’s take a look at revenue revisions, which aren’t exactly inspiring a lot of confidence in the bull case right now. Seeking Alpha Revenue has plunged, both in actuals in recent quarters, and in expectations from analysts. Coinbase needs a raging bull market in Bitcoin in particular to drive volume from customers, and we simply don’t have it. As I said above, my outlook for Bitcoin isn’t exactly bullish at the moment, and while I’m open to a bullish resolution on the pattern I noted, that’s not my base case. Given that, my outlook for revenue estimates for Coinbase is also flat to lower. Finally, the valuation of the stock isn’t even attractive. The stock is near relative lows, but the valuation is still in the middle of the range for the past year. TIKR The stock trades for 4.2X forward sales, which is near the average of 4.4X. If the stock were back at 2.5X forward sales I’d be more sympathetic to a bullish resolution, but it isn’t, so I’m not. The bottom line here is that legal risk, a weak chart for Bitcoin, and an even weaker chart on the stock itself has me thinking it’s time to move on from Coinbase. I’m downgrading the stock to sell as I simply don’t see the risk as being worth the potential reward. The key level is $47 on Coinbase, and if that fails, I think it could be a very attractive short. I’m not recommending anyone go out and short as that involves a lot of risk, but if that’s your thing, you can short Coinbase under $47, with a stop just above that. My base case right now is we see a break of $47, and a potential move down to the double bottom at $31. It’s a sell.