Coinbase (NASDAQ:COIN) has been in the regulators’ crosshairs on a regular basis in recent times but on Wednesday, the leading crypto exchange had some good news on the regulatory front for a change.
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The company said it had been given the go-ahead by the National Futures Association (NFA) to operate a futures commission merchant (FCM). Essentially, that means it can make crypto derivatives on its platforms available to eligible U.S. customers.
The approval not only allows the US exchange to better compete with global crypto powerhouse Binance, but since the global crypto derivatives market can be three to four times bigger than the spot market, the approval gives a big boost to its TAM (total addressable market).
So, good news, right? Not necessarily, says Mizuho analyst Dan Dolev, who thinks the product expansion brings a few concerns to the fore.
First off, given Coinbase already has a derivative exchange, there could be “cannibalization risk.” Recall, in 2022, the company bought crypto futures exchange FairX, which was already registered with US regulators, and rechristened it Coinbase Derivatives Exchange. According to a Bloomberg report, when traders want to trade derivatives, COIN currently routes them via third-parties (like brokers).
Secondly, given the “leverage associated with getting exposure to crypto via derivatives,” Dolev thinks trading value will most probably decline.
Lastly, due to the lower fees for future trading vs. Spot, futures pricing could lead to “take rate compression.”
“For instance,” explains Dolev, “buying $100 of Bitcoin on the Coinbase app points to a fee of $3.84. For comparison, the schedule on COIN’s website points to $0.75 fee per side for non-pro Bitcoin futures trading. Hence, it is reasonable to assume that take rates for futures are lower.”
So, what does this all ultimately mean for investors? For now, Dolev rate COIN an Underperform (i.e. Sell) along with a $27 price target. That is the Street’s most bearish take and factors in a 64% decline from current levels. (To watch Dolev’s track record, click here)
The number of COIN bears on the Street is by no means negligible. 7 other analysts say Sell, and with a similar mix of 6 Buys and 8 Holds, the stock claims a Hold consensus rating. All told, the $80.68 average target implies ~6% upside from current levels. (See Coinbase stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
