Why is Cathie Wood so bullish on Coinbase?

After trending downwards in 2022, the Coinbase share price has been on a march since the start of 2023, as cryptocurrencies surge more generally. While regulatory concerns could halt the rally, Coinbase stands to gain in the long run.

- Cathie Wood’s flagship Ark Innovation ETF snaps up more than 253,000 Coinbase shares in three days.

- Piper Sandler doesn’t expect regulatory scrutiny to drag down Coinbase.

- The crypto exchange platform accounts for nearly a fifth of the First Trust SkyBridge Crypto Industry and Digital Economy ETF portfolio.

Cathie Wood has been buying shares in Coinbase [COIN] over the past couple of weeks, a sign that she is confident the crypto exchange platform will benefit from the industry’s recovery.

Wood’s flagship Ark Innovation ETF [ARKK] snapped up more than 253,000 shares between 10 and 14 February, according to trading updates. The Ark Next Generation Internet ETF [ARKW] bought more than 42,000 shares over the same period.

The longstanding crypto bull seems to have taken advantage of a slight pull-back in the Coinbase share price. While the stock is up 84.2% year-to-date, to $65.20 at the close on 17 February, it has fallen from its year-to-date high of $87.63, which it reached on 3 February.

The shares dropped 5.4% on 16 February, likely in reaction to a downgrade from DA Davidson – from ‘buy’ to ‘neutral’ – ahead of the company’s fourth quarter (Q4) earnings, due to release after the market closes on Tuesday.

Poised for a bounce-back?

Coinbase came under pressure last year following a crash in the Bitcoin and Ethereum prices, as well as a wider market sell-off sparked by investors pulling their crypto assets from exchanges to avoid getting caught in the contagion from the FTX collapse.

This downwards trend led Coinbase to lay off 20% of its workforce in January. In a message to employees, however, co-founder and CEO Brian Armstrong emphasised that “crypto isn’t going anywhere” and that operational efficiency will be key to Coinbase weathering the downturn and coming out stronger.

“Over the last decade, Coinbase has made it through multiple bear markets using this process”, wrote Armstrong.

He added that Coinbase should benefit from greater blockchain regulation, which will help to weed out the bad actors in the industry.

Caution will likely prevail in the near-term, however. According to DA Davidson analyst Christopher Brendler, the Coinbase share price gains in the year so far emphasise “an unfavourable risk/reward”, with Brendler anticipating disappointing Q4 results and 2023 guidance.

Regulation picture needs to be clearer

There are signs that the US is tightening its rules on crypto. The Securities and Exchange Commission (SEC) has charged crypto exchange Kraken for allegedly not registering its ‘staking-as-a-service’ product – staking is where investors use their crypto assets to validate transactions on a blockchain. On 9 February, Kraken agreed to pay $30m in penalties as well as to shut down the unregistered securities product.

Following the news, Piper Sandler analyst Richard Repetto reiterated his ‘overweight’ rating on Coinbase.

Given that “COIN has long touted the regulatory compliance of its crypto products [and] services, platform, and general operations”, wrote Repetto in a note to clients seen by StreetInsider, as the SEC moves toward “what appears to be a more aggressive stance on crypto regulation, we are cautiously optimistic that COIN won't be weighed down by recently increased scrutiny around staking”.

However, CEO Brian Armstrong believes the SEC potentially banning US retail investors from taking part in staking altogether “would be a terrible path” to follow.

“America risks losing its status as a financial hub long term, with no clear [regulations] on crypto, and a hostile environment from regulators”, he tweeted.

Funds in focus: First Trust SkyBridge Crypto Industry and Digital Economy ETF  

Despite the SEC’s crackdown causing regulatory uncertainty, analysts are generally bullish on Coinbase. The stock has 10 ‘buy’ ratings, 10 ‘hold’ ratings and five ‘sell’ ratings, according to MarketBeat data. The consensus price target of $75.38 implies an upside of 15.6% from the most recent closing price.

Cathie Wood’s Ark Innovation ETF has Coinbase as its seventh-biggest holding, with a weighting of 5.03% as of 17 February. The fund is up 34% year-to-date. The stock is the fourth-biggest holding in the Ark Next Generation Internet ETF, with a weighting of 6.85%. The fund is up 37.7% year-to-date. 

Coinbase is the top holding in the iShares Blockchain and Tech ETF [IBLC], accounting for 13.13% of the portfolio. The fund has jumped 59.8% in 2023.

The fund with the highest exposure to Coinbase, making up 17.91% of its portfolio, is the First Trust SkyBridge Crypto Industry and Digital Economy ETF [CRPT], in which Coinbase is the second-largest holding. The fund has gained 47.7% year-to-date.