After the crypto meltdown of 2022, many investors expected Coinbase Global (COIN 5.68%) to turn things around this year. But that hasn't been the case. Trading volume is still down, and Coinbase has had difficulty winning back traders after the long crypto winter.
Even worse, it now finds itself in the middle of a regulatory battle with the Securities and Exchange Commission (SEC), which filed a lawsuit against the company on June 6, accusing it of operating as an unregistered securities exchange.
Yet, despite all of these travails, the stock is still up more than 60% for the year and remains on the radar of value investors hoping for a rebound in the crypto market. In fact, immediately after the SEC filed its lawsuit against Coinbase, Cathie Wood of Ark Investment scooped up another 419,324 shares worth a total of $21.6 million. Should you follow her lead, or is it time to throw in the towel on the stock?
The SEC vs. Coinbase
To answer that question, it's absolutely crucial to get a handle on the current SEC regulatory action against Coinbase. On the surface, it looks bad. The SEC portrays Coinbase as a rogue securities exchange that has been making billions of dollars from trading in unlicensed securities and failing to protect retail investors in the process.
But in a recent Bloomberg interview, Wood said the case against Coinbase is much flimsier than the SEC's case against rival crypto exchange Binance, which the agency accused of fraud and deception. There are no similarly serious charges of wrongdoing against Coinbase.
As a result, Wood thinks that the new SEC crackdown on cryptocurrency exchanges might actually end up helping Coinbase by weakening some of the competition. Binance is the top cryptocurrency exchange in the world by trading volume. If it is no longer able to operate within the U.S., that would certainly benefit Coinbase.
Moreover, Coinbase says it is mounting a strenuous defense against the SEC, and does not plan to go down without a fight. Chief Executive Officer Brian Armstrong has said that the SEC was fully on board with the company's initial public offering (IPO) in April 2021; that's hardly ancient history. Furthermore, the SEC has never provided any rules or guidelines for crypto market participants to figure out what's a security, and what's not.
Plan B for Coinbase
The good news, if you're a Coinbase investor, is that the company is developing what can best be described as plan B. This consists of moving more and more of its operations offshore, to friendlier regulatory destinations.
At first, this sounded like a bluff of some kind. But in recent months, Coinbase has steadily ramped up its overseas presence, and it now looks like investors can expect a greater share of the company's revenue and earnings to come from outside the U.S.
Image source: Getty Images.
The word "Global" is in the company's name for a reason: There are plenty of countries where people and institutions want to buy and sell cryptocurrencies.
Coinbase recently opened up an offshore crypto derivatives exchange in Bermuda, and has talked up the prospects of expanding to financial hubs like Dubai, where regulators actually welcome crypto.
Basically, the exchange has the potential to expand to overseas locations where regulators and lawmakers have put in place a workable framework for crypto. So you certainly have to factor in these long-term growth prospects when you value the stock.
Should you buy Coinbase?
As long as you're comfortable with the regulatory uncertainty, Coinbase could be a high-risk, high-reward investment. Just to be clear, though, the company could be in the courts for years arguing its case and attempting to get some sort of clarity from regulators. So this is not an issue that's going to be resolved overnight.
For many investors, that's just simply too much risk to take on, and there are plenty of other value plays in the tech sector that don't come with all this baggage.
But Coinbase still trades at a huge discount. Even though it's up for the year, it still needs to double in price before it gets back to its 52-week high of $116. At a current price of $57, then, the stock seems remarkably undervalued. Thus, I remain bullish on Coinbase, primarily because I remain bullish on the long-term potential of the global crypto market.
