JPMorgan downgraded cryptocurrency exchange Coinbase (NASDAQ:COIN) to 'Underweight' while maintaining an $80 price target.

The revised stance follows an "underwhelming" start to Spot Bitcoin ETF trading.

What Happened: JPMorgan analysts, led by Kenneth B. Worthington, "see Coinbase as both a leading driver and beneficiary of the cryptocurrency economy."

A lackluster entry of Bitcoin ETFs into the market, however, suggests potential headwinds for the company.

"Coinbase is making investments in the buildout of its derivative platform and Layer-2 Base chain," states JPMorgan, acknowledging the company's initiatives to diversify and innovate.

The report also juxtaposes these positives with the reality of a "highly-competitive and costly" international landscape and Binance as the main competitor.

It also underscores the Bitcoin ETFs as pivotal, calling expectations "elevated" and initial flows-to-date "underwhelming." This leaves Coinbase at risk of failing to meet the high expectations pinned on these new investment products.
The analysts draw historical parallels with the launch of GLD (OTC:GLD), a gold-backed ETF, to contextualize the Bitcoin ETFs' performance. Despite the high initial sales – "$3.9 billion in gross sales" in their first week – the report finds their performance "disappointing."

Interestingly, despite the seemingly similar performance, it strikes a different tone for the "$1.3bn in its first week and $3.5bn in its first year" of GLD exchange-traded funds.

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Why It Matters: Opportunities for Coinbase lie in expanding across untapped markets and the promising growth of its derivative offerings and the Base platform. Yet, they come with substantial risks, notably from regulatory scrutiny.

Ongoing litigation with the U.S. Securities and Exchange Commission (SEC) poses a significant risk, with JPMorgan stating, "if the motion is not granted, Coinbase will face a drawn-out court battle against the SEC." Additionally, the prolonged dominance of Binance is an ever-present competitive risk.

The analysts state: "We continue to value Coinbase at $80, but under a new methodology," referring to their adoption of a 'normalized earnings' approach based on cryptocurrency market capitalization.

With an estimated "$2.00 per share" earnings power at the current market cap, JPMorgan contends that the existing challenges might squeeze the exchange's earnings.

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