Coinbase (NASDAQ:COIN) stock has been surging in recent weeks on renewed cryptocurrency enthusiasm for cryptocurrencies and solid Q2 earnings results. As a leading cryptocurrency exchange operator, ownership of this stock serves as an indirect way to gain exposure to this asset class.
Yet while these two factors help to justify COIN’s latest rally, that doesn’t mean concerns about a correction/pullback are not valid as well. Coinbase still has a lot to prove. Consistent profitability remains elusive, and there’s increasing competition. As I’ll explain in further detail below, though, there may be enough in play to keep shares trending higher in the coming months.
COIN Stock: Many Risks, but Reversal Fears are Overblown
In theory, what could knock Coinbase shares, up by more than 31.7% in the past month, and up nearly threefold year-to-date, back down to lower prices? For one, the recent run-up cryptocurrency prices could quickly come to an end.
While the possible approval of Bitcoin (BTC-USD) ETFs is one reason crypto is rallying right now, another reason may be that investors bet that high interest rates will soon come down, creating a market more favorable to speculative asset classes. If subsequent economic data indicates high interest rates are here to stay in 2024, this optimism could quickly fade.
Besides falling crypto prices, there’s something else that could rally sap enthusiasm for COIN stock. That would be further news regarding the U.S. Federal Government’s plans to regulate the cryptocurrency space. As you may know, Coinbase is already in the crosshairs of the U.S. Securities and Exchange Commission.
Like I hinted above, sentiment could shift back to bearish, if concerns about competition and/or Coinbase’s path to consistent profitability rise again. Having said all of this, while there are numerous risks at hand, fears of an imminent reversal for the stock are overblown. Here’s why.
3 Factors That May Keep Shares Surging
Even as there is plenty that could bring the COIN stock rally to a screeching halt, three factors may outweigh the risks, keeping shares surging through the rest of 2023, and well into 2024.
First, with the latest Consumer Price Index (or CPI) data showing the annualized rate of inflation (3.2%) keeps falling back down towards the Federal Reserve’s 2% target rate, a “Fed pivot” on interest rates may just well arrive sometime next year.
Again, low rates will bode well for speculative assets like cryptocurrencies. A bona fide bull market for crypto will benefit Coinbase’s underlying business, and will help to bolster bullishness for COIN shares.
Second, irrespective of interest rate policy changes, as Coinbase CFO Alesia Haas pointed out in a recent interview with Barron’s, rising geopolitical tensions and an upcoming “halving” event may help drive a further lift for the price of Bitcoin, which presumably would provide a lift as well for other major cryptocurrencies.
Third, subsequent news could suggest Coinbase’s prospects are strengthening. Cost cutting and modest revenue growth may enable the company to finally get out of the red. Partisan gridlock in Washington may delay the implementation of a crypto regulatory regime.
Bottom Line: Consider Shares Worthy of a Speculative Buy
While leaning bullish on the stock, I’ll admit that shares could again encounter a brief round of turbulence, if in the coming weeks it becomes clear that spot Bitcoin ETFs will not receive regulatory approval.
While the company itself is confident that the SEC will approve them, citing a recent case involving another crypto-focused financial services firm, I’m skeptical that the securities watchdog will just roll over and approve them, without putting up a fight/putting up roadblocks that delay their approval.
Still, if COIN and crypto prices stumble if regulatory approval doesn’t happen, don’t assume the recent rally has come to an end. Factors like the specter of lower interest rates could give more runway to the cryptocurrency run-up.
In short, while you should approach this stock as you would approach any risky asset (like crypto itself), feel free to consider COIN stock worthy of a speculative buy.
On the date of publication, Thomas Niel held a long position in BTC-USD. He did not hold (either directly or indirectly) any positions in the other securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.