Why the Grayscale Win Is Better for Bitcoin and MicroStrategy Than Coinbase

The result wowed the world of crypto because it essentially clinches the eventual approval of a spot Bitcoin ETF. Having a way to invest in the currency that aligns with mainstream financial products has long been seen a potential fuel for prices of digital assets, especially because BlackRock (ticker: BLK) and other financial companies have also applied for their own versions of such funds.

Bitcoin prices jumped, as did shares in crypto broker Coinbase (COIN) and MicroStrategy (MSTR), a business intelligence company founded and chaired by Bitcoin bull Michael Saylor that has extensive holdings of the digital asset.

The move in MicroStrategy stock—it was up 11% on Tuesday but slipped almost 3% on Wednesday—makes the most sense, Mark Palmer, an analyst at Berenberg, wrote in a Wednesday note. Berenberg rates MicroStrategy at Buy with a target of $510 for the price; the shares opened at $375.10 on Wednesday.

MicroStrategy held 152,800 Bitcoin tokens worth some $4.2 billion at current prices as of the end of July, representing much of the company’s $5.2 billion market capitalization.

While a spot Bitcoin ETF could be a compelling alternative to MicroStrategy for investors seeking exposure to Bitcoin, it would still be ultimately positive for the company. “Approval of a spot ETF would be good for Bitcoin, and anything that would be good for Bitcoin would be good for MicroStrategy,” said Palmer.

It’s a different story for Coinbase. Berenberg rates the shares at Hold with a price target of $39, while the stock opened at $83.56 on Wednesday after it rallied 15% in the previous session.

One reason the stock jumped after the Grayscale ruling is that investors saw it as a big loss for the regulator, which is also engaged in a legal action against Coinbase. However, “we believe any readthrough from the Grayscale ruling to the prospects of the SEC’s case against Coinbase is misguided,” Palmer said. 

Coinbase, for its part, does see the ruling as positive. Paul Grewal, the company’s chief legal officer, told Barron’s in a Tuesday interview that the decision suggests the SEC needs to rethink how it has approached enforcement and its review of applications linked to crypto.

Coinbase is set to be the custodian of Bitcoin held by spot Bitcoin ETFs, but optimism regarding that is likely overdone, Palmer said. Berenberg doesn’t see the additional revenue Coinbase would get as being a game-changer for the company. The stock has rallied more than 50% since BlackRock’s application, however, helped by a bull case that includes other opportunities, such as the prospect of selling market data to ETF providers.

In fact, Palmer sees Coinbase itself as a risk to the approval of spot Bitcoin ETFs more broadly. “We would not be surprised if the company’s involvement were to serve as part of the SEC’s reconfigured arguments for rejecting the applications,” said Palmer. Coinbase is fighting the SEC over whether many of the digital assets it handles are securities, which would make them subject to regulation by the agency.

In response, Coinbase sent Barron’s a statement from Grewal, the chief legal officer, saying that spot, or physical, exchange-traded products will be attractive to investors, that Coinbase has a role to play as a custodian, and that its committment to surveillance-sharing agreements with exchanges reinforces their efforts to meet regulatory requirements. 

Of course, there is also the argument that the SEC has only lost in the short term. “We believe it is quite feasible that the SEC will craft alternative arguments to justify continued rejections of spot Bitcoin ETF applications,” Palmer said.

That wouldn’t be good for Bitcoin, MicroStrategy—or Coinbase.

Write to Jack Denton at [email protected]