Coinbase experiences a surge of more than 60% in the same month that FTX and Binance founders face potential imprisonment.

• In November, Coinbase shares experienced a 62% increase, marking their second-best month since their debut on the Nasdaq in 2021.
• The rally took place in the same month as Sam Bankman-Fried's fraud conviction and Changpeng Zhao's guilty plea for criminal charges.
• JPMorgan analysts predict that Bitcoin ETFs will initially benefit Coinbase in the short term but may eventually harm its business in the long run.

Despite two prominent figures in the crypto industry facing prison time in a month, shares surged over 60%, marking their second-best monthly growth since the exchange's public launch in 2021.

Coinbase has been one of Wall Street's top performers in 2023, with rallies in and crises at key competitors driving its growth.

The rebound in the stock market provides relief for early holders of Coinbase, who experienced a significant loss of 86% of their value in 2022 due to soaring inflation and rising interest rates, causing investors to shift towards safer assets during a recession.

This year, tech stocks have experienced a significant resurgence, particularly those associated with the artificial intelligence industry and cryptocurrency. Notably, Coinbase has weathered the "crypto winter" and remains a viable player in the market, while many of its competitors have either vanished or scaled back.

This month, Sam Bankman-Fried, founder of FTX, was found guilty of seven criminal fraud counts related to the collapse of his exchange and the theft of customer funds. His conviction was announced on Nov. 2 after a monthlong trial.

In less than three weeks, on Nov. 21, Changpeng Zhao, the founder of Binance, pleaded guilty to violations of the Bank Secrecy Act for not implementing an effective anti-money laundering program and for willfully violating U.S. economic sanctions.

The Binance founder, Bankman-Fried, who faces potential life imprisonment, is scheduled to be sentenced in March. Meanwhile, Zhao's sentencing is set for February. Although guidelines suggest a sentence of 12 to 18 months, the Justice Department may push for a longer punishment for Bankman-Fried.

Unlike FTX, which filed for bankruptcy in late 2022, Binance is still operational, though without its founder Zhao, who agreed to step down as CEO as part of a plea deal. Even before that, the company was experiencing a decline in trading, with volume down by two-thirds between the first and third quarters of the year, according to CoinGecko.

Despite having over $65 billion in assets, Binance's market share decreased from over 60% in February to under 50% in September, indicating that the exchange may be losing its grip on the industry as regulators continue to pressure it, according to CoinGecko.

After the Justice Department announced a $4.3 billion settlement with Binance, customers withdrew over $1 billion from the exchange within the first 24 hours. Additionally, liquidity decreased by 25% immediately following the announcement as market makers reduced their positions, according to Kaiko data.

A Binance representative stated to CNBC that Zhao attended court to safeguard users and secure the company's future.

Despite being tested more than any other exchange, Binance remains the world's largest cryptocurrency exchange by volume and is seeing an increase in institutional user transactions.

Coinbase, the fourth-largest global exchange by daily volume, is the only publicly traded U.S. exchange with a market cap of approximately $30 billion.

On Wednesday, Mizuho analysts reported that Coinbase shares have increased by approximately 20% since Zhao's settlement, which they believe is due to anticipation of potential gains for COIN as a result of outflows from Binance, the largest exchange in the industry. However, on Thursday, Coinbase shares fell 2.4% to $124.72, erasing some of their recent gains.

Mizuho increased its stock price target from $31 to $35, while maintaining its underperform rating.

‘Turn the page’

Coinbase spokesperson declined to comment on the story, but CEO Brian Armstrong stated in an interview with CNBC's Joumanna Bercetche that the Binance settlement would enable the crypto industry to move beyond a series of scandals.

Regulatory clarity will bring in more investment, especially from institutions, as the enforcement action against Binance has allowed us to close that chapter of history, according to Armstrong.

Despite the absence of the Securities and Exchange Commission in the Binance settlement, both Coinbase and Binance continue to face legal battles with the regulatory body. Meanwhile, Coinbase executives have suggested the possibility of leaving the U.S. for a jurisdiction with clearer rules on cryptocurrency if the company cannot reach a resolution with the SEC.

Wall Street appears to be shrugging off that concern.

Analysts at Needham advised purchasing Coinbase shares in a report on Nov. 21, stating that the company had emerged from the crypto winter better positioned than in the previous up cycle. Additionally, they noted that FTX's failure, Binance's retreat, and Bittrex's exit from the market had all contributed to the current state of the crypto market.

On November 20, Bittrex announced that all trading activity on its global platform would be disabled starting December 4, and urged customers to withdraw their assets immediately. In April, the SEC accused Bittrex and its former CEO of operating an unregistered exchange.

Yet there may be a new competitive threat on the horizon.

The first U.S. spot bitcoin exchange-traded funds (ETFs) are predicted to receive approval from U.S. regulators soon, enabling investors to purchase digital currency directly through the same process as stock and bond ETFs. Several top asset managers, including ProShares, WisdomTree, and Invesco, have submitted applications to the SEC.

If regulatory approval is obtained, more opportunities will be available for individuals to purchase bitcoin. Although Coinbase offers a range of cryptocurrencies, bitcoin accounted for 38% of transaction volume and 95% of revenue in the third quarter. For those who want to dabble in bitcoin but are not experienced investors, there may be additional options to buy through their primary online brokerage.

Last week, analysts predicted that crypto ETFs would benefit Coinbase in the short term but could become more challenging in the long run.

Coinbase has been chosen by many large asset managers, including BlackRock, Franklin Templeton, and WisdomTree, for custody services, which entails safeguarding the assets. The initial increase in revenue would stem from the custody fees associated with ETFs.

JPMorgan predicts that in the long run, the demand for Coinbase accounts may decrease, resulting in pricing pressure.

Analysts with a neutral rating on the stock and an $80 price target wrote that many novice investors are limited to flagship tokens and do not require Coinbase's services. Additionally, the ETF markets are more transparent, efficient, and cost-effective to execute, and there is potential for a migration to ETFs for cheaper exposure and trading, which could drive Coinbase to lower fees.

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