Coinbase: Ripple’s Long-Running Battle With SEC Ends With Positive News

Coinbase Stock at a Glance

• Fair Value Estimate: $80
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: None

Shares of Coinbase Global COIN were trading sharply higher on July 13 in reaction to the results of the SEC’s case against Ripple, the issuer of the cryptocurrency XRP. In 2020 the SEC alleged that Ripple’s sales of XRP in private placements to institutional buyers and the public through open-market transactions on exchanges were unregistered sales of securities. This has been a much-watched case, as the question of whether cryptocurrencies are securities has important ramifications for both the industry and Coinbase’s own struggles with the SEC.

The trial ended with mixed results. The judge ruled that Ripple’s institutional sales were securities contracts, while its exchange transactions were not. The key distinction was that institutional buyers knew they were contributing capital to Ripple, while public buyers on exchanges had no way of knowing if they were acquiring XRP from Ripple or from another public holder of XRP. This is ultimately an incrementally positive outcome for Coinbase, as the decision holds that XRP is not inherently a security and exchange-based transactions are not investment contracts.

However, we do not plan to change our fair value estimate in response to this news, as we do not expect the court’s decision to resolve Coinbase’s regulatory struggles overnight. The trial was related to only a single cryptocurrency, and several important questions remain unanswered. Additionally, the company still faces low trading volume as weak cryptocurrency conditions persist. With the market’s positive reaction to the July 13 news adding to an already-substantial rally in the shares, which are trading at nearly 3 times where they were at the start of the year, we now view Coinbase as overvalued.