Bitcoin (BTC-USD) temporarily dropped below the psychological and technical level of $20,000, but that level appears to be acting as a sort of floor. In the same way, the headwinds facing cryptocurrency-related stocks like Coinbase (COIN), Silvergate Capital (SI), and MicroStrategy (MSTR) are likely only temporary. However, there are reasons to be bullish on Silvergate, bearish on Coinbase, and neutral on MicroStrategy over the longer term.
Silvergate, Coinbase, and MicroStrategy: The Basics
Silvergate Capital is generally known as a crypto bank, but that’s not its entire business. The company has a 20-year track record of serving entrepreneurs in unique and niche industries, including cryptocurrency. Silvergate provides commercial lending and banking as well as U.S. Dollar and Euro settlement. It also acquired the dollar-backed Diem stablecoin originally proposed by Facebook as Libra.
Coinbase is the largest cryptocurrency exchange in the U.S., with about 93% of its revenue coming from commissions and fees on crypto trades.
Technically, MicroStrategy is an enterprise software company that provides business intelligence, mobile app software, and cloud-based solutions. The company enjoys a recurring revenue model and earns money on licensing and subscriptions. However, in reality, MicroStrategy is a bitcoin play because most of its value comes from its bitcoin holdings.
Bullish on Silvergate Capital
Through its Silvergate Exchange Network, the firm serves crypto exchanges like Coinbase and provides banking services to them and institutions that trade cryptocurrencies. Given the growing institutional interest in cryptocurrencies, this is a robust business model. However, Silvergate Capital isn’t solely a crypto play. It’s primarily a bank, and it benefits significantly more from rising interest rates than traditional banks.
As inflation soars and interest rates rise steadily, Silvergate is becoming increasingly profitable, as demonstrated by the 73% beat against consensus estimates for the first quarter. The firm is earning more interest as rates rise but is not paying any interest to holders of its trading accounts. Silvergate reported in its annual regulatory filing that a 1% increase in the federal funds rate would boost its income by almost 60% over the following year.
Silvergate also has additional upcoming opportunities, with the monetization of its Diem stablecoin infrastructure being chief among them. A stablecoin fits in well with the firm’s other offerings, as the primary ways stablecoin issuers make money is through short-term lending and investing. Silvergate may also be able to monetize its stablecoin by charging transaction fees.
Bearish on Coinbase Now, Potential Upgrade in 12 months
As a crypto exchange, Coinbase’s valuation hinges on the price of bitcoin, so it seems unlikely that the company’s stock will stage a sustainable rebound until the crypto winter is over. The company just slashed about 1,100 jobs or 18% of its workforce due to fears about the crypto winter, and executives aren’t ruling out more job cuts.
Coinbase reported some troubling numbers for the first quarter, including a 27% year-over-year decline in revenue and a decline in active users from 11.4 million in the fourth quarter to 9.2 million in the first. Total trading volume fell from $547 billion in the fourth quarter to $309 billion in the first. Goldman Sachs analysts warned that Coinbase might not return to profitability anytime soon.
Another concerning issue is that the crypto exchange recently warned that if it goes bankrupt, the $256 billion in cryptocurrency and fiat money it holds for its customers “could be subject to bankruptcy proceedings.” Coinbase added that its users would become “general unsecured creditors,” which means they wouldn’t have any right to claim the money they have stored with Coinbase.
It’s important to note that Coinbase records the vast majority of its revenue (more than 80% in the first quarter) on fees charged to retail investors on their crypto trades. As a result, since retail investors are likely to continue to cut back on their crypto trading in the near future, Coinbase’s revenue is likely to remain in freefall.
As a result, it may be wise to remain bearish on Coinbase in the near term, with the potential to shift to neutral or even bullish in the coming years, depending on which path the crypto exchange follows. If retail trading on the platform recovers, Coinbase may make sense as a bullish bet, especially since it has a strong balance sheet with relatively little debt compared to its assets.
Neutral on MicroStrategy Now, Potentially Bearish or Bullish Next Year
When considering MicroStrategy, it’s important to realize that it’s more of a direct bitcoin play than a stock. The company earned $119.28 million in revenue in the March 2022 quarter. However, the vast majority of its value lies in the bitcoin it holds, which is why its stock should move in step with the bitcoin price.
Investors became concerned about MicroStrategy amid all the reports about the potential for a margin call on its bitcoin loan. However, CEO Michael Saylor told Bloomberg last week that they were in no danger of a margin call. MicroStrategy took a $205 million loan backed by bitcoin from Silvergate in March.
Saylor also told Bloomberg that there won’t be a margin call as long as that loan remains collateralized with a loan-to-value ratio of less than 50%. However, investors became concerned because MicroStrategy said in May that a margin call would be triggered if bitcoin fell to around $21,000, which it did last week. More recently, Saylor said bitcoin would have to fall below $3,500 before MicroStrategy would need more collateral.
The problem is that MicroStrategy’s balance sheet is weak due to a significant amount of debt compared to its assets, but that will turn around if bitcoin recovers. However, if the cryptocurrency doesn’t recover by 2025, MicroStrategy will be in trouble because its debt will start coming due. Thus, a neutral rating on MicroStrategy appears wise now, but it should be revisited in 12 months.
Wall Street’s Take
Turning to Wall Street, Silvergate has a Strong Buy consensus rating based on seven Buy ratings, one Hold rating, and zero Sell ratings assigned over the last three months. At $172.88, the average Silvergate Capital price target implies upside potential of 207%.
Coinbase has a Moderate Buy consensus rating based on 14 Buy ratings, four Hold ratings, and two Sell ratings assigned over the last three months. At $137.84, the average Coinbase price forecast implies upside potential of 165.5%.
Lastly, MicroStrategy has a Strong Buy consensus rating based on three Buy ratings, one Hold rating, and zero Sell ratings assigned over the last three months. The average MicroStrategy price target is $539.33, implying upside of 215.6%.
In the current macro environment, Silvergate Capital is enjoying skyrocketing revenue, thanks to rising interest rates and more stability due to its focus on institutional investors and entrepreneurs rather than the whims of retail investors.
Essentially, Coinbase needs crypto prices to recover before its revenue will improve, while Silvergate should prove to be more recession-resistant than Coinbase. MicroStrategy also needs bitcoin prices to recover.