Why Coinbase Stock Jumped 34% in July

What happened

Shares of Coinbase Global (COIN 18.68%) jumped 33.9% in July, according to data provided by S&P Global Market Intelligence. This easily surpassed the 9.1% return of the S&P 500. Indeed, Coinbase stock more strongly correlated to the price of Bitcoin during July, with Bitcoin up 18% during the month.

So what

For Coinbase shareholders, the ride must feel chaotic. The problem is that, because of changes in the economy, the market isn’t sure what Coinbase is worth based on past results. And because of volatility in the cryptocurrency space, investors aren’t confident in Coinbase’s future. These realities mean that Coinbase often moves more due to exogenous factors than news with its own business. And this was largely the case again in July.

Keep in mind that Coinbase stock was down 81% in the first half of 2022 and hit its all-time low on June 30. But Bitcoin was down more than 50% during this time — one of its strongest pullbacks ever. And the S&P 500 was down 21%, it’s worst six-month performance to start a year since 1970.

With both Bitcoin and the S&P 500 rebounding in July, it was only natural for Coinbase stock to follow suit. 

There’s one major exception to what I’m saying; Coinbase did have relevant news during the month. On July 21, the Securities and Exchange Commission (SEC) charged a former Coinbase employee with insider trading. In the official SEC press release, it stated that “a number of the crypto assets at issue were securities,” which Coinbase isn’t allowed to list. A few days later, Bloomberg reported that the SEC was investigating Coinbase for this.

Paul Grewal is Coinbase’s Chief Legal Officer and adamantly disagrees with the SEC regarding certain crypto assets on its exchange really being securities. However, the potential of a brewing legal battle had investors heading for the exits late in July. For perspective, before this situation came to the surface, Coinbase stock was up around 60% for the month.

COIN data by YCharts

Now what

Activity in the cryptocurrency space is down, and Coinbase is feeling it. In the first quarter of 2022, the company’s revenue was down 27% year over year as transaction volume dropped. And it swung to a $430 million loss in Q1 compared to net income of $771 million in the prior-year period. Because of this, CEO Brian Armstrong underscored the company’s need to get more efficient with its labor in a July 12 blog post. Shareholders certainly hope that leads to improved cash flow in future quarters.

Investors will get an up-to-date look at the business when Coinbase reports financial results for the second quarter of 2022 on Aug. 9.

However, even if Coinbase shows improvement in Q2, support for the stock will likely remain thin as long as an investigation from the SEC hangs over its head.

Jon Quast has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin and Coinbase Global, Inc. The Motley Fool has a disclosure policy.