Coinbase Surges Nearly 10%. Be Wary of Chasing a Short Squeeze.

The agreement is seen as a big boost to efforts to launch the ETFs, since the Securities and Exchange Commission cited the potential for fraud in rejecting prior efforts.

Shares of Coinbase on Tuesday rose about 9.8% to $89.15, giving it a staggering 76% return for the month.

The agreement could indeed be a boon for the applications, paving the way for a Bitcoin fund that attracts institutional investors and bolsters token prices. But the revenue opportunity for Coinbase is less clear and could ultimately even damage the stock.

While Coinbase and the Cboe haven’t released terms of the deals, they are unlikely to add meaningfully to Coinbase’s revenue, said Mizuho analyst Ryan Coyne.

“The number one thing that Coinbase needs is to keep the flywheel spinning on retail trading activity,” said Coyne. With successful ETF deals, “Coinbase could probably get more institutional volume, but that doesn’t provide it significant revenue upside.”

The reason is the stark difference between what Coinbase makes on retail trades versus those made by institutions. Most recently, the company has been able to earn fees amounting to about 1.68% of retail transaction volume versus 0.02% for that of institutions, said Coyne, whose firm rates Coinbase “Underperform.”

The fees it collects to custody institutional assets are also relatively paltry. That means a potential Bitcoin ETF could even eat into Coinbase’s earnings if it causes retail traders to shift to the new products, he said.

Coinbase declined to comment.

The underlying reason for Tuesday’s run-up might be the massive bets investors have placed against the stock. Short sellers have borrowed about 22% of Coinbase’s available shares, according to FactSet. That means even a small bit of news or move in the stock can cause a stampede of investors seeking to buy back shares before their losses mount. Coinbase has seen such phenomena before in recent weeks, Coyne said.

Investors could get a better sense of how substantial an opportunity the ETF deals are when Coinbase reports its second-quarter earnings in early August. On prior earnings calls, company executives have said they are trying to diversify the company’s revenue away from retail trading so that Coinbase can make money even when traders are less active, as they have been lately.

But until then, investors should be wary. Squeezes are fun while they last, but dangerous to chase.

Write to Joe Light at [email protected]