Despite FTX Fallout, There’s Still a Case for DAPP

The fallout from the collapse of crypto broker FTX, including trading gone awry at research arm Alameda Research, isn’t fully known at this point, and it feels like with each passing day, another firm admits vulnerabilities to the contagion. What is clear is that at the moment, “contagion” is an accurate word because the demise of privately held FTX is punishing an array of crypto-correlated and fintech equities, including member firms in exchange traded funds such as the VanEck Digital Transformation ETF (DAPP).

A prime example of a crypto-correlated stock that’s now being jaundiced by the FTX brush is Coinbase (NASDAQ:COIN). To some extent, that makes sense because Coinbase was a direct rival to FTX, but that doesn’t mean the DAPP holding was exposed to FTX’s malfeasance.

“Coinbase has little direct exposure to FTX ($15m in crypto assets on the FTX platform), but we believe the number of negative near-term catalysts for the space outweigh the positives,” Needham analyst John Todaro said in a note on Tuesday. “We believe the next several weeks will be a critical time for the space as OTC firms, crypto lenders, funds, conglomerates, and BTC miners come under heightened pressure given their exposure to FTX.”

Coinbase is DAPP’s second-largest holding at a weight of 8.34%, as of November 21, according to issuer data. Indeed, Coinbase stock is under pressure, but if that pressure is mostly the result of the FTX collapse, it may be misplaced.

In fact, a case can be made that if the market moves past the view that Coinbase is imperiled, the exchange operator could benefit from increasing volume in what’s proving to be a volatile climate for digital assets.

“Coinbase could even see an uptick in transaction revenue in the current quarter – there will be higher volatility and trading volume in the near term as investors assess how far and wide the damages reach,” reported Tanaya Macheel for CNBC.

The FTX implosion is exposing the importance of trust and reliability in the crypto space. Though not perfect, Coinbase is seen as trustworthy against the backdrop of FTX’s dubious business practices, and that means something.

“We also expect Coinbase will engage in more aggressive cost rationalization, and with the expected increase in interest income over the next year coupled with cost cuts, we think insolvency fears (as are currently reflected in bond prices) are overblown,” said Barclays analyst Benjamin Budish in a report.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.