JPMorgan analysts have downgraded Coinbase to underweight on Tuesday, shifting from its previous neutral stance.

Despite acknowledging Coinbase as the "dominant US exchange in the crypto ecosystem," analysts express concerns about the sustainability of the catalyst that propelled Bitcoin to nearly two-year highs.

In reference to the catalyst, specifically Bitcoin ETFs, analysts fear that the momentum driving the crypto ecosystem out of a prolonged downturn may not meet market expectations.

Increased Outflows

CoinShares data on Monday revealed significant outflows of $2.2 billion from Grayscale's Bitcoin ETF, with reports attributing a substantial portion to FTX estate sales, totaling nearly $1 billion.

The downgrade has not impacted Coinbase's current stock price of around $122, with the cryptocurrency exchange experiencing a remarkable 129% surge in the past year.

However, the stock has encountered a 28% decline in the last month alone.

Despite the change in rating, the analysts maintained the price target at $80.

This revised target now reflects the analysts' perspective on the stock's "normalised earnings" rather than their previous discounted cash flow approach.

This shift is attributed to considerations of the overall crypto market capitalization, enabling a comparison of Coinbase's trading volume with the industry's market cap.

Analysts, led by Kenneth Worthington, draw parallels between Bitcoin ETFs and the Gold ETF GLD's launch in 2004, highlighting a similar initial market enthusiasm.

"Disappointing" First Week

According to them, the first-week net flows of $1.2 billion for Bitcoin ETFs are deemed "disappointing," with Grayscale's outflows placing the overall aggregate net sales below GLD.

Beyond the concerns related to Bitcoin ETFs, the ongoing legal battle between the US Securities and Exchange Commission (SEC) and Coinbase presents potential risks.

While analysts believe these risks might not impact operations in the near term, an unfavorable outcome, such as Coinbase not being granted a motion to dismiss, could result in a protracted legal battle against the SEC.

This scenario raises the possibility of the SEC winning, forcing Coinbase to cease offerings like its Wallet or staking services, as alleged violations of securities laws.

Despite these challenges, analysts note that Coinbase is not devoid of positive prospects.

The exchange stands to benefit from "greater revenue opportunities," with the potential for increased trading commissions and enhanced ecosystem engagement.

Additionally, JPMorgan highlights the rising popularity of Ethereum staking as a factor that could positively impact Coinbase's stock.