The Decline of Retail Investors in the Bitcoin Rally

As the Bitcoin rally continues, there is an important missing element that has fueled previous surges: retail investors. For the rally to sustain its momentum, it is crucial for retail investors to come back into the market. One indicator of this trend can be seen in the performance of Coinbase stock.

Coinbase Global has witnessed a continuous influx of retail investors, pushing its shares up by 3% in early trading on Tuesday, reaching approximately $146. This impressive performance has resulted in a 312% increase in the stock's value over the course of the year, signifying a remarkable resurgence for this leading U.S. crypto brokerage.

However, despite this renewed interest in Coinbase itself, there appears to be a dwindling enthusiasm for Bitcoin among retail investors, particularly in the U.S. Retail trading volumes and overall interest in cryptocurrency still remain relatively subdued. Various technical factors have contributed to the recent rally, including the liquidation of overleveraged short positions. Although trading volumes on U.S. exchanges have experienced some improvement, they still remain comparatively low.

John Todaro, an analyst at Needham, has observed signs of apathy among U.S. investors towards cryptocurrencies.

"In prior years, retail crypto engagement was considerably higher and, despite the recent price gains, it has now been notably muted," Todaro commented in a note on Tuesday. "We have found that the best indicators for assessing the state of the crypto market and Coinbase's position within it are based on a scale ranging from retail disinterest to euphoria. Currently, retail interest is leaning more towards disinterest."

Additional data supports these conclusions. Coinbase's ranking on app stores has dropped significantly, indicating a decline in retail participation, according to Todaro. The broker's app currently sits at 24th place among finance apps across platforms, showing only a slight improvement from its 28th place ranking in September. This position is far below its peak ranking in October 2021 when Bitcoin was soaring to new record highs.

It is clear that retail investors play a critical role in sustaining the Bitcoin rally, and their diminished presence raises questions about the rally's long-term feasibility. To ensure future growth in this market, it is imperative to rekindle the interest of retail investors in cryptocurrencies and inspire a renewed sense of excitement and engagement.

The Growing Interest in Crypto and the Bull Case for Coinbase

According to Google search trends, the term "crypto" is currently attracting the same level of interest as it did back in July, even though it is 50% lower than the average for 2022. This suggests that there is still significant interest in cryptocurrencies despite a previous trading slump.

One of the main reasons for the overall bullish outlook on Coinbase, as well as the broader crypto market, is the expectation that rising Bitcoin prices will attract retail investors. This influx of new traders would lead to increased trading volumes and related fees for Coinbase, bolstering its position in the market.

Historically, crypto markets have experienced cycles driven by the fear of missing out (FOMO). This phenomenon suggests that if Bitcoin prices continue to rise, more investors may jump on the bandwagon, further boosting trading activity. Even Wall Street analysts are starting to warm up to this idea. For instance, Needham has raised its price target on Coinbase stock from $120 to $160 while maintaining a Buy rating. Additionally, even long-time Coinbase bear Dan Dolev of Mizuho Securities has slightly revised his price target to $35 from $31 while retaining his Underperform rating.

Dolev acknowledged that although Coinbase's share of industry volumes did not improve significantly in the second half of November, there has been a meaningful improvement compared to September and October levels. He believes this upward trend in volumes is not specific to Coinbase alone but reflects the overall anticipation and hope surrounding the potential launch of a Bitcoin exchange-traded fund (ETF).

Other analysts have also recently raised their price targets for Coinbase, although FactSet reports that the average target remains at $88, which is still below the current market prices. The overall consensus among analysts seems to be a Hold rating.

Wall Street seems to have been caught off guard by the rally in Bitcoin prices this year and its impact on Coinbase's stock. Now, it is up to retail traders to play their part in sustaining the rally.