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The Great Divide: How the SEC's Crypto Crackdown Shapes a Bifurcated Market

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Earlier this week, the Securities and Exchange Commission (SEC), Wall Street’s highest regulator, made headlines by suing two of the world’s largest crypto exchanges – Binance and Coinbase ((COIN - Free Report) ). Investors immediately punished both exchanges after digesting the news. Binance Coin (BNB), the cryptocurrency issued by the Binance exchange, is down 14% on the week on heavy volume. Meanwhile, Coinbase shares are lower by more than 15% (down more than 20% at one point) on the week after paring some losses the past two days.

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Why is the SEC Cracking Down on Coinbase and Binance?

The SEC complaint alleges that Binance allowed U.S.-based customers to purchase “crypto derivatives.” In other words, their evidence suggests that customers can make wagers on the price of crypto assets without buying the crypto itself – an illegal act for an unregistered exchange. Coinbase was sued for a similar act. The SEC claims that Coinbase lists at least 13 unregistered crypto assets that should be registered by law. In the lawsuit, the SEC lists altcoins (any crypto asset that is not Bitcoin), such as Solana and Polygon.

Coinbase CEO Brian Armstrong has long argued that the SEC needs to provide more clarity to the crypto industry. In a recent tweet, Armstrong pointed out that the SEC approved the COIN IPO yet Armstrong has found that “There is no path to register.”

What is Next for Investors?

The situation between the crypto exchange behemoths and regulators is likely to get ugly before it gets resolved in one direction or another. While the unregistered concerns have persisted for some time, the SEC is clearly ratcheting up their clampdown. On the other side of the coin, arrows are likely to fly in both directions. For example, Binance’s law team insinuates that SEC Chair Gary Gensler once offered to perform advisory work for the exchange in 2019 – raising conflict of interest concerns.

Are there Opportunities Outside of Coinbase?

Investors should avoid investing in publicly traded crypto exchanges like Coinbase until there is more clarity in the crypto industry landscape. However, there are other ways to participate in crypto beyond COIN.

If the News Matters, the Price Will Tell You

Amid the SEC news Tuesday, Bitcoin and Bitcoin proxies such as the ProShares Bitcoin ETF ((BITO - Free Report) ) ignored the negative news dump and rose close to 6%. Despite the recent FTX exchange debacle, Bitcoin has been stair-stepping higher in a bullish fashion for much of 2023 and looks poised to break out once again.

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Zacks Rank #1 (Strong Buy) stock MicroStrategy ((MSTR - Free Report) rose 8% on Tuesday as volume levels were double the norm. The software company switched to the “Bitcoin Standard” a few years ago, using cash generated from its core business to purchase Bitcoin. Last quarter, MSTR swung to a profit. Recent earnings revisions show that analysts are bullish on the company’s prospects.

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Meanwhile, Bitcoin miners such as Marathon Digital ((MARA - Free Report) ) have been on a tear. The Valkyrie Bitcoin Miners ETF ((WGMI - Free Report) is the top-performing ETF year-to-date. WGMI is up 131% versus gains of 9% for the S&P 500.

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The recent SEC crackdown will likely act as a dark cloud over the crypto exchange Coinbase. However, there are opportunities to cash in on crypto beyond COIN. Bitcoin and proxies such as BITO have been climbing the wall of worry and are poised to move higher. Meanwhile, MSTR, which adopted the Bitcoin Standard, has robust earnings revisions and a drastically improving earnings picture. 

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