10 Crypto Stocks To Avoid During The SEC Crackdown

Published on June 7, 2023 at 9:23 am by Fatima Farooq in Hedge Funds, News

In this article, we will be looking at 10 crypto stocks to avoid during the SEC crackdown. To see more of these stocks, you can go to 5 Crypto Stocks To Avoid During The SEC Crackdown.

The first week of June has spelled nothing but trouble for the cryptocurrency sector. The US Securities and Exchange Commission (SEC) sued crypto companies Binance and Coinbase Global, Inc. (NASDAQ:COIN) one after the other in a span of merely two days. Binance, the largest crypto exchange across the globe, was charged with 13 offenses relating to American securities law violations on June 5. According to CNBC, one major accusation made by the SEC was that Binance and its co-founder, Changpeng Zhao, “comingled” investor funds with their own funds, which was a clear violation of US securities laws. The very next day, the SEC also sued Coinbase Global, Inc. (NASDAQ:COIN) in the New York Federal Court. This time, the major charge was that the company had been operating as an unregistered broker since 2019.

“An Extensive Web Of Deception”

Gary Gensler, SEC Chair, was invited on CNBC’s “Squawk on the Street” on June 6 to shed more light on the SEC’s regulatory actions within the crypto space. Gensler believes that the situation regarding crypto assets and trading has been clear for many years, holding that crypto trading platforms must fall into compliance with US securities laws for the good of the investing public. He noted that companies like Binance are advertising themselves as being exchanges but are flouting securities laws that traditional exchanges are supposed to be complying with. He referred to their operation as an “extensive web of deception” through which they are merely attempting to “evade US law.” As far as Coinbase Global, Inc. (NASDAQ:COIN) is concerned, the SEC feels that around 13 crypto assets that the company has been making available to its customers since it began operating are actually “crypto asset securities,” in the eyes of the SEC.

In the Binance complaint filed by the SEC, the Commission adopted extreme measures, asking for emergency relief such as an asset freeze for Binance and “even the appointment of a receiver.” CNBC’s Jim Cramer, while taking note of these requirements during the interview, went as far as saying that these requirements could be “the end of Binance.” When confronted with this statement, Gensler merely responded that the SEC’s concerns lay with the investing public and their protection against platforms like Binance.

“We Don’t Need More Digital Currency”

Further into the interview, Gensler took a shot at the very enterprise behind cryptocurrencies, stating that the US didn’t actually need more digital currency. For him, the dollar, euro, and yen were all digital currencies at the moment. He noted that all investments today were digital, whether they were in big tech, automobiles, or anything really. Here are some of Chair Gensler’s comments on the crypto business from his interview:

“What we find is this is a field that’s built – the whole business model is built on non-compliance with the US securities laws. We’re asking them to come into compliance and they’re going a bit of ‘catch us if you can.’ That’s a sort of generalization.” And they’re comingling various functions that in traditional finance, we don’t allow. I mean, the public would be aghast if they thought the New York Stock Exchange was also running a hedge fund trading against them.”

The SEC’s strict regulatory moves and legal actions have begun taking a hit on the crypto markets, with many companies like Riot Platforms, Inc (NASDAQ:RIOT) and Marathon Digital Holdings Inc (NASDAQ:MARA) beginning to feel the heat. What’s more is that the investing public is beginning to take notice of these current developments. According to CNBC, investors withdrew $791.6 million in funds from Binance on June 6 in light of the company’s looming lawsuit before the New York Federal Court. About $1.65 billion were withdrawn from Binance in total, with $13 million worth of assets were withdrawn from the company’s “US arm on the Ethereum blockchain.” Over the coming months, as these cases further develop, investors can expect to see billions of dollars being moved around, with many investors, who are spooked by the SEC’s aggressive approach, altogether abandoning their stakes in crypto holdings. In light of these developments, we are keeping track of current hedge fund holdings in crypto stocks and covering them for your below to be able to see how these holdings evolve and change by the next quarter.

Crypto Stocks To Avoid During The SEC Crackdown

Luis Louro / shutterstock.com

Our Methodology

We selected crypto stocks that are involved in the cryptocurrency industry directly or indirectly since the recent crackdown on the crypto markets is bound to impact all players in the industry if the courts swing in favor of the SEC. We looked at Insider Monkey’s hedge fund data for the first quarter to rank these stocks using hedge fund sentiment, from the highest number of hedge fund holders to the lowest. Current events and how the situation develops may result in many hedge funds fleeing their crypto holdings during the second quarter, which is something to keep an eye on over the coming months.

Crypto Stocks To Avoid During The SEC Crackdown

10. Block, Inc. (NYSE:SQ)

Number of Hedge Fund Holders: 64

John Marrin at CLSA downgraded shares of Block, Inc. (NYSE:SQ) from Buy to Underperform on May 11. The analyst also reduced his price target on the stock from $93 to $63.

Block, Inc. (NYSE:SQ) is a leading financial company in the crypto space, with its CEO Jack Dorsey holding that crypto, especially Bitcoin, had a large role to play in the company’s future.

ARK Investment Management was the most prominent shareholder in Block, Inc. (NYSE:SQ) at the end of the first quarter, holding 10.5 million shares in the company.

The recent crackdown on the crypto markets is thus bound to set Block, Inc. (NYSE:SQ) and its crypto businesses back. These businesses include its Bitcoin hardware wallet and Bitcoin mining business.

Shares of Block, Inc. (NYSE:SQ) are down by 22.01% over the past year as of June 7.

There were 64 hedge funds holding stakes in Block, Inc. (NYSE:SQ) during the first quarter, with a total stake value of $3.4 billion.

9. Interactive Brokers Group, Inc. (NASDAQ:IBKR)

Number of Hedge Fund Holders: 44

Our hedge fund data for the first quarter shows 44 funds long Interactive Brokers Group, Inc. (NASDAQ:IBKR), with a total stake value of $2.2 billion.

Interactive Brokers Group, Inc. (NASDAQ:IBKR) is an automated electronic broker. Its business includes trading in stocks, cryptocurrencies, and more.

On April 19, Piper Sandler’s Richard Repetto lowered his price target on Interactive Brokers Group, Inc. (NASDAQ:IBKR) from $120 to $115.

Baron Funds mentioned Interactive Brokers Group, Inc. (NASDAQ:IBKR) in its first-quarter 2023 investor letter:

“We initiated a position in Interactive Brokers Group, Inc. (NASDAQ:IBKR), a leading brokerage firm that enables institutional and individual investors to trade securities, commodities, and foreign currencies from a single platform. Interactive Brokers targets sophisticated investors with complex needs, including those who trade multiple asset classes across global markets and use leverage to finance trades. The company differentiates itself through its low prices, the vast array of markets that it serves, and its strong growth from international markets. Interactive Brokers has 2.2 million accounts, a customer base that has more than quadrupled in the last five years and has more recently been growing over 20% per year.

We have long been admirers of the company’s founder and chairman, Thomas Peterffy. He founded the company that would become Interactive Brokers in 1977 when he bought a seat on the American Stock Exchange as an options market maker. With a background in computer engineering, Peterffy was the first to use computers to calculate options prices while others were still doing manual calculations. This automation allowed Peterffy to increase trading efficiency, and he ultimately built the world’s largest electronic options market-maker. In 1993, Interactive Brokers added brokerage capabilities, allowing clients to use the same infrastructure that the company had spent years building for its own trading. Interactive Brokers eventually sold the market-making business to focus exclusively on the more profitable brokerage business. Thomas remains the face of the company and owns 70% of the shares…” (Click here to read the full text)

Interactive Brokers Group, Inc. (NASDAQ:IBKR), like Coinbase Global, Inc. (NASDAQ:COIN), Riot Platforms, Inc (NASDAQ:RIOT), and Marathon Digital Holdings Inc (NASDAQ:MARA), is likely to be heavily impacted by the SEC’s crackdown on the crypto markets.

8. Coinbase Global, Inc. (NASDAQ:COIN)

Number of Hedge Fund Holders: 28

Analysts at Mizuho have placed an Underperform rating on Coinbase Global, Inc. (NASDAQ:COIN) shares as of June 6, alongside a price target of $27.

Coinbase Global, Inc. (NASDAQ:COIN) was spotted in the portfolios of 28 hedge funds in the first quarter. Their total stake value in the company was $1.2 billion.

Being one of the crypto companies the SEC is suing, Coinbase Global, Inc. (NASDAQ:COIN) is likely to take a huge hit from the current crypto crackdown. The stock is down by 25.82% over the past year as of June 7.

Holding 11.8 million shares in the company, ARK Investment Management was the largest shareholder in Coinbase Global, Inc. (NASDAQ:COIN) at the end of the first quarter.

7. Robinhood Markets Inc. (NASDAQ:HOOD)

Number of Hedge Fund Holders: 27

Robinhood Markets Inc. (NASDAQ:HOOD) is down by 1.5% over the past six months as of June 7.

Operating within the crypto industry as a brokerage, Robinhood Markets Inc. (NASDAQ:HOOD) may also be significantly impacted by the SEC’s increased scrutiny of crypto trading platforms.

As of May 12, Benjamin Budish at Barclays holds an Underweight rating and a $9 price target on Robinhood Markets Inc. (NASDAQ:HOOD) shares.

A total of 27 hedge funds were long Robinhood Markets Inc. (NASDAQ:HOOD) in the first quarter, with a total stake value of $703 million.

6. Riot Platforms, Inc (NASDAQ:RIOT)

Number of Hedge Fund Holders: 17

We saw Riot Platforms, Inc (NASDAQ:RIOT) in the 13F holdings of 17 hedge funds during the first quarter. Their total stake value in the company amounted to $70 million.

Needham analysts lowered their price target on Riot Platforms, Inc (NASDAQ:RIOT) on May 11 from $15 to $13.

Bitcoin mining companies like Riot Platforms, Inc (NASDAQ:RIOT) may be caught in the crossfire during the SEC’s regulatory battle with Binance and Coinbase, especially since current news is bringing bitcoin prices tumbling down.

Citadel Investment Group was the most prominent shareholder in Riot Platforms, Inc (NASDAQ:RIOT) at the end of the first quarter, holding 3.3 million shares in the company.

Riot Platforms, Inc (NASDAQ:RIOT), like Coinbase Global, Inc. (NASDAQ:COIN) and Marathon Digital Holdings Inc (NASDAQ:MARA), has been declining ever since the SEC’s legal actions.

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