Coinbase (NASDAQ: COIN) will go down in history as the fastest bankruptcy on Wall Street.
OK, maybe it won’t be that dramatic.
After all, Coinbase is the largest U.S. cryptocurrency exchange and the only publicly traded crypto company in the market that serves more than 8,000 institutional clients.
Seems like an obvious long trade, doesn’t it?
Well, consider this: The company has been plagued with lawsuits, dubious scandals, security issues, and shabby fundamentals from the very beginning. Also keep in mind that you have to believe in the long-term upward trend in crypto …
It may surprise you, but I am a crypto bear.
That doesn’t mean I can’t gauge his money-making potential. I’ve been on the right side of the trade before. And there are even ways to make money with crypto without buying and holding coins. I’ll explain that at another point in time …
I also really believe in the reasons why crypto was created. After all, the dollar has lost 17% of its purchasing power in the past 10 years. The technology behind crypto – the blockchain – will be used in the future, not Dogecoin.
But I don’t like investments that can only be profitable in one direction.
Now that Coinbase is public, I see a delicious salmon and wait for it with my mouth wide open as it swims upstream.
Flying too close to the sun
Last week I talked about short squeeze and the massive upside potential if you are on the long side of the trade.
The shorts, however, are often right in their bets; Their timing may just be wrong or an event could cause the stock they are betting on to go up.
To recap, when the pandemic caused a short squeeze on Blue Apron (NYSE: APRN), 48% of the float (the number of publicly available stocks) was sold short at the time.
Today only 0.59% of Coinbase’s float is being sold short, so a short squeeze is unlikely any time soon.
And its share price has fallen steadily since it went public (IPO) in April, nearly 35% at the time of this writing. If you bet against the stock in April, you would be printing more money than the Fed.
Keep in mind that part of this downtrend was likely caused by insider selling. In April, the SEC recorded 10 insider deals – all sales – valued at billions.
And on the day the company went public, Coinbase co-founder and CEO Brian Armstrong sold 750,000 shares for $ 291.8 million.
Seems like management only cares about filling their own pockets …
However, Armstrong – with a salary of $ 1 million and total compensation of more than $ 59 million including stock options – needs to maintain the momentum in Coinbase stock to redeem his options.
According to MSN, Armstrong was granted a multi-billion dollar performance award in August 2020 if the stock traded at a certain price for a certain number of days. Needless to say, he’s still raking in the batter.
Aside from the greed for insiders, there are three key areas I don’t like about the company.
The management is young, inexperienced, and making poor decisions, which has resulted in multiple lawsuits.
It has been accused and sued for:
- Artificially inflate crypto prices
- Unlawful and Unfair Business Practices
- Employee wage discrimination
- Overtaxing customers
Does the management really care how well the company is doing? Does it even matter if the company goes bankrupt? I do not think so. After all, Armstrong joined the Dekabillionärsclub this year.
The management doesn’t care in the slightest about their customers which brings me to my next point …
Bad customer service
Coinbase has struggled with little to no customer support for years.
Thousands of users have complained that Coinbase locks their accounts and liquidates holdings, all without warning from the company, causing investors to lose millions in opportunity costs. And when users contact customer service, they get a general answer or sometimes none at all.
This is not a way to treat customers or run a business and I think Coinbase is going to pay dearly for it now that it is in the open market.
With so many disgruntled investors, lawsuits filed, and a lack of transparency from the company, Coinbase is doomed to fail unless it comes together.
You might think it’s a profitable company, but its business model is perhaps the most unsustainable part of the company.
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Bad business model
Coinbase makes money using the oldest, dirtiest trick in the book … collecting taxes.
This is what I mean …
In order to buy and sell cryptos through the company’s service, you have to pay a fee for each transaction. As things stand, 90% of the income comes from transaction fees, while 10% comes from the sale of own crypto assets to customers. (Can you say shady?)
It seems like a decent idea at first because as long as people are buying and selling cryptos, Coinbase makes money.
But what if people stop trading cryptos or prices go down?
Analysts at Nasdaq, the exchange on which Coinbase is listed, are not optimistic …
The company had an excellent first quarter of 2021 with estimated revenue growth of $ 1.8 billion and trading volume for the quarter to $ 335 billion as the price of Bitcoin nearly doubled over the year to date, resulting in the number of active monthly traders rose from 2.8 million late last year to 6.1 million in the first quarter.
However, given the cyclical nature of the crypto market, it is likely unrealistic to expect the company to maintain its growth rates in the first quarter of 2021 for the remainder of 2021. In addition, soaring bond yields and a stellar 8x spike in Bitcoin prices make the crypto market quite vulnerable to short-term correction.
This means that the company’s earnings, monthly users, and total transaction values are directly dependent on the pricing of cryptos.
And it looks like Coinbase management is starting to see the unsustainability of its business as it is now trying to find new ways to keep institutions interested in Bitcoin. In May, it launched a beta version of a “prime brokerage service” that will help companies trade and hold cryptos while providing data analytics.
I don’t see that take off …
And by the way, you can trade crypto for free on Robinhood, so why use Coinbase at all?
We can also take a look at MicroStrategy (NASDAQ: MSTR), which announced last week it was selling $ 500 million in corporate junk bonds to buy more bitcoin to prove that a company’s peg to bitcoin isn’t a good business is.
Sure, the stock price more than quadrupled year over year, but it fell dramatically as investors realized the uncertainty surrounding the company’s investment. MicroStrategy has already spent $ 2.25 billion on the digital asset. That’s a big bet when a little is enough in Bitcoin.
The future of crypto
Bitcoin’s recent slump has hurt its appeal when compared to more traditional assets.
In fact, Goldman Sachs reported that it recently held meetings with more than 25 chief investment officers of hedge funds who said bitcoin was their least favorite asset.
Interestingly, last week Coinbase received its first “sales review” from Raymond James. The company argued that the commission-based fee structure and security concerns would cause the stock to underperform.
But to top it off, most analysts rate Coinbase as a “buy”. And you know what we think of these analysts …
I believe that cryptocurrency as we know it today will soon disappear, with most coins ultimately going the route of the internet stocks of the early 2000s. As with crypto, you could potentially make money on the way up with Coinbase, but I wouldn’t count on this trend forever. Make sure you stay agile, diversify, and only invest what you are willing to lose in cryptos.
Unless Coinbase initiates a dividend, is bought out or spun off into another company, I don’t waste time with it.
To your riches,
Editor, Outsider Club
After his passion for business and investing led his passion for business and investing to one of the largest financial publishers in the world, where he teamed up with former Chicago Board Options Exchange traders, Wall Street hedge fund managers and International Monetary Fund analysts, Alex decided to start doing business Pencil and guide others through this new age of investing. Check out the page of its editors here.
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