Leading U.S. crypto exchange Coinbase is “tremendously overvalued” at current levels, warned short-selling legend Jim Chanos, predicting a collapse in fee income that will send the stock plunging.
He told the Crypto Critics Corner podcast that Coinbase still gorges itself on overly favorable retail trading commissions, and his short position is based on an end to the “feasting” it enjoys relative to mature brokers like Charles Schwab.
“Coinbase was not a call on crypto prices,” Chanos said in a podcast published on Sunday. “It was a call on what we thought was a sort of ancillary predatory business model.”
The Wall Street veteran, who made a name betting successfully against corporate frauds like Enron, expects Coinbase’s fees to compress from their current levels as competition from rivals including Binance, Kraken, Gemini, and FTX intensify.
He estimates the 150 basis points it charges on trading volume down to potentially as low as 50 bps, already down from a “stunningly high” 400 bps it collected at one point.
This means Coinbase will have to cut costs at a faster pace than the rate its revenue base shrinks. Despite the ongoing slump in crypto markets, however, the company actually bulked up on staff recently.
A full quarter of its roughly 4,950 employees were added in the first three months of the year alone.
Coinbase currently forecasts adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to swing to a $500 million loss for the full year.
This compares to a small first-quarter profit of $20 million and $4.1 billion in 2021. Valuation multiples should subsequently plunge.
“Money-losing broker dealers, if you witness Robinhood, generally trade at one to one and a half times tangible book value [per share],” he said.
Currently this figure is in the low 20s, and by the end of this year it could even be in the mid-teens, according to Chanos’s estimates. This would imply a decline to around $23 per share, far below Friday’s closing price of $75.
‘We’re all going to make it’
Chanos’s short puts him on the other side of the bet from Cathie Wood, who recently gave Coinbase a morale boost after she opportunistically scooped up shares earlier this month at the height of the crypto crash, when algo stablecoin TerraUSD and its paired token Luna collapsed.
Coinbase still collects 87% of its topline from trading commissions, according to the company’s first-quarter figures. To diversify revenue streams, it is hoping to build out new businesses like its new exchange platform for buying and selling non-fungible tokens (NFTs).
It also is encouraging more users to think beyond simply buying and selling assets like Bitcoin and Ethereum.
By the end of the first quarter, Coinbase expanded its staking offer to include Cardano’s native ADA token, a top 10 crypto asset by market cap. That allows it to pocket a commission when holders lock up their cryptocurrencies to earn a return, much like an interest-bearing savings account.
Brian Armstrong, cofounder and CEO of Coinbase, dismissed speculation of fee compression earlier this month, arguing in a Q1 earnings call that that hasn’t been the case over recent quarters.
“We tend to do our best work in down periods, so you know, ironically I’ve actually never been more bullish on where we are as a company,” Armstrong said.
In fact, Coinbase finished its Q1 shareholder letter with the optimistic hashtag #WAGMI so familiar to a crypto community that’s seen its share of ups and downs: We’re all going to make it.
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