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Why is this short seller betting against Coinbase?

By Daniela Ešnerová


Updated

A photo of a screen with a writing Coinbase and coins with BTC and ETH logo.
Coinbase is “tremendously overvalued,” according to Jim Chanos. – Photo: ShutterStock

Cryptocurrencies are not the only assets that are suffering in this market downturn. Crypto-related stocks are feeling the pain, too. 

Coinbase (COIN), whose shares plunged last month on a missed earnings forecast, is a bet from a reknown short seller. Why?

US investment manager Jim Chanos, most known for predicting the demise of Enron before its 2001 bankruptcy, explained why he is shorting Coinbase (COIN) during his recent appearance on Crypto Critics' Corner podcast. There, he also warned that another crypto-related stock, MicroStrategy (MSTR), is a “high-wire act.”

Coinbase (COINshare price

Jim Chanos PhotoJim Chanos, Investment Manager (Photo: Getty Images)

Different tune in 2022

Coinbase, operator of the only public cryptocurrency exchange, floated on Nasdaq in April 2022 during a crypto bull market, with some analysts predicting that the company could hit a $100bn valuation.

But the tune is very different a year later. 

Speaking on the podcast, Chanos disclosed that his bet against COIN was made at the beginning of 2022.

“Coinbase was not a call on crypto prices," he said. "It was a call on what we thought was a sort of ancillary predatory business model.

“When you get things like crypto, to me, a lot of the endgame in crypto is just sucking fees and ripping off retail clients. At the end of the day, that's what crypto all about, in my opinion.

“When COIN went public, we looked at this and we couldn't get our heads around the valuation and set it aside. But when Nasdaq were breaking in December/January, we revisited it.

“And what really struck me was how much they were overearning. This was a company that earned $2 per share in 2020, which was not a bad year for crypto. They then earned $17 or $16 [per share] last year and, of course, they are going to lose money this year.

XRP/USD

0.57 Price
-9.700% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.01168

BTC/USD

63,857.75 Price
-1.050% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 106.00

ETH/USD

3,417.35 Price
-0.030% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 6.00

BCH/USD

384.70 Price
+1.760% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 2.50

“But what struck me,was the amount of revenue relative to the assets under their umbrella. At one point, it got as high as 4%. It's now well below that, but 4% annually on your client's assets is a stunningly large number. Charles Schwab (SCHW) earns a fraction of that - sort of 25 [basis points.] In the most recent quarter, Coinbase was still well over 100 bps.

“Even if you believe in crypto and bitcoin (BTC), what you're going to see is more and more fee compression are commission rates that are going to go down. 

“Businesses that were feasting on 300 bps or 400 bps on assets going down to 100 bps and 50 bps. Coinbase isn't making money at 150 bps. It's not going to and they told you,” Chanos said, adding that the company has to be cutting expenses.

On 2 June, Coinbase confirmed that it introduced a hiring freeze and rescinded job offers in mid-May.

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MicroStrategy (MSTR) share price

 

Chanos bearish on MicroStrategy

Chanos is also bearish on another crypto-stock, MicroStrategy (MSTR). MicroStrategy is a business analytics and software company and also the world's biggest corporate owner of bitcoin with approximately 130,000 bitcoins on its balance sheet.

Michaal Saylor, MSTR's founder and CEO, and a long-time vocal cryptocurrency proponent, has periodically added bitcoins to the company's balance sheet in recent months. 

Chanos called the company a “high-wire act."

“Bitcoin is now below [Saylor's] cost and the core business isn't worth a whole lot, so that's going to be an interesting exercise to see how it plays out,” said Chanos.

 

Markets in this article

SCHW
Charles Schwab
62.30 USD
-1.53 -2.400%
SCHW
Charles Schwab
62.30 USD
-1.53 -2.400%
COIN
Coinbase Global Inc (Extended Hours)
235.70 USD
-12.25 -4.950%
MSTR
MicroStrategy Incorporated
1557.27 USD
-36.74 -2.320%
US100
US Tech 100
19751.0 USD
-74.3 -0.370%

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
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