Short this crypto dealer
Coinbase will struggle to stay ahead of circling rivals
One of the biggest trends in finance over the past few years has been the rise of cryptocurrencies, such as bitcoin and ethereum. When they first arrived on the scene they were seen largely as the playthings of those interested in computers and of other rather less savoury characters who wanted to prevent their activities from being traced by the authorities (even though digital currencies are not fully anonymous). However, the rapid surge in price brought them to the attention of most investors, with the result that at several points last year the price of a single bitcoin was trading at around $60,000.
This euphoria wasn’t just limited to digital currencies themselves. Coinbase (Nasdaq: COIN), the only listed bitcoin exchange, was valued at $86bn when it listed on the Nasdaq stock exchange in the US last year. Since then, its price has swung up and down by almost as much as the cryptocurrencies that are traded on it. The share price fell by a third shortly after it was listed, only to rally above its listing price, before plunging in value again. At the moment it is down by more than half from the peak it hit in November. Still, all the evidence suggests that the worst may not yet be behind it, and that it still has further to fall.
Even those most sceptical about cryptocurrencies have to accept that there are some compelling reasons why their use is likely to keep growing in the long run, even though some of the surge in activity that came from people bored by lockdowns is already starting to disappear.
A tougher competitive landscape
However, as many other exchanges have found out, growth doesn’t necessarily turn into profits, especially if it ends up attracting competitors, eager to steal market share by pushing down margins. Already there are a number of bitcoin exchanges snapping at Coinbase’s heels. While many of these are dubious fly-by-night operations, several existing online brokers (such as Robinhood) and established payments firms (PayPal, for example) are trying to muscle into the area.
As a result, it’s likely that Coinbase will be forced to slash the amount of money that it makes from every trade. Even the company admits that a combination of competitive pressure and the end of the boom spurred by lockdown-related trading means that revenues are likely to fall this year. While it expects them to recover, the medium-term growth rate will be around 20% a year.
That’s a decent growth rate by anyone’s standards, but it’s not enough to justify the fact that Coinbase is trading on a multiple of 70 times its 2023 earnings. That makes its current price hard to justify, particularly if you are less optimistic about the company’s prospects – shortseller Jim Chanos has even suggested that the competitive pressure might be enough to drive Coinbase to a loss this year.
Coinbase’s share price is below its 50-day and 200-day moving averages, suggesting that the path of least resistance remains lower. I’d suggest that you go short at the current price of $177 at £10 per $1, and cover your position if it rises to $275. This gives you potential downside of £980.
“Coinbase’s margins are set to come under pressure from rival brokers”