Reply To: Digital Platform Coinbase Nears All-Time Low in Wake of FTX Collapse, Where to for COIN?


In an interview with Srivatsan Prakash, famous short seller Jim Chanos made the following comments (edited for clarity) about Coinbase Global (NASDAQ:COIN):

“Coinbase is based here in the United States, which is a big help. The problem Coinbase has is that its model doesn’t work. There doesn’t have to be fraud for you to lose money as a Coinbase shareholder.

I think the Coinbase depositor is probably in OK shape. But again, there’s no deposit insurance here, although it’s in the United States. If Coinbase does something that they shouldn’t, depositors and people who are holding coins on the exchange would be at risk. Again, I don’t think they’re doing anything they shouldn’t, and there’s no evidence they’re doing anything they shouldn’t.

Their problem is simply that they have a high cost model in a market that is about to compress their commission rates. And that’s a different story. Coinbase is still charging retail customers 1.3% of assets per trade, and so that’s a round trip of 2.7%, which means that if you make four trades a year with Coinbase that’s 10% of your capital. That’s a big, big drag. And they are charging institutions a fraction of that rate. So it’s only going to be a matter of time before Fidelity and Vanguard and everybody else who offers crypto trading is going to completely undercut Coinbase for the same basic services. They are simply an executing broker. There’s no advantage to being there versus another well respected site. So that’s number one.

Number two, the bull case morphed this summer into “Don’t worry about the losses, they are going to get into a bigger institutional deal with their Blackrock deal.” And that took the stock from $50 to $100. The problem with that deal is that the institutional business is tiny, because the commission rates are so much smaller. So the vast majority of Coinbase’s revenues are still coming from retail traders, not institutions. They don’t make any money on the institutional business, and probably never will. That was fallacy number one.

The funnier pivot was when the bulls told me “OK, commission are probably going to be under pressure and costs are too high, but they’re going to stop paying their customers interest on cash balances.” Well OK, that’s fine, but how long can you get away with that, with not paying interest when everyone else — Schwab, Fidelity, Vanguard — are going to be paying clients interest on their cash balances? That’s just a fundamental, basic expectation by customers. So if you have to bolster your P&L by doing that, you’ve got a problem. So Coinbase has a business model problem. It just doesn’t work.”