American investment manager and celebrity short seller Jim Chanos redoubled his criticism Coinbase Global, Inc. COIN during an interview with Srivatsan Prakash on Monday.
Chanos explained why he believes Coinbase’s business model is not working and why he believes the cryptocurrency exchange could end up falling victim to other well-known brokerages.
“Coinbase has a business model problem. It just doesn’t work,” he said.
Following the bankruptcy of FTX and subsequent allegations of fraud, Chanos warned that “there must be no fraud for you to lose money as a Coinbase shareholder.”
The short seller outlined several reasons why he sees gray skies ahead, and also noted that the saver appears to be in good shape, with no current risk of liquidity problems; the exchange is based in the USA, which provides some security for investors; “and there’s no evidence that they’re doing anything they shouldn’t.”
Chanos sees problems with Coinbase model
“They have a high cost model in a market that is about to cut commission rates.” Chanos noted that Coinbase charges around 1.3% per trade, which means a trader loses 10% of their profits on four trades per year. “It will only be a matter of time before Fidelity, Vanguard and everyone else who offers crypto completely undermines Coinbase for the same basic services,” he said.
“The vast majority of Coinbase’s revenue still comes from retail traders, not institutions.”
While Coinbase’s deal with Blackrock, announced on Aug. 4, lifted the stock from about $50 to $100, the reality is that Coinbase’s institutional investors make up a tiny fraction of its business, Chanos said. “They don’t make money from the institutional business and they probably never will.”
Finally, Chanos pointed to a bullish theory he heard from investors that Coinbase could increase its profits by stopping interest payments on its clients’ cash balances.
Chanos said possible direct competitors to Coinbase such as Schwab, Fidelity and Vanguard will continue to pay interest, which puts Coinbase at a disadvantage among investors.
“It’s just a fundamental, basic customer expectation. So if you need to increase your profits and losses by doing this, you are in trouble,” Chanos said.
Two Wall Street Analysts Weigh Their Opinions
On Tuesday, two analysts rated Coinbase, sharing similar sentiment and lowering their share price targets.
Barclays analyst Benjamin Budish kept the company at an even weight and lowered its price target from $55 to $44.
Needham analyst John Todaro maintained his buy recommendation for the stock and cut his price target from $89 to $73.
Todaro noted that while Coinbase has little direct access to FTX, the firm’s bankruptcy has created heightened uncertainty and potential risks in the sector. Todaro is also seeing a decline in Coinbase trading volume from both retail and institutional investors.
Shares of COIN closed up 5.02% to $45.57 in late trading on Wednesday.
This article was originally published on the Benzinga website and is republished here with permission.