American investment manager and renowned short seller Jim Chanos doubled down on his criticism Coinbase Global, Inc. coin during an interview with Srivatsan Prakash on Monday.
Chanos outlined why he believes Coinbase’s business model isn’t working and believes the cryptocurrency exchange could eventually fall prey to other well-known brokers.
“Coinbase has a business model problem. It doesn’t work,” he said.
In the wake of FTX’s bankruptcy and subsequent fraud allegations, Chanos warned that “fraud doesn’t have to be enough to cause you to lose money as a Coinbase shareholder.”
The short seller outlined several reasons why he sees gray skies ahead, but also noted that depositors appear to be in good shape, with no current risk of liquidity issues; The exchange is US-based, which offers investors some protection; “And there’s no evidence that they’re doing anything they shouldn’t.”
Chanos sees issues with Coinbase’s model
“They have a high cost model in the market that will lower their commission rates.” Chanos pointed out that Coinbase charges about 1.3% per transaction, which is equivalent to a trader losing 10% of their profits on four transactions per year. “It is only a matter of time before Fidelity and Vanguard and everyone else offering crypto trading will completely undercut Coinbase for the same basic services,” he added.
“Most of Coinbase’s revenue still comes from retailers, not institutions.”
While Coinbase’s deal with BlackRock, announced on Aug. 4, propelled the stock from about $50 to $100, the reality is that Coinbase’s institutional investors are an insignificant part of the company, Chanos said. “They don’t make money from institutional trading and probably never will.”
Finally, Chanos pointed to a bull theory he heard from investors that Coinbase could increase its profits by stopping interest payments on its customers’ cash balances.
Chanos said Coinbase’s last direct competitors, such as Schwab, Fidelity and Vanguard, would continue to pay interest, putting Coinbase at a greater disadvantage with investors.
“It’s just a basic, basic customer expectation. So if you want to increase your P&L with this, you have a problem,” said Chanos.
Two Wall Street analysts weigh in
Two analysts weighing in on Coinbase on Tuesday shared similar sentiment and lowered price targets for the stock.
Barclays analyst Benjamin Budish kept the company at an even weight and lowered the price target from $55 to $44.
Needham analyst John Todaro maintained the buy rating on the stock and lowered the price target from $89 to $73.
Todaro noted that while Coinbase has little direct exposure ftx, the company’s bankruptcy has increased uncertainty and potential risks in the industry. Todaro is also seeing a drop in trading volume for Coinbase from both retail and institutional investors.
COIN shares closed down 5.02% at $45.57 at close of trading on Wednesday.
This article was originally published on Benzinga and appears here with permission.