Wall Street short seller Jim Chanos has shared his rationale behind what made Coinbase Global Inc (NASDAQ: COIN) such an appealing short.
What Happened: In a recent podcast on Crypto Critics Corner, Chanos called Coinbase “tremendously overvalued” and predicted its fee-based revenue model would soon decline.
See Also: HOW DOES COINBASE MAKE MONEY?
Coinbase earns the bulk of its revenue from fees charged on trading cryptocurrencies like Bitcoin (CRYPTO: BTC), Ethereum (CRYPTO: ETH), and Dogecoin (CRYPTO: DOGE).
“Coinbase was not a call on crypto prices. It was a call on what we thought was a sort of ancillary predatory business model,” he said.
He foresees more and more fee compression and a decline in compression rates as competition intensifies.
In his view, the businesses that were “feasting” on 300 and 400 basis points of assets will no longer be able to do so. He expects the exchange will only be able to charge 50 basis points on its trading volume, down from the 150 basis points currently in play.
“So that’s a company that’s going to have to cut costs, as we now know they’re doing, faster than revenues because they’re losing money at a reasonably prodigious rate right now.”
See Also: Coinbase Plans To Slow Hiring Amid Crypto Market Downturn
Chanos used Robinhood Markets Inc (NASDAQ: HOOD) as an example of a “money-losing broker-dealer” that typically trades at 1 to 1.5 times tangible book value.
“The tangible book value right now is in the low twenties at Coinbase. And by the end of the year, it’ll be in the mid-teens,” said Chanos.
“So this is still a stock trading between $6 and $7. And, you know, it's just tremendously overvalued even here.”
Price Action: According to data from Benzinga Pro, Coinbase shares closed 12.13% lower on Wednesday.
