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Coinbase Deserved Its Stock Plunge
The crypto exchange's problems are only just beginning
During a winter that many crypto fans already want to forget, the latest fear, uncertainty and doubt — or “FUD” — arose when Coinbase, the largest regulated exchange in the U.S., fired roughly one-fifth of its staff. The 1,200 employees set to be let go constitute a sharp increase from 60 fired last November, which coincided with the demise of Sam Bankman-Fried’s Ponzi empire.
Now, however, it is Coinbase’s turn to face the music. Its stock price has tumbled from $360 to $44 apiece, losing 88% of its value since the start of 2022. The crypto exchange had only gone public seven months previously at around $430, a month after CNBC’s Mad Money host Jim Cramer infamously declared: “We like Coinbase to $475 [per share]”.
The collapse of Coinbase’s stock should come as no surprise. In fact, many betting on its falling share price also predicted the demise of the company itself. Short-seller Jim Chanos, who exposed Enron in 2001, had not only grown skeptical of crypto but also of the many flawed business models that prominent crypto entities had adopted. Chanos identified Coinbase as one of many companies “sucking fees” and “ripping off retail clients.”
So, of course, when the bear market in dubious tech stocks started gaining momentum at the start of 2022, Chanos’s firm took out a short position. “Tech stocks don’t do well in reverse,” he said during a Crypto Critics Corner interview a few months in. “When they have to start shrinking, bad things happen.”
Fast forward to today, and that rings true for Coinbase. Its stock price has not only plunged, but the exorbitant fee structure the crypto exchange has been charging clients has come back to bite it, crippling its market share, profitability, and employee count. Chanos recently estimated that Coinbase has been charging 2.6% fees for “retail investor round-trip trades”, while the crypto exchange is still losing a whopping $500 million per quarter. If Coinbase doesn’t reduce its fees and crypto trading volumes continue to fall, its sales will come in at 30% lower than the 2023 consensus.
That’s the good news. As the bear market sets in, Coinbase may face a reckoning of its own. The crypto exchange uses its regulated status as a major selling point — even though it has flouted many rules. Coinbase recently agreed to pay $100 million to end an investigation into its failure to implement anti-money laundering (AML) and know-your-customer (KYC) policies. Multiple insiders have been leaking information to front-run customers, with one study suggesting “token front-running” was more common than previously thought. And the fact that PonziCoin is allowed to appear on Coinbase’s website is, well, rather telling.
The only thing going for Coinbase nowadays is it provides an off-ramp for those wanting to convert crypto into fiat in a — supposedly — legitimate fashion. But competition exists, which will likely challenge Coinbase eventually. When that time comes, true crypto believers won’t have trouble switching platforms either, after considering Coinbase’s former reputation. Most fans, along with crypto skeptics, regulators, and law enforcement, will happily welcome the exchange’s decline.
*Disclaimer: Much like Mr. Chanos, Concoda has been short Coinbase stock (COIN 0.00%↑) since Jan 2022.