Bad News for Coinbase Stock

Alexander Boulden

Posted May 20, 2024

Coinbase (NASDAQ: COIN) has been getting a lot of attention lately.

The renewed crypto bull market caused the masses to buy crypto from the only company they know. According to the company’s latest earnings, retail investors ran up the company’s revenues by 72%, to $1.6 billion, in the last quarter.

That might seem like great numbers to the average investor, but I’m here to tell you that it’s not what it seems.

A few years ago, l said Coinbase will go down in history as the fastest bankruptcy on Wall Street.

In fact, the stock’s down 40% since I wrote that — not exactly a bankruptcy, but trending in the right direction.

Ever since the company started trading publicly, I just couldn’t wrap my head around one thing: It charges you to use its service when other companies don’t. Why in the world would you ever use Coinbase?

You need to keep this in mind as you delve into the company. Because once people start realizing they don’t need Coinbase, well, it’s all over for the company in its current form.

Sure, the CEO has made a lot of money and will probably figure out another way to run this kind of scam.

He’s done a great job so far…

Coinbase is the largest U.S. cryptocurrency exchange and the only publicly traded crypto company on the market today, serving more than 8,000 institutional clients.

Seems like an obvious long trade, right?

Well, consider this: The company’s been plagued with lawsuits, shady scandals, security issues, and shoddy fundamentals from the start. Also consider that you must believe in the long-term uptrend in crypto…

And many people do not.

There are also other companies coming online that will offer the exact same service for free, something Coinbase can’t do — more on that in a bit.

Now, that doesn’t mean I can’t appreciate the moneymaking potential of a good short-term trade. The stock’s up 90% in the last year. However, the company’s stock price is directly related to the number of people who use it. So if people realize they don’t need to use it and its user base declines, guess what? The stock is toast. It also naturally fluctuates with the price of crypto, so if crypto goes down, which it will eventually, you won’t want to be the one holding the bag…

To be clear, I truly believe in the reasons Bitcoin was created. After all, in the last 10 years, the dollar has lost 17% of its purchasing power. Instead of putting our money in social security, if we put it in Bitcoin, well, we could all be sipping margaritas in a tropical paradise.

Let me briefly touch on a few key points as to why I don’t like the stock.

Flying Too Close to the Sun

I like to keep track of insider transactions to get a read on market sentiment. And insiders have been selling like crazy. In April 2021, the SEC recorded 10 insider transactions — all sells — worth billions.

And the day the company went public, Coinbase co-founder and CEO Brian Armstrong sold 750,000 shares, pocketing $291.8 million.

Seems like management cares only about lining their own pockets…

However, Armstrong — salaried at $1 million, with total compensation of more than $59 million when including stock options — needs to keep the momentum of Coinbase stock going in order to cash in on his options.

According to MSN, in August 2020 Armstrong was granted a multibillion-dollar performance award, given the stock trade at a certain price for a specific number of days. Needless to say, he’s still raking in the dough.

Aside from insider greed, there are three key areas I dislike about the company.

Poor Management

Management is young, inexperienced, and makes poor decisions, which has led to multiple lawsuits.

It’s been accused of and sued over the following:

  • Artificially inflating crypto prices
  • Unlawful and unfair business practices
  • Pay discrimination among employees
  • Overcharging customers

Does management really care how well the company does? Does it even matter if the company goes bankrupt? I think not. After all, Armstrong is part of the decabillionaire club.

Management doesn’t care about its customers in the slightest, which brings me to my next point…

Poor Customer Service

For years, Coinbase has struggled with little to no customer support. 

Thousands of users have complained of Coinbase locking their accounts and liquidating holdings, all with no warning from the company, causing investors to lose millions in opportunity cost. And when users reach out to customer service, they get a generic response or sometimes none at all.

This is no way to treat customers or run a business, and I think Coinbase will pay dearly for it.

With so many investors angered, lawsuits filed, and lack of transparency from the company, Coinbase is doomed to fail.

You may be thinking it’s a profitable company, but its business model is perhaps the most unsustainable part.

Risky Business Model

Coinbase makes money using the oldest and dirtiest trick in the book… levying taxes. 

To buy and sell cryptos using the company’s service, you must pay a fee for each transaction. And that adds up to a lot of dough. As it stands, 90% of revenue comes from transaction fees, while 10% comes from the sale of its own crypto assets to customers. (Can you say shady?)

It seems like a decent idea at first because as long as people are buying and selling cryptos, Coinbase makes money. 

But what happens when people stop trading cryptos or prices tank?

This means the company’s revenues, monthly users, and total transaction values are directly dependent on the pricing of cryptos.

And it looks like Coinbase management is starting to realize the unsustainability of its business, as it’s now scrambling to find new ways of keeping institutions interested in Bitcoin.

And, by the way, you can trade crypto for free on Robinhood, Binance, and, just to name a few. So why even use Coinbase?

And now the competition is really heating up.

According to Barron’s, “CME Group, the Chicago-based trading firm, plans to launch spot Bitcoin trading amid interest from Wall Street money managers… If CME is to muscle in on spot Bitcoin trading, it would be bad news for Coinbase.

The Future of Crypto

I do believe cryptocurrency as we know it today will soon disappear, with most coins ultimately going the way of internet stocks of the early 2000s. So, as with crypto, you may be able to make money with Coinbase on the way up, but I wouldn’t count on that trajectory forever.

Make sure to stay nimble, diversify, and invest only what you’re willing to lose in cryptos.

Unless Coinbase initiates a dividend, gets bought out, or spins off into another company, I’m not wasting my time on it.

Just buy Bitcoin instead, and don’t use Coinbase to do it.

Stay frosty,

Alexander Boulden
Editor, Wealth Daily

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After Alexander’s passion for economics and investing drew him to one of the largest financial publishers in the world, where he rubbed elbows with former Chicago Board Options Exchange floor traders, Wall Street hedge fund managers, and International Monetary Fund analysts, he decided to take up the pen and guide others through this new age of investing.

Alexander is the investment director of Insider Stakeout — a weekly investment advisory service dedicated to tracking the smartest money on the planet so that his readers can achieve life-altering, market-beating returns. He also serves at the managing editor for R.I.C.H. Report, a comprehensive service that uses the highest-quality investment research and strategies that guides its members in growing their wealth on top of preserving it.

Check out his editor’s page here.

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