I mentioned a few weeks ago that, if you’ve talked to me recently, it’s near invariable that I’ve brought up banks in some way, shape or form to you. There’s one other topic that has been top of mind recently, and that’s been Coinbase. To put it simply, I’m perplexed how COIN can trade with a ~$12B market cap when the business faces enough headwind I think it would be fair to call it a hurricane
I have little expertise of the of likelihood of trial or congress passing new rules. Both feel meaningfully greater than zero. Look at ELON 420, the power of unlimited funds and the best private lawyers vs the SEC on display. Hard to think they don't at least have a 10 or 20% chance in court + congress.
I think you underestimate the value of their consumer franchise as crypto gateway, dominance in the huge US market and how durable that can be. Also if they do win how much goodwill they will have with the community.
I think you underestimate somewhat the complexity of offering their product and how quickly competitors could be at parity. There is a reasonable amount of tech investment and risk there, it's not forever but a couple of years is even further head start.
Look at coinbase profitability during a bull cycle, expands pretty dramatically. If bull cycle emerges in a couple years --seems probable -- if they do outfox the sec they should have great market position.
Overall I think the high case (market leader in a growing market) is much higher than you paint and the risk reward in shorting good companies, market leaders in growing technology spaces is just not good, the unlimited downside is not just theoretical. You're not even protected by a bubble of pricing on your entry... You are entering at Ebitda multiples not 80x revenue of a couple years ago.
"Overall I think the high case (market leader in a growing market) is much higher than you paint and the risk reward in shorting good companies, market leaders in growing technology spaces is just not good, the unlimited downside is not just theoretical."
I would agree with this - speaking as a nocoiner who thinks crypto is largely stupid BS. The thesis has echoes of TSLA. Crypto as an asset class/industry has many fewer tailwinds and more headwinds than electric cars/green tech, but on the other hand it's all just software so the operational leverage is insane. US regulators have settled with other crypto brokerages, which does not suggest a cold determination to systematically strangle the crypto industry to death. The Blackrock ETF filing designating COIN as custodian suggests savvy insiders are seeing things quite the opposite.
It seems like you would agree with Andrew's assessment that this a great bet. You give Coinbase a 10%-20% chance of winning in court+Congress. Andrew's view is that if Coinbase loses, it's basically a 100% return for the short. So using your probabilities, it seems like an 80%-90% probability of a Coinbase legal loss which delivers close to a 100% return. Is that fair? That seems a lot better than picking up pennies in front of a steamroller as you described it, especially given Andrew's view that Coinbase winning results in competition and a lot of CB's EBITDA is aggressive add-backs and/or USDC related interest income that's facing headwinds in 2Q.
I think the 2 year high case for coin is $500. That was most people's hopeful price target after ipo before crypto slowed. I think low case is $0.
Also I didn't give it 10-20 I said hard to think of could be less than, but I am uncertain the true number, so that is the lower bound of my estimate.
There are obviously in between cases of high or low. So this is sort of garbage but if we say 30% of zero and 70% of $500 you have an EV of $350 so no, I still think it's pennies in front of a steamroller.
Think my high is too high? I lost 7 figures personally shorting tesla around $300 pre split. Worst imaginable case felt like $1000 yet it peaked at something like $2000 pre split.
Coinbase wins this outright this stick could rocket. Shorting well run companies for price or event factors is dumb imo, your mileage my vary. This is I think the only way I have lost seven figures in my life don't care to repeat it.
Whoops, flipped my %s. 70% chance of 0 plus 30% chance of $500 = $150/share EV in the simple equation, still a bad deal at current price of $53.
If you are barfing on $500, I will just say, in a boom cycle they did "net income for 2021 was $3.624B, a 1024.4% increase from 2020", if they do $4B in net income with huge growth in the next boom cycle and beat the SEC, $500 = $120B valuation = 30 P/E that's in the ballpark of where they listed, and touched again in 2021
Makes sense, thanks for sharing some of your thinking.
Peak NI was $3.0bn in 2021. Even if they reachieve similar or superior volumes, NI will probably be a lot lower because pricing has come down and opex has grown considerably. And then there is Andrew's case that CB win = increased crypto competition. So 33% growth vs prior peak plus 30x PE on that peak earnings amount seems very difficult to achieve.
Discussing this article with some very smart friends who are moderately bullish coin, some thoughts are relevant
"what I find with many bear cases on any company, they assume the corporation is static and unmoving, set in its path like those old school football games ". Sure opex is up. It can also go down. You some next bull cycle will be max the same size, why wouldn't it be 3x-10x bigger? Every last cycle was much bigger?
We are looking at the realistic high case not the expected case.
Different friend : "this uy is underestimating how long it will take other sites user experience to catch up ". I agree... IB just sells exposure to the asset and poorly. Coinbase has a propriety L2 wallet you can move your coins to and use them, this requires so much, for one thing actually buying and custodying coins. The tradfi competition is nowhere except very think exposure to asset prices. sure since author is a crypto skeptic and probably hasn't done an on chain transaction in the last month he assumes that's all that customers want because that's all he is doing is trading exposure to the aseet. But if crypto works a lot of people are doing a lot more stuff and most finance companies are years behind on building that, and the crypto native alternatives have been weakened immensely.
I feel like the author looks at coinbase and says "$53 is fully valued coinbase if not shut down but 90% they lose the suit so fair value is $6". And he sorry of uses multiples to justify $53 as fairly valued
But I look the short risk here
What if $150 is fairly valued coin if not shut down? And the market has already priced in the SEC? Seems more plausible, no?
I would think the optics of the SEC shutting down Coinbase are pretty bad for the government, and they'd see a large settlement plus more regulations as a win. In other words, isn't a reasonable base case here a settlement where COIN pays a few billion and halts trading in a bunch of securities?
That would hurt the core business (40% of volumes are not BTC or ETH) but would also reduce regulatory uncertainty. Long term I think competition and lower rates are massive headwinds, but the incremental operating leverage is huge if crypto goes through another bull cycle. For me it's hard to pinpoint where it all nets out...
Thanks for the article. I believe my Fidelity account allows crypto trading in bitcoin and ethereum. Interactive Brokers allows trading through a third party at 1/3 the commission price of Coinbase Pro (which has a newer name). Robinhood also allows crypto trading. More brokers likely to follow.
Coin <-> USDC interest connection is half correct.
- Bull case for coin pending crypto legality would be that they are the “normie” friendly U.S. exchange. Xchanges beyond CB opening would happen, but CB has onboarded the majority of American retail and is “trusted”. Add to that they’re building their own L2, and the CB wallet to DeFi ponzi pipeline will be seamless for new users. CB will seed interesting ponzis on Base (L2) and market them in-wallet to normies. Consider what CryptoCom did/ does with their wallet.
- Other institutions opening up crypto Xchanges and offering interest on USDC wouldn’t be as possible since CB - Circle have a formal agreement not shared by other institutions. BlackRock has also made deals with CB directly - CB Prime and Aladdin. CB interest earned from customer USD deposits is sent to Circle to mint USDC and the USD is used to buy treasuries. CB & Circle benefit from CB’s success not other exchanges even if they list USDC. Circle could very well enter into agreements like that with other Xchanges, but the incentive to do so isn't really there sans more adoption for USDC; but USDC doesn't require their support to acquire more adoption as it's already one of the largest and "most trusted" stablecoins.
- Who would have thought that if the U.S. throttles crypto. Normie trading on CB, a largely U.S. user-base, would be almost non-existent? Trading goes down -> fees go down. CB exonerated -> fees go back up.
- ETF w/ CB as custodian will rake in fees for BTC and make up for lack of alt trading. Part of ETF approval is to show a significant amount of BTC trading occurs on U.S. markets. As of now, in the lead up to the ETFs approval, CB has seen a substantial amount of inflows purchasing BTC during U.S. trading hours.
- Regulatory clarity from Gov would draw U.S. retail back into crypto
- CB’s argument that the SEC doesn’t provide regulatory clarity is sound and backed up by multiple statements from judges working on crypto cases with SEC involvement. Your comments about SEC not having to share information is weird. Regulation through enforcement is not proper, and certainly not in the interests of protecting investors. When there aren't any clear rules, and when companies that attempt to follow what rules were shoddily presented get a lawsuit thrown at them anyway, then it's clear there are no rules and the intention is to destroy what U.S. crypto institutions are left.
- Continued SEC attempts to destroy/ cripple the U.S. crypto industry are contingent upon Gensler remaining in his position. There are no positive indicators that he will remain in his position, so reasonably, we can assume that he will be removed, or forced to change his tune.
- I don't think you understand what staking is.
“but specifically endorse how Coinbase has handled crypto and absolve them of what I think are pretty clear securities violations!)” - Bi-partisan support is clear and prevalent for changing regulations for crypto. Multiple bills from either side have been presented for regulatory clarity, and yes that includes treating crypto differently than other assets.
“Obviously, those aren’t the only outcomes. The best bull case for Coinbase would probably be: the SEC lawsuit drags on for years,” - Multi-trillion $ funds citing CB as custodian & SEC responding thoughtfully to these filings makes this reasonably appear as personal bias.
speaking specifically to competition, say congress legalizes crypto.
coinbase is both an exchange (CME + NASDAQ) and a broker (IBKR / SCHWAB). this gives them a cost (spreads) advantage.
it is non-trivial to set up the tech infra to be an exchange for many tokens, they aren't fungible like stocks or commods. so there's a tech advantage.
sure, they'd be competition on btc and eth, as some would want to gain exposure to the largest tokens only. coinbase may lose brokerage share there. most brokers will end up routing the trades to coinbase, the exchange, which has the largest liquidity in the US.
robinhood, ftx.us, and binance.us, set up shop (and in robinhood's case allowed trading in ~10? crypto tokens) through the crypto boom and never made a dent in coinbase's market share during that period. worth asking why.
you are find too kind and give too much credit allowing for “10x annualized ebitda” like you said it’s all fake. if you remove just sbc and impairment charges then this thing is not even adjusted ebtida positive.
I have little expertise of the of likelihood of trial or congress passing new rules. Both feel meaningfully greater than zero. Look at ELON 420, the power of unlimited funds and the best private lawyers vs the SEC on display. Hard to think they don't at least have a 10 or 20% chance in court + congress.
I think you underestimate the value of their consumer franchise as crypto gateway, dominance in the huge US market and how durable that can be. Also if they do win how much goodwill they will have with the community.
I think you underestimate somewhat the complexity of offering their product and how quickly competitors could be at parity. There is a reasonable amount of tech investment and risk there, it's not forever but a couple of years is even further head start.
Look at coinbase profitability during a bull cycle, expands pretty dramatically. If bull cycle emerges in a couple years --seems probable -- if they do outfox the sec they should have great market position.
Overall I think the high case (market leader in a growing market) is much higher than you paint and the risk reward in shorting good companies, market leaders in growing technology spaces is just not good, the unlimited downside is not just theoretical. You're not even protected by a bubble of pricing on your entry... You are entering at Ebitda multiples not 80x revenue of a couple years ago.
Feels like pennies in front of a steamroller.
"Overall I think the high case (market leader in a growing market) is much higher than you paint and the risk reward in shorting good companies, market leaders in growing technology spaces is just not good, the unlimited downside is not just theoretical."
I would agree with this - speaking as a nocoiner who thinks crypto is largely stupid BS. The thesis has echoes of TSLA. Crypto as an asset class/industry has many fewer tailwinds and more headwinds than electric cars/green tech, but on the other hand it's all just software so the operational leverage is insane. US regulators have settled with other crypto brokerages, which does not suggest a cold determination to systematically strangle the crypto industry to death. The Blackrock ETF filing designating COIN as custodian suggests savvy insiders are seeing things quite the opposite.
It seems like you would agree with Andrew's assessment that this a great bet. You give Coinbase a 10%-20% chance of winning in court+Congress. Andrew's view is that if Coinbase loses, it's basically a 100% return for the short. So using your probabilities, it seems like an 80%-90% probability of a Coinbase legal loss which delivers close to a 100% return. Is that fair? That seems a lot better than picking up pennies in front of a steamroller as you described it, especially given Andrew's view that Coinbase winning results in competition and a lot of CB's EBITDA is aggressive add-backs and/or USDC related interest income that's facing headwinds in 2Q.
Let me think this through
I think the 2 year high case for coin is $500. That was most people's hopeful price target after ipo before crypto slowed. I think low case is $0.
Also I didn't give it 10-20 I said hard to think of could be less than, but I am uncertain the true number, so that is the lower bound of my estimate.
There are obviously in between cases of high or low. So this is sort of garbage but if we say 30% of zero and 70% of $500 you have an EV of $350 so no, I still think it's pennies in front of a steamroller.
Think my high is too high? I lost 7 figures personally shorting tesla around $300 pre split. Worst imaginable case felt like $1000 yet it peaked at something like $2000 pre split.
Coinbase wins this outright this stick could rocket. Shorting well run companies for price or event factors is dumb imo, your mileage my vary. This is I think the only way I have lost seven figures in my life don't care to repeat it.
Whoops, flipped my %s. 70% chance of 0 plus 30% chance of $500 = $150/share EV in the simple equation, still a bad deal at current price of $53.
If you are barfing on $500, I will just say, in a boom cycle they did "net income for 2021 was $3.624B, a 1024.4% increase from 2020", if they do $4B in net income with huge growth in the next boom cycle and beat the SEC, $500 = $120B valuation = 30 P/E that's in the ballpark of where they listed, and touched again in 2021
Makes sense, thanks for sharing some of your thinking.
Peak NI was $3.0bn in 2021. Even if they reachieve similar or superior volumes, NI will probably be a lot lower because pricing has come down and opex has grown considerably. And then there is Andrew's case that CB win = increased crypto competition. So 33% growth vs prior peak plus 30x PE on that peak earnings amount seems very difficult to achieve.
Will be an interesting one to see unfold.
Many thanks for the good comment.
You could be right.
Discussing this article with some very smart friends who are moderately bullish coin, some thoughts are relevant
"what I find with many bear cases on any company, they assume the corporation is static and unmoving, set in its path like those old school football games ". Sure opex is up. It can also go down. You some next bull cycle will be max the same size, why wouldn't it be 3x-10x bigger? Every last cycle was much bigger?
We are looking at the realistic high case not the expected case.
Different friend : "this uy is underestimating how long it will take other sites user experience to catch up ". I agree... IB just sells exposure to the asset and poorly. Coinbase has a propriety L2 wallet you can move your coins to and use them, this requires so much, for one thing actually buying and custodying coins. The tradfi competition is nowhere except very think exposure to asset prices. sure since author is a crypto skeptic and probably hasn't done an on chain transaction in the last month he assumes that's all that customers want because that's all he is doing is trading exposure to the aseet. But if crypto works a lot of people are doing a lot more stuff and most finance companies are years behind on building that, and the crypto native alternatives have been weakened immensely.
I feel like the author looks at coinbase and says "$53 is fully valued coinbase if not shut down but 90% they lose the suit so fair value is $6". And he sorry of uses multiples to justify $53 as fairly valued
But I look the short risk here
What if $150 is fairly valued coin if not shut down? And the market has already priced in the SEC? Seems more plausible, no?
I would think the optics of the SEC shutting down Coinbase are pretty bad for the government, and they'd see a large settlement plus more regulations as a win. In other words, isn't a reasonable base case here a settlement where COIN pays a few billion and halts trading in a bunch of securities?
That would hurt the core business (40% of volumes are not BTC or ETH) but would also reduce regulatory uncertainty. Long term I think competition and lower rates are massive headwinds, but the incremental operating leverage is huge if crypto goes through another bull cycle. For me it's hard to pinpoint where it all nets out...
Thanks for the article. I believe my Fidelity account allows crypto trading in bitcoin and ethereum. Interactive Brokers allows trading through a third party at 1/3 the commission price of Coinbase Pro (which has a newer name). Robinhood also allows crypto trading. More brokers likely to follow.
Few things:
Coin <-> USDC interest connection is half correct.
- Bull case for coin pending crypto legality would be that they are the “normie” friendly U.S. exchange. Xchanges beyond CB opening would happen, but CB has onboarded the majority of American retail and is “trusted”. Add to that they’re building their own L2, and the CB wallet to DeFi ponzi pipeline will be seamless for new users. CB will seed interesting ponzis on Base (L2) and market them in-wallet to normies. Consider what CryptoCom did/ does with their wallet.
- Other institutions opening up crypto Xchanges and offering interest on USDC wouldn’t be as possible since CB - Circle have a formal agreement not shared by other institutions. BlackRock has also made deals with CB directly - CB Prime and Aladdin. CB interest earned from customer USD deposits is sent to Circle to mint USDC and the USD is used to buy treasuries. CB & Circle benefit from CB’s success not other exchanges even if they list USDC. Circle could very well enter into agreements like that with other Xchanges, but the incentive to do so isn't really there sans more adoption for USDC; but USDC doesn't require their support to acquire more adoption as it's already one of the largest and "most trusted" stablecoins.
- Who would have thought that if the U.S. throttles crypto. Normie trading on CB, a largely U.S. user-base, would be almost non-existent? Trading goes down -> fees go down. CB exonerated -> fees go back up.
- ETF w/ CB as custodian will rake in fees for BTC and make up for lack of alt trading. Part of ETF approval is to show a significant amount of BTC trading occurs on U.S. markets. As of now, in the lead up to the ETFs approval, CB has seen a substantial amount of inflows purchasing BTC during U.S. trading hours.
- Regulatory clarity from Gov would draw U.S. retail back into crypto
- CB’s argument that the SEC doesn’t provide regulatory clarity is sound and backed up by multiple statements from judges working on crypto cases with SEC involvement. Your comments about SEC not having to share information is weird. Regulation through enforcement is not proper, and certainly not in the interests of protecting investors. When there aren't any clear rules, and when companies that attempt to follow what rules were shoddily presented get a lawsuit thrown at them anyway, then it's clear there are no rules and the intention is to destroy what U.S. crypto institutions are left.
- Continued SEC attempts to destroy/ cripple the U.S. crypto industry are contingent upon Gensler remaining in his position. There are no positive indicators that he will remain in his position, so reasonably, we can assume that he will be removed, or forced to change his tune.
- I don't think you understand what staking is.
“but specifically endorse how Coinbase has handled crypto and absolve them of what I think are pretty clear securities violations!)” - Bi-partisan support is clear and prevalent for changing regulations for crypto. Multiple bills from either side have been presented for regulatory clarity, and yes that includes treating crypto differently than other assets.
“Obviously, those aren’t the only outcomes. The best bull case for Coinbase would probably be: the SEC lawsuit drags on for years,” - Multi-trillion $ funds citing CB as custodian & SEC responding thoughtfully to these filings makes this reasonably appear as personal bias.
speaking specifically to competition, say congress legalizes crypto.
coinbase is both an exchange (CME + NASDAQ) and a broker (IBKR / SCHWAB). this gives them a cost (spreads) advantage.
it is non-trivial to set up the tech infra to be an exchange for many tokens, they aren't fungible like stocks or commods. so there's a tech advantage.
sure, they'd be competition on btc and eth, as some would want to gain exposure to the largest tokens only. coinbase may lose brokerage share there. most brokers will end up routing the trades to coinbase, the exchange, which has the largest liquidity in the US.
robinhood, ftx.us, and binance.us, set up shop (and in robinhood's case allowed trading in ~10? crypto tokens) through the crypto boom and never made a dent in coinbase's market share during that period. worth asking why.
you are find too kind and give too much credit allowing for “10x annualized ebitda” like you said it’s all fake. if you remove just sbc and impairment charges then this thing is not even adjusted ebtida positive.