Coinbase: Watch out for the huge risks
By almost every measure, Coinbase stock is too risky.
It’s risky to go by what is being said about the fundamentals and what has happened recently in the crypto industry.
I think the stock is a sell, which means that you should get out of it.
I don’t mean you should sell it short, since that’s also a very risky bet. The company has a lot of unknowns, so it’s best to stay away from it.
The Coinbase Global stock price declined last week when Bitcoin prices and the FTX cryptocurrency exchange both plummeted. Coinbase is an exchange that shares similarities with FTX, making it an obvious target for fears of contagion.
In comparison to conventional financial services organizations, Coinbase and FTX are subject to less regulation. Regulations such as needed capital ratios are necessary to prevent the failure of banks, but do not apply to cryptocurrency exchanges. As a publicly traded company, Coinbase is subject to SEC regulations such as reporting its financial situation and disclosing corporate/manager holdings, but not the Basel III capital adequacy regulations that regulate conventional banks. In other words, it is not mandated by law or treaty to retain a specific amount of cash, to weight its assets by risk, or to engage in any of the other practices that are typical in conventional finance. Given this, you cannot blame investors for abandoning COIN after FTX collapsed. Both markets are susceptible to the identical risk concerns.
The FTX problem has been detailed numerous times on Seeking Alpha. In case you missed it, the summary is as follows: FTX was a platform for buying and selling bitcoins. It transferred $10 billion to Alameda Capital, its investment arm. Alameda owned a large quantity of FTT, FTX’s native token. The balance sheet of Alameda was leaked, suggesting that the city would become bankrupt if FTT decreased substantially. Changpeng “CZ” Zhao, CEO of Binance, said publicly that he would sell all of his FTT upon hearing the news of the solvency concern. Consequently, more individuals attempted to sell their FTT and withdraw their FTX cash amounts. The withdrawals were unable to be executed, however, since $10 billion had been moved to Alameda, which lost the funds. Following this, FTX filed for bankruptcy.
The FTX crisis is currently in the past. Some users may be partially paid during the company’s bankruptcy procedures, although it is unlikely that all will be fully whole.
Coinbase is a totally different matter. However, the precise nature of Coinbase’s exposure to FTX remains obscure. The company’s CEO, Brian Armstrong, has stated that Coinbase has no exposure, although the exchange’s website still contains a ‘buy FTT’ button.
In any case, direct exposure is not necessary for the contagion effect to manifest. The term “financial contagion” refers to the potential of a small portion of a system to affect the entire system; you do not need a direct link to the source to be affected. After the dust settles, Coinbase will likely experience a rise in withdrawals and a decline in trading volume if the collapse of FTX forces consumers to abandon the cryptocurrency industry entirely. Consequently, this is a risk issue for COIN shareholders as it will reduce the company’s earnings.
As previously indicated, Coinbase is a stock to avoid for me. If I had some, I would sell it. This is the reason why a’sell’ rating appears next to this article. This rating is not intended to encourage anyone to short Coinbase, as I will explain below.
Numerous unknowable elements contribute to the pricing of a company like COIN, which presents a difficulty for investors. Its financial performance is mostly determined by cryptocurrency pricing and trading volume. However, as I explained in my recent post “Bitcoin Is Essentially a Coin Flip,” cryptocurrencies cannot be valued using standard valuation approaches. Cryptocurrency does not generate cash flows that may be discounted to the present. It is impossible to ascertain its closest approximation to fundamentals, namely its transactional application in the actual world. A blockchain does not record whether a cryptocurrency is exchanged for cash or a product; it just indicates when a token is transferred. Therefore, we cannot precisely assess the “Bitcoin economy” that must exist for BTC to be anything other than a bubble. Bitcoin-accepting stores indicate its existence, but its magnitude is tough to estimate. Therefore, cryptocurrencies, the mainstay of COIN, cannot be valued.
