Why Did Jim Chanos Call Coinbase Bubble Stock?: Factors Affecting Coinbase Stock

On Friday, in a statement to CNBC, Jim Chanos Kynikos Associates founder and president called Coinbase a “bubble stock.”

Coinbase listed its stock(COIN) last year and became the first crypto exchange to do so. However, the value of the stock has cut down by 50% in less than a year. At one instance, its stock price was trading for as high as $400. This value of stock coincided with the price of Bitcoin which was at its trading at its own ATH of around $69,000.

At this point both the assets are far away from their ATHs, a closer look at data reveals that investors who invested in Coinbase stock faced more losses as compared to those investors who invested directly in Bitcoin.

Chanos in the interview said that they call Coinbase a “one of the bubble stocks”. Chanos further said that the exchange has got a unique market niche as it is one of a kind of crypto exchange and as a result also fosters the valuation to go with it.

Moreover, Chanos further stated that it seems like Coinbase will not have a profitable year with a market cap of $40 billion.

What’s Affecting Coinbase Stock?

On being asked the reason behind the underperformance of COIN, Chanos pointed out the competition among different cryptocurrency exchanges, leading to “fee compression” and because the exchange relies on these fees for revenue, therefore in case these are affected it’s bound to suffer losses.

Moreover, the Kynikos founder said no matter how great efforts Coinbase put in to expand its business into more ventures, it will all be in vain as it wouldn’t show any desired results in the performance of stocks.

Chanos also points out the separation between the prices of COIN and Bitcoin. Earlier, a positive correlation could be found between BTC and the value of the stock, leading investors to believe a similar value proposition. It is, however, no longer the same.

There is a significant decrease in the demand for Coinbase stock with the emergence of more crypto-linked exchange-traded products and mining stocks.

In addition, Coinbase had to tackle various other issues because of the general outlook of the crypto industry for the year. As various analysts predict, the value of Bitcoin and other digital assets will be oscillating between the same range. With the ongoing political turmoil around the world, investors will be reluctant towards crypto investments. This will mean lower transactions for Coinbase, resulting in affecting its profitability.

In relation to this, Jere Ong, the principal analyst at JR research, shares that in the fourth quarter of last year, fees charged on retail transactions constituted 96% of the exchange revenue.

According to him, it shows the instability of Coinbase’s business, and therefore suggests investors hold exchange stocks for a “short period.”

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Andrew is a blockchain developer who developed his interest in cryptocurrencies while his post-graduation. He is a keen observer of details and shares his passion for writing along with being a developer. His backend knowledge about blockchain helps him give a unique perspective to his writing