Investment Alert: Sell Coinbase (COIN)
Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.
Taking on the government is a risky proposition at the best of times. Even when it would seem the odds are in your favor, it can be costly to escalate a legal case to the Supreme Court, not to mention it’s highly distracting for management.
Nonetheless, some have tried and many have failed. Outside the corporate world, the Al-Alaqi v. Panetta case was a benchmark adjudication; it was a 2012 case challenging the targeted drone killings by the United States of three U.S. citizens in Yemen. The Supreme Court ruled against the plaintiffs.
Another group sued the U.S. government for separating migrant children from their parents at the border. Again, the US Supreme Court ruled against them.
Now we’re not here to debate those issues, only to point out that, even when you think you have a strong case, it’s no cakewalk beating the government.
And yet that is essentially what Brian Armstrong, CEO of Coinbase is considering. If you’re a shareholder, we think it’s probably best to sell now and ask questions later.
- Coinbase and the SEC may go head to head in a risky move for the cryptocurrency exchange.
- The firm’s revenue mix has skewed increasingly towards earnings interest from deposits vs transactions.
- Coinbase may relocate to an international HQ.
Why Holding Coinbase Is So Risky Now
Last month, the SEC notified Coinbase that it was in the final steps before formally issuing charges via a Wells notice. Armstrong has reacted in two ways primarily:
- He has stated that he would consider moving the company’s HQ abroad.
- He claimed he is “going to have to actually end up going to court”
And it’s that second claim that we think is very worrying for shareholders. But it’s not the only reason to be skeptical of this cryptocurrency exchange.
Coinbase Revenue Mix Is Concerning
When we looked at financials previously, a huge chunk of the firm’s revenues were generated from investing deposits.
That’s not a bad strategy at all. JP Morgan forecast it would 12x its bottom line, and largely it’s because it can invest deposits sitting in checking accounts at higher yields in the Treasury market now.
But Coinbase is not set up as a bank. It is designed to make money from the buying and selling of cryptocurrencies, so it’s skew of revenues away from transactions is concerning.
Does Coinbase Delight Customers?
Another concern we have is that Coinbase teeters on the edge of the Buffett’s requirement to delight customers.
Famously, Coinbase has charged astronomically commissions. As perhaps the only perceived reputable game in town for the average investor (look no further than FTX to see the peril of depositing funds in less well established firms), Coinbase took full advantage by charging high commissions.
It was in many respects the very opposite of the philosophies of Vanguard and Schwab to democratize access to markets through low commissions.
From a technical perspective, Coinbase is also sitting below its 200-day Moving Average now.
And we don’t see a strong impetus to sparking a rally back above it. At the very least, it will need to prove it can reclaim that key threshold to get us interested.
So too, we would like to see the financials improve, meaning the revenue mix would be more weighted towards transactions than the arbitrage from earning interest on deposits.