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Bulls on Coinbase stock argue that trading of cryptocurrencies isn’t commoditized the way stock trading is.
Michael Nagle/Bloomberg
Coinbase
Global stock has turned into a money-maker—for investors betting against it.
Shares of Coinbase (ticker: COIN), the big crypto exchange, are off 32% this year, including a 6% decline in trading Monday to around $175. The stock is down 60% from its 52-week high around $430. And short sellers, who borrow a stock, aiming to buy it back later a lower price, are making a killing.
Coinbase shorts are up $455 million in year-to-date mark-to-market profits, according to data analytics firm S3 Partners. The shorts are up 39% for the year on positions worth $1.2 billion, says Ihor Dusaniwsky, managing director at S3. Those profits more than offset $200 million in market losses on Coinbase in 2021.
Moreover, short interest in Coinbase has picked up. Over the past seven days, 166,000 shares of new short positions have emerged, a 2.5% increase over the prior week, even as the stock rallied 16%.
“Short sellers are increasing their exposure into what they think is an overbought stock,” says Dusaniwsky. “With $1.2 billion in dollars at risk, this is an extraordinarily widely held short on the institutional side. A ton of hedge funds are short the name.”
The shorts appear to have lined up a major ally in James Chanos, head of Kynikos Associates. A famed short seller, Chanos said in an interview on CNBC that Coinbase is a “bubble stock.”
“We basically think Coinbase is over earning,” he said. “If you do the numbers, their revenue base is roughly 3% to 4% of their custodian assets, their customer assets.” Chanos also expects Coinbase’s fees to come under pressure as rival exchanges proliferate, according to media reports.
Neither Chanos nor Coinbase responded to a request for comment.
Coinbase still has plenty of backers on Wall Street. The mean target for the stock price is $316 with the equivalent of an overall Buy rating, according to
FactSet
.
Needham’s John Todaro is one analyst in the bullish camp. He reiterated a Buy rating and $360 target on the stock in a note published last week.
Todaro says Coinbase has a big revenue opportunity in its pending marketplace for NFTs, or nonfungible tokens. The company has said it plans to launch an NFT platform this year. In a base-case scenario, Todaro says, NFTs could add $450 million in annualized revenue to Coinbase, worth 6% of 2023 estimated sales and 5% of 2024 estimated revenue.
In a bull case, he sees NFTs generating $1.3 billion in annualized revenue, worth 13% of Coinbase’s total in 2024. His bear case for NFT revenue is just $132 million in 2024.
“Coinbase has a captive crypto audience that overlaps with NFTs,” Todaro said in an interview, reiterating his bullish view.
Todaro says he isn’t worried about fee pressure in the near term. Coinbase offers far more crypto tokens and potential trades between pairs of currencies than other platforms for retail investors, such as
Robinhood Markets
(HOOD), he notes. Major exchanges available in the U.S., like Binance and FTX, don’t rival Coinbase’s breadth of tokens available to trade, he says.
While fees are high relative to stocks, he adds, most retail investors are willing to pay steep commissions since they think the payoffs will be much larger.
“Crypto exchanges are non-commoditized,” he says. “You can go to any brokerage and trade a stock, but Coinbase is one of the few exchanges to trade something like Shiba Inu. Someone might trade Dogecoin on Coinbase to get a 20-times return—so a 5% commission isn’t a concern.”
Todaro and other bullish analysts are fighting market sentiment on Coinbase, however. And Wall Street has been cutting its price targets, from an average $395 a share at the end of 2021 to $316 now, according to FactSet.
Moreover, Coinbase isn’t primed for a “short squeeze,” a burst of buying by short sellers to cover their positions that can push a stock sharply higher.
Only about 5% of the float in Coinbase is held short, a relatively small amount to trigger a squeeze. Borrowing costs are low. And since many shorts’ positions are profitable, they aren’t likely to face margin calls by brokerages, forcing them to buy shares to cover their borrowed positions.
“It’s not a squeeze candidate,” says Dusaniwsky. “The shorts are up by almost half a billion dollars. No one is forced to exit a winning position. The shorts can withstand more of a rally.”
Write to Daren Fonda at daren.fonda@barrons.com
