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COINBASE -if bitcoin is a house of cards- then $COIN is the clarion bell on top of the house about to crumble.

We are excited and nervous at the same time about our short position in Coinbase Global, Inc., known as Coinbase. COIN is an American company that operates a cryptocurrency exchange platform that operates remote-first without an official physical headquarters. They recently went public in a much-publicized direct listing. I don’t think COIN could have timed the offering better. It was one of the largest ever direct listings and insiders unloaded a stunning amount of their holdings. If bitcoin is a house of cards as I believe it is, then COIN is the clarion bell on top of the house about to crumble. Even if crypto is more than a passing fad, every brokerage company, including non-brokerage companies like Paypal, Venmo, and Square are all in the process of allowing consumers to buy and sell crypto on their platform.  Coinbase’s first mover advantage is ephemeral and their margins will certainly go down with the increased competition. This is a high conviction trade yet we all know the market can be irrational longer than you can be solvent.

I lifted this analysis from Coindesk, a site devoted to all things cyrpto.

IPOs raise new capital, direct listings do not. This direct listing will not fill Coinbase’s coffers with cash, but it will make it easier for Coinbase to raise capital going forward. A direct listing is a liquidity event; an IPO is a capital-raising event.

In theory, IPOs are less volatile in initial trading than direct listings, for three reasons:

  • They do not count on the support of large institutions, which in an IPO would commit to buying a certain size tranche. These institutions would then have a face-saving and economic incentive to keep the price above their commitment level.
  • In an IPO, existing shareholders typically have a lock-up period of six to 12 months during which they cannot dump their shares on the market. A direct listing does not have a lock-up because it is based on shareholders selling their holdings. (There are exceptions, such as Palantir, which imposed its own lock-up that limited insiders to selling 20% of their holdings. The share price slumped the day the lock-up expired.)
  • The sellers of Coinbase shares in a direct listing (existing shareholders) do not have to sell their shares. Some may wait to see how trading is going before submitting their offers, which will affect the number of shares being traded and could exacerbate price swings. Coinbase has registered 114,850,769 shares eligible for sale, but we do not yet know how many shares will actually change hands Wednesday. It could be significantly less.

We have the answer to that. Look at the list of sellers below!

 

But what about the fact that COIN is wildly profitable. Also taking from the company’s S-1 ”

Crypto has the potential to be as revolutionary and widely adopted as the internet. The unique properties of crypto assets naturally position them as digital alternatives to store of value analogs such as gold, enable the creation of an internet-based financial system, and provide a development platform for applications that are unimaginable today. These markets and asset classes collectively represent hundreds of trillions of dollars of value today.

 

It’s worth noting that most of Coinbase’s revenue comes from transactions (85%) and that the majority of that revenue comes from retail investors. Institutional transaction revenue totaled just $55.9 million, a little more than 5%. Intriguingly institutional clients contributed most trading volume to the platform, driving 64%, up 86% year-over-year (YoY) from the Generalist

Coinbase is wildly profitable, an unusual characteristic of IPOs today. According to the IPO prospectus, the Company earned $322 million in profits on $1.41 Billion in revenues.  Revenues grew by a mind-boggling 136%. But can this growth continue? And if so more importantly can the margins continue to improve or will they collapse with the entry of dozens of new competitors all driving transaction costs down. Is this a race to the bottom? Who will be the next company to offer completely fee-less trading of crypto?  Robin Hood already does. Will it be E-trade once again now owned by Morgan Stanley that fires the first shot?  If you watched the interview last week on CNBC with the founder of Interactive Brokers- there is no question in his mind that fees will plummet.  They intend to be aggressive.  This is just a handful of the providers now offering bitcoin purchases. The list will grow rapidly soon.  Already Paypal, Venmo, and Square are all in the process of allowing consumers to buy and sell crypto on their platform.

Last but not least, Coinbase’s customer service is atrocious. I lost my password and have been trying to get into my account for over a month now, submitting my ID multiple times with no response. It’s not that I have a lot of money there or anything but the Etherium coins I had given up for worthless have tripled.

Compare Providers

 EXCHANGE  WHY WE CHOSE IT  TRADE FEE
Coinbase Secure, reputable, and easy to get started Transaction fee of $0.99 to $2.99. Other fees may apply.
eToro Virtual account and CopyTrader allow you to learn with less risk Spread-based pricing – 0.75% for Bitcoin
Robinhood Commission-free bitcoin trades No commissions or fees
Coinmama Instant purchases with a credit or debit card Commissions up to 3.90%. Other fees may apply.
BlockFi Ability to earn interest and use bitcoin as loan collateral No added commissions or fees
Bisq High-privacy decentralized exchange Up to 0.70%

So it’s a logical conclusion that Coinbase’s largely retail client base is going to pressure the company to lower transaction fees.  Can volume outpace margin compression as it does at the Google juggernaut?  That all depends if Coinbase can maintain its stranglehold on the crypto world as Google does on online advertising.  That my friend is the entirety of the bet. Based on the rapacious and ravenous unloading of stock by key employees and investors, I would say they have already placed their bets. Now it’s your turn. Slowly add into this trade as COIN has been down every day since the listing and is due for a bounce. Long investors, or bag holders- tail out of this mistake on any rebound.

If COIN does appear to be the dominant player, the rash of new competitors never gain traction, and COIN expands into all kinds of digital transactions, joining the metaverse game players, dominating the crypto collectible and the brand new NFT market, then this short will be a painful experience.  For now, though, there seems to be some momentum to the downside.

Transaction
Date
Reported
DateTime
Company Symbol Insider
Relationship
Shares
Traded
Average
Price
Total
Amount
Shares
Owned
Filing
2021-04-20
Sale
2021-04-22
8:06 pm
Coinbase Global Inc. COIN Ehrsam Frederick Ernest III
Director
135,000 $319.72 $43,161,756 2,085,875
(Indirect)
View
2021-04-16
Sale
2021-04-20
9:40 pm
Coinbase Global Inc. COIN Ehrsam Frederick Ernest III
Director
770 $339.02 $261,048 2,220,875
(Indirect)
View
2021-04-16
Sale
2021-04-20
9:40 pm
Coinbase Global Inc. COIN Ehrsam Frederick Ernest III
Director
128,730 $335.05 $43,131,355 2,221,645
(Indirect)
View
2021-04-15
Sale
2021-04-19
9:38 pm
Coinbase Global Inc. COIN Andreessen Marc L
Director
10% Owner
19,249 $329.7 $6,346,474 103,075
(Indirect)
View
2021-04-15
Sale
2021-04-19
9:37 pm
Coinbase Global Inc. COIN AH Equity Partners III (Parallel) L.L.C.
AH Capital Management L.L.C.
HOROWITZ BENJAMIN A
10% Owner
19,249 $329.7 $6,346,474 103,075
(Indirect)
View
2021-04-15
Sale
2021-04-19
9:36 pm
Coinbase Global Inc. COIN Andreessen Horowitz LSV Fund I L.P.
Andreessen Horowitz LSV Fund I-B L.P.
Andreessen Horowitz LSV Fund I-Q L.P.
CNK Fund I L.P.
CNK Fund I-B L.P.
CNK Fund I-Q L.P.
CNK Equity Partners I L.L.C.
AH Equity Partners LSV I L.L.C.
10% Owner
19,249 $329.7 $6,346,474 103,075
(Indirect)
View
2021-04-15
Sale
2021-04-19
9:35 pm
Coinbase Global Inc. COIN a16z Seed-III LLC
Andreessen Horowitz Fund III L.P.
Andreessen Horowitz Fund III-A L.P.
Andreessen Horowitz Fund III-B L.P.
Andreessen Horowitz Fund III-Q L.P.
AH Parallel Fund III L.P.
AH Parallel Fund III-A L.P.
AH Parallel Fund III-B L.P.
AH Parallel Fund III-Q L.P.
AH Equity Partners III L.L.C.
10% Owner
19,249 $329.7 $6,346,474 103,075
(Indirect)
View
2021-04-14
Sale
2021-04-16
9:45 pm
Coinbase Global Inc. COIN WILSON FREDERICK R
Director
10% Owner
4,702,324 $386.36 $1,816,768,380 0
(Indirect)
View
2021-04-14
Sale
2021-04-16
9:45 pm
Coinbase Global Inc. COIN Union Square Ventures 2012 Fund L.P.
Union Square 2012 GP L.L.C.
USV Investors 2012 Fund L.P.
USV Opportunity 2014 GP LLC
USV Opportunity 2014 LP
USV Opportunity Investors 2014 LP
Weissman Andy
Wenger Albert
Burnham Brad
Buttrick John
10% Owner
4,702,324 $386.36 $1,816,768,380 0
(Indirect
Direct)
View
2021-04-14
Sale
2021-04-16
9:44 pm
Coinbase Global Inc. COIN Jones Jennifer N.
CAO
110,000 $394.86 $43,435,000 18,483
(Direct)
View
2021-04-14
Sale
2021-04-16
9:44 pm
Coinbase Global Inc. COIN Haun Kathryn
Director
204,885 $358.83 $73,517,984 860,868
(Indirect
Direct)
View
2021-04-14
Sale
2021-04-16
9:43 pm
Coinbase Global Inc. COIN HAAS ALESIA J
CFO
255,500 $388.73 $99,320,789 0
(Direct)
View
2021-04-14
Sale
2021-04-16
9:42 pm
Coinbase Global Inc. COIN Ehrsam Frederick Ernest III
Director
60,997 $334.75 $20,418,669 2,350,375
(Indirect)
View
2021-04-14
Sale
2021-04-16
9:42 pm
Coinbase Global Inc. COIN Ehrsam Frederick Ernest III
Director
86,933 $398.65 $34,655,590 2,411,372
(Indirect)
View
2021-04-14
Sale
2021-04-16
9:41 pm
Coinbase Global Inc. COIN Ehrsam Frederick Ernest III
Director
150,859 $377.24 $56,909,397 2,472,383
(Indirect)
View
2021-04-14
Sale
2021-04-16
9:41 pm
Coinbase Global Inc. COIN Choi Emilie
President
299,248 $403.92 $120,871,660 74,155
(Indirect
Direct)
View
2021-04-14
Sale
2021-04-16
9:40 pm
Coinbase Global Inc. COIN Choi Emilie
President
302,910 $326.51 $98,903,789 288,688
(Direct)
View
2021-04-14
Sale
2021-04-16
9:39 pm
Coinbase Global Inc. COIN Chatterjee Surojit
Chief Product Officer
160,000 $386.78 $61,885,000 5,344
(Direct)
View
2021-04-14
Sale
2021-04-16
9:39 pm
Coinbase Global Inc. COIN Armstrong Brian
Brian Armstrong Living Trust
CEO
Chairman
10% Owner
749,999 $389.1 $291,827,965 300,001
(Indirect)
View
2021-04-14
Sale
2021-04-16
9:35 pm
Coinbase Global Inc. COIN Andreessen Marc L
Director
10% Owner
294,775 $381 $112,309,275 103,075
(Indirect)
View
2021-04-14
Sale
2021-04-16
9:34 pm
Coinbase Global Inc. COIN AH Equity Partners III (Parallel) L.L.C.
AH Capital Management L.L.C.
HOROWITZ BENJAMIN A
10% Owner
294,775 $381 $112,309,275 103,075
(Indirect)
View
2021-04-14
Sale
2021-04-16
9:33 pm
Coinbase Global Inc. COIN Andreessen Horowitz LSV Fund I L.P.
Andreessen Horowitz LSV Fund I-B L.P.
CNK Fund I L.P.
CNK Fund I-B L.P.
CNK Fund I-Q L.P.
CNK Equity Partners I L.L.C.
AH Equity Partners LSV I L.L.C.
Andreessen Horowitz LSV Fund I-Q L.P.
10% Owner
294,775 $381 $112,309,275 103,075
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