In an eerie parallel to late 1999/early 2020, retail “investor” money has flooded into the stock market. The rush of newbies are signing up in lemming-like droves for corrupted stock trading apps like Robinhood. Schwab reported opening 3.2 million new accounts in Q1. Most if all of these newbies did not know and still do not know anything about fundamental stock and GAAP financial analysis (some of them manage $10’s of millions on behalf of individuals – Gerber Kawasaki comes to mind). On balance, these folks think “GAAP” is a place to buy clothing.
Wall Street manages to suck in retail money to fleece them with corrupted securities like SPACs and money-losing Silicon Valley stock scams. Enticing them into the shares of insanely overvalued companies, many of which will no longer exist two to five years from now. Meanwhile the early investors and insiders with low-to-no cost stock are dumping their bounty onto the unsuspecting mass of newly minted trading “experts.”
$COIN is the perfect example. Coinbase operates a cryptocurrency exchange platform. Founded in 2012, it is the largest cryptocurrency exchange by volume in the U.S. COIN went public via a Direct Public Offering on Wednesday. In a DPO, existing shareholders register their shares for sale and unload them on the pubic. No new shares are created and the proceeds from the stock sold does not go to the company. Rather, the money from the sale of stock goes to the selling shareholders. COIN has approximately 205 million shares issues, of which 114.8 million were registered for resale. Fully diluted COIN has 261 million shares o/s.
The Wall Street spin on this type of transaction is that it creates market liquidity for a company like COIN to raise equity capital at some point. This is little more than mendacious propaganda. In truth, this type of share sale offering enables insiders with low-dollar cost shares to take advantage of the largest stock bubble in history and unload billions worth of private stock onto the public, many of which are retail “investors” who have been sucked into the stock market by the allure of “easy money.”
In terms of valuation, COIN closed Monday at $332, giving the Company an $86.7 billion valuation using the fully diluted share-count . Based on 2020 revenues of $1.28 billion and net income of $322 million, this values COIN at 67.7x sales and 269x earnings. This is an insane valuation for a any company, let alone a company who’s business model is neither untested nor has it stood the test of time. Compare this to the CME, which has a market cap of $73.8 billion, is highly profitable and which has been in business since 1848. The CME trades at 4.9x sales and 35x net income.
COIN was priced at $250 on Wednesday. It opened at $381. In the first 10 minutes it traded up $429 then spent the next six hours falling almost non-stop down to $310 before bouncing a bit to close at $327. Since then it has largely traded sideways between $320 and $340, although today the stock broke below $320 after $ARKK’s Cathie Woods – who gets her investing inspiration from the New Testament, piled into shares greedily last week and yesterday (Monday, April 19th). I’m wondering if she knows the shares she’s purchasing using OPM are coming from insiders who can’t wait to dump them on stool pigeons like her.
In the chart above, everyone who bought shares at a price above the white horizontal line is underwater. This includes ARKK’s Cathie Wood, who sold some TSLA shares and bought $246 million worth of Coin last Wednesday and has added as the stock goes lower every day since then – her latest purchase being Monday at levels well above where the stock is trading now.
I don’t know how long it will take for speculators’ love affair with cryptocurrencies to sour. But make no mistake, the fate of these digital coins, especially Bitcoin, is directly correlated with the stock market bubble. By the end of 2017, Bitcoin had run to $20,000. Concurrently, the SPX hit an all-time in late January 2018. Between then and late December that year, the SPX had dropped 18.1%, largely in two big draw downs. Similarly Bitcoin tanked from $20,000 to the low $3,000s. Bitcoin traded in a lateral channel between $5,000 and $10,000, until the trillions printed by the Fed sent both the stock market and Bitcoin soaring.
And then there’s the biggest risk, which is completely ignored by crypto bulls: Central Bank and government regulation. COIN was forced to acknowledge this in its public offering prospectus under the section on risks: “changes in the legislative or regulatory environment, or actions by governments or regulators.” The latter refers to possibility that governments will forbid the use of cryptos as legal tender.
On January 27th this year, the General Manager of the Bank for International Settlements (the Central Bank of Central Banks), Agustin Carstens, gave a speech titled “Digital currencies and the future of the monetary system.” This is a must-read speech for anyone interested in cryptos because it’s a subtle message from the BIS about its view on private cryptos.
In this speech he specifically asserted that Bitcoin is “a poor store of value” because of its volatility and because the market is “decidedly concentrated and opaque.” He further stated “investors must be cognizant that Bitcoin may well break down altogether.” Carstens went on to explain that it is an essential government function to provide the framework for a stable monetary system and that if the global monetary system is to be based on digital currencies, it is the Central Banks that should be the issuers.
My point here is that the speech referenced above, in conjunction with the multiple pejorative remarks toward Bitcoin from the ECB and the Fed and from Treasury Secretary, Janet Yellen, suggests to me that, at some point, government authorities and Central Banks will make a move to severely limit or eliminate the use of private cryptos.
The bottom line is that, given all of the systematic and unsystematic risks attached to the asset class on which COIN bases its business model, COIN is a tremendous short opportunity once shares become readily available to borrow or options on the stock begin trading. The upside is limited, at best, and we know insiders are continuously dumping their shares. The downside potential is easily 90%.
The commentary above is an excerpt from the Short Seller’s Journal, a weekly newsletter that dissects the latest economic reports and presents ideas for short seller’s. You can learn about it here: Short Seller’s Journal information.