It’s hard to tell in which direction the cryptocurrency space is heading. There has been a lot of bearish sentiment recently, and momentum has seemingly stalled. Nevertheless, the recent news that Bitcoin has been adopted as legal tender in El Salvador is big news and could be the catalyst for the bull market to resume.
Which should be good news for the various companies operating in the crypto ecosystem, not least, the leading exchange Coinbase (COIN), right?
Not so, says Raymond James’ Patrick O’Shaughnessy. Bull or bear crypto market, the analyst is down on Coinbase’ prospects and initiated coverage of COIN with an Underperform (i.e. Sell) rating. O’Shaughnessy has no fixed price target in mind. (To watch O’Shaughnessy’s track record, click here)
Not that O’Shaughnessy underplays the company’s well-earned reputation. The analyst acknowledges Coinbase is an “established leader” in the crypto space and highlights its status as the U.S.’ “preeminent trading platform.”
Moreover, the company is active in the burgeoning cryptoeconomy’s development and “hyper aggressively working to expand and diversify its sources of revenue.”
That said, the fact Coinbase derives the bulk of its revenue from trading commissions is a sticking point to O’Shaughnessy.
“Over and over again history has shown that brokerage and exchanges see excess profits competed away unless there is a structural barrier to entry,” the 5-star analyst said. “We don’t see a structural barrier to entry here and therefore expect significant pricing degradation over time, with growth in non-transaction revenues hard-pressed to offset this. As a result, we do not find the current risk-reward attractive.”
This “known” issue aside, there is currently a “sea of unknowns” to also consider when weighing up an investment in Coinbase and the cryptocurrency marketplace in general. Security concerns and an “uncertain regulatory environment” are two and so is the “long-term staying power of crypto as an asset class.”
Although there’s no denying the whole space is going through a huge growth sprout, one in which even previously reticent financial institutions are keen to participate, O’Shaughnessy argues that it’s too early to tell whether crypto can demonstrate “meaningful and durable societal utility.” And even if crypto does prove its worth, the analyst still thinks Coinbase’ transaction economics do not represent a viable long-term strategy.
“We view it unlikely that over the long-term retail customers will continue to happily pay a 1%+ transaction fee, particularly if/when trusted financial institutions begin to offer trading and custody,” the analyst further noted.
O’Shaughnessy, however, is currently the only Coinbase bear on Wall Street. Overall, with an additional 10 Buys and 4 Holds, the analyst consensus rates the stock a Moderate Buy. The average price target is a bullish one; at $388.86, the figure suggests 12-month returns of ~74%. (See Coinbase stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
