What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing 2021 was a year of the tech ipo with dozens of big name tech companies going public via ipos direct listings and specs. While they initially got a lot of hype with very few exceptions, they have been complete disasters to date. Many of them have lost at least half of their value, and some of them are down as much as 70 percent, collectively incinerating hundreds of billions of dollars worth of shareholder value. Part of the reason is that many of these companies were burning cash to fund hyper growth when it became obvious that the fed would raise interest rates, these stocks started falling out of favor, as it would become more difficult to fund their cash burn in such an Environment coinbase appeared like one of the best positions of the new ipos.

Not only were they growing fast, but they were also highly profitable. If anyone could withstand a fed tightening cycle, it should be them. Unfortunately, this has not been the case with the share price being cut in half since its direct listing last april. Now the infamous short seller, jim chanos says that he is short coinbase and thinks there's even more downside.

Of course, we should take his positions with a grain of salt. This is the same man who drove his fun to near bankruptcy with his multi-year tesla short, but in this case, he's making some interesting points about coinbase's business model, which could see the company fall under enormous pressure over the coming years. In this video we'll look at how coinbase makes money and why gym channels decide to short their shares. Coinbase is a cryptocurrency platform where you can buy, sell and transact with crypto.

It was one of the first crypto exchanges founded all the way back in 2012, and it's become the market leader. Its customers hold close to 10 of all cryptocurrencies in the world. They make money from transaction fees that they charge on crypto trades, as well as fees from various subscriptions and other value-added services. As you can see from this chart, 93 of their total revenue comes from transaction fees and of that 95 is from retail customers.

So while they claim to be a diversified, crypto economy, company, at least for now, they're predominantly an app that individuals use to speculate on crypto and, to a much lesser extent, use it to facilitate payments in the real economy. Coinbase's fee structure is a bit complicated, so we'll look at how much you pay for a hypothetical 100 bitcoin trade. They actually have two different platforms: coinbase and coinbase pro coinbase charges a roughly 3.5 fee. Every time you buy or sell crypto.

So if you buy 100 worth of bitcoin, that immediately goes down to 96.50. The fees on coinbase pro are much cheaper. You pay about half a percent for transactions under 10 000 and the fees decrease as a percentage. The larger your trade is, their transaction revenue is highly correlated with the price of bitcoin and other cryptocurrencies.

When bitcoin is in a bull market, the value of their customers holdings go up because they charge a percentage. This automatically increases their revenue. Also, bull markets tend to increase the general hype around crypto, so more people open accounts and start trading. While a point, five percent fee might not sound like a lot.

It can add up if you actively trade crypto, even if you only buy or sell one time per month, you'll rack up six percent in fees over the course of a year. This gives you a massive handicap where you could easily lose money, even if crypto prices rise moderately today, pretty much all u.s stock brokerages offer commission free trading. Of course, we know that nothing is ever free market makers like citadel extract a few pennies from each trade made on supposedly free platforms, but most of the time, this is a tiny amount representing less than one-tenth of a percent of the order, value the fees that Coinbase charges are way higher than that, even when you use coinbase pro. Of course, crypto is a much newer asset class than stocks which have been around for centuries, so you should expect fees to be higher in the beginning, but coinbase's fees are much higher even than other crypto brokerages binance, which is the largest crypto exchange outside of the Us charges fees between 5 and 10 times lower than coinbase, while offering almost identical functionality.

Jim chanos views, coinbase's high fees as unsustainable and their revenue could decline, even if the crypto markets do well going forward. Over the past few years, coinbase has grown its user base and revenue substantially as the crypto markets have skyrocketed. Their revenue increased 15-fold from 500 million dollars in 2019 to almost 8 billion in 2021. Their transaction cost, as a percentage of revenue, is only about 15.

That means that they're charging you a markup of almost seven times above their own internal costs. This has allowed them to post net profits, despite spending heavily on sales and marketing to attract new customers. It also allows them to compensate their senior executives handsomely with ceo brian armstrong, making 60 million dollars in total compensation in 2020 or more than four times what apple ceo tim cook made. Despite having some of the highest fees in the industry, they still have been able to grow rapidly, reaching almost 90 million customers by the end of 2021.

Part of the reason for this is their reputation as one of the oldest and most trusted crypto platforms. Their reputation was further bolstered in 2021, when they became the first pureplay crypto platform to go public. They use cold storage to hold their customers coins, making losses from a hack, pretty much impossible. Their stringent security features make it one of the safest platforms.

If you open an account with coinbase, you can rest assured that your crypto is safe and you're not going to get scammed in 2020 and early 2021, a lot of new investors were getting into crypto for the first time when you're a beginner, you're, probably willing to Stomach paying a little bit in extra fees for the peace of mind instead of rolling the dice with a shady offshore exchange in the early days, coinbase was the only game in town for that, but seeing the meteoric growth in fat profit margins coinbase was generating just About every retail brokerage and fintech company started jumping on the bandwagon. Today you can trade crypto on paypal, cash, app, robinhood and just about every other retail brokerage and their transaction fees are either competitive with or cheaper than coinbase. There are also countless startups raising billions of dollars from venture capitalists to burn on customer acquisition. This is epitomized by crypto.com, paying matt damon millions of dollars to start a commercial of such high production quality.

That could easily be mistaken for a movie trailer. This is the same company that spent 700 million dollars to rebrand the laker stadium, in los angeles, to prominently display crypto.com crypto trading is not rocket. Science, pretty much any technology company or even a startup, can create a new trading platform that can do substantially everything that coinbase can do when you have so much competition for a commodity product like this, you invariably create a race to the bottom. The competitors have to burn more and more money on advertising at the same time, their profit margins shrink because they have to undercut each other on price and, at the same time, competition has been heating up.

Bitcoin has been on a volatile downtrend, losing 25 percent of its value over the past year, point base made 3.6 billion dollars of net profit in 2021., based on its current price. This gives them a price to earnings ratio of about 12 making. It almost appear like a value stock, but jim chanos argues that these earnings figures are largely irrelevant, as these were extraordinary times in the world of investing when a company makes unusually high profits for a short period of time. This is called over earning one of the best examples of this is moderna.

Currently, they have a price earnings, multiple of six, which makes it look like a deep value stock, but these earnings are clearly not sustainable, as eventually everyone will already be vaccinated and demand will plummet whenever you see a company's revenue 10xing in a couple years. It's very dangerous to extrapolate this going forward. This problem is compounded by the fact that companies tend to ipo when they think they can get the highest valuation. Many of the tech companies that ipo'd in 2020 and 2021 were coveted beneficiaries either because they were involved in work from home services or because they were losing money and benefited from the fed's money.

Printing coinbase listed its shares almost exactly at the local maximum for bitcoin's price. At this point, their revenue and profits were skyrocketing, so their stock would be an easy sell on wall street. This gave early investors and corporate insiders an opportunity to offload their shares at high prices. Co-Founder and ceo brian armstrong wasted no time dumping, almost 300 million dollars worth of his shares on the very first day of trading.

He may have used part of these proceeds to buy 133 million dollar mega mansion in bel air and the fourth most expensive, real estate transaction in california history. There is a very high correlation between ipos and stock market valuations. It's simple supply and demand when stocks are expensive, companies are likely to issue new shares to take advantage of these high prices. This might also explain why ipos have poor average returns according to data compiled by nasdaq 64 of ipos underperformed their relevant index by 10 or more after three years.

This data only goes through 2020.. If you include 2021, the numbers would be even worse because of the massive bubble in tech stocks which allowed cash burning companies to go public at obscene valuations. Coinbase is a real company and they'll likely continue to play an important role in the crypto economy. For the foreseeable future, but it should serve as a cautionary tale to all investors to not fall for the hype when accompanying ipos right at the peak of its business cycle.

Alright, guys that wraps it up for this video. What do you think about coinbase? Do you agree with jim chanos how their best days are behind them? Let us know in the comments section below, as always. Thank you so much for watching and we'll see in the next one wall, street millennial signing out.