“This business will be commoditized,” says New Constructs CEO

Coinbase (COIN), the largest cryptocurrency exchange in the United States, could see its profits come under pressure as more companies embrace blockchain and competition in the trading space increases, according to at least one strategist.

“This business will be commoditized,” David Trainer, CEO of research firm New Constructs, told Yahoo Finance on Friday.

“The underlying goal of blockchain technology is not to make money for businesses, but to improve the prosperity of society,” he added. “I think it’s a disintermediation technology that won’t make companies like Coinbase rich. It will do the opposite. And Coinbase’s margins should be drastically reduced.”

Coinbase shares fell to an all-time low on Monday, following a drop in bitcoin and other major cryptocurrency prices and extending the declines after its first-ever quarterly report as a public company last week. The stock fell 7.7% to $ 238.37, falling below its benchmark price of $ 250 per share for the first time since Coinbase’s direct listing last month.

However, even with the decline, Coinbase shares still had a market cap of around $ 50 billion. While that valuation has halved since Coinbase’s direct listing, it remains around double the market capitalization of peer exchange firm Nasdaq (NDAQ).

“We believe the valuation remains extremely high,” Trainer said, adding that he believed Coinbase would be fairly valued in a “best case scenario” between $ 5 billion and $ 10 billion.

For Trainer, Coinbase’s first quarter results reinforced the fact that competitors could disrupt Coinbase’s business, given the company’s reliance on retail investors. Coinbase’s retail transaction revenue totaled $ 1.5 billion in the first three months of the year, comprising the vast majority of its $ 1.8 billion total revenue during the period. The majority of the platform’s assets, however, were held by institutional investors.

Other cryptocurrency exchanges, including Gemini, Bittrex, and Binance, have also gained traction, although many analysts have warned that these companies’ need for scale could mean transaction fees would be reduced to attract new users. This in turn could adversely affect operating results, which depend on transaction fees. Coinbase CFO Alesia Haas, however, said during the company’s earnings call last week that Coinbase was “not focused on competing with fees.”

The Coinbase logo displayed on a phone screen and the representation of Bitcoin can be seen in this illustrative photo taken in Krakow, Poland on April 15, 2021 (Photo by Jakub Porzycki / NurPhoto via Getty Images)

“You don’t make a lot of money trading things,” Trainer said. Most people, he noted as an example, don’t realize that the forex market overshadows the volume of the stock market. “But we never talk about it. Why? Because there is no profit. Just because there is a big market for something that there is profit to be made. ”

“I think that’s the point people are missing about blockchain,” he added. “Yes, it’s going to disrupt really big markets. But what it’s going to do is shift the role of corporate intermediary in a lot of those markets. So corporate profits as a percentage of societal gain go decrease because of the blockchain. ”

“And so companies like Coinbase kind of make you think, oh, because we’re blockchain we’re going to be really profitable,” he said. “Well, the real truth about blockchain is that businesses are going to be less profitable.”

However, other Wall Street analysts have been more bullish on Coinbase shares. According to Bloomberg data as of Monday, eight companies rated the stock as a buy and four companies rated the stock as owned. None have rated Coinbase stocks as Sell.

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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