Coinbase (COIN), the largest cryptocurrency exchange in the U.S., could see profits come under pressure as more companies embrace blockchain and competition in the exchange space increases, according to at least one strategist.
"This business will be commoditized," David Trainer, CEO of the research firm New Constructs, told Yahoo Finance on Friday.
"The underlying purpose of blockchain technology is not to make money for corporations, but to improve the prosperity of society," he added. "I think it's a disintermediating technology that will not enrich companies like Coinbase. It will do the opposite. And Coinbase's margins are due to be meaningfully reduced."
Shares of Coinbase fell to an all-time low on Monday, tracking a dip in bitcoin and other major cryptocurrency prices and extending declines after its first-ever quarterly report as a public company last week. The stock fell as much as 7.7% to reach as low as $238.37 — falling below its reference price of $250 per share for the first time since Coinbase's direct listing last month.
However, even with the dip, Coinbase's stock still had a market capitalization of about $50 billion. While that valuation has halved since Coinbase's direct listing, it remains about double the market cap of peer exchange company Nasdaq (NDAQ).
"We think the valuation remains extremely elevated," Trainer said, adding that he believed Coinbase would be fairly valued in a "best case scenario" between $5 billion to $10 billion.
To Trainer, Coinbase's first-quarter earnings results reinforced that competitors could upend 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 in total revenue during the period. The majority of assets on the platform, however, were held by institutional investors.
Other cryptocurrency exchanges including Gemini, Bittrex and Binance have also been gaining traction, though many analysts have warned that these companies' need for scale could mean transaction fees get slashed to draw in new users. That could in turn hurt operating results, which depend on fees taken gleaned from transactions. Coinbase Chief Financial Officer Alesia Haas, however, said during the company's earnings call last week that Coinbase was "not focused on competing with fees."
"You don't make a lot of money trading things," Trainer said. Most people, he noted as an example, don't realize that the foreign exchange market dwarfs the volume of the stock market. "But we never talk about it. Why? Because there are no profits. Just because there's a big market for something doesn't mean there are profits to be made."
"I think that's the point that people miss about blockchain," he added. "Yes, it's going to disrupt some really big markets. But what it's going to do is displace the role of the corporate middleman in a lot of those markets. So corporate profits as a percentage of societal gain are going to shrink because of blockchain."
"And so, firms like Coinbase are kind of tricking you into thinking, oh, because we're blockchain, we're going to be real profitable," he said. "Well, the real truth about blockchain is that companies are going to be less profitable."
Other analysts on Wall Street have been more upbeat on shares of Coinbase, however. According to Bloomberg data as of Monday, eight firms rated shares as a Buy, and four firms rated the stock as Hold. None rated Coinbase's stock as Sell.
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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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