The Hedge Fund Manager Who Flagged And Shorted Enron Finds Another Hit Betting Against Crypto Exchange Coinbase

The Hedge Fund Manager Who Flagged And Shorted Enron Finds Another Hit Betting Against Crypto Exchange Coinbase


Photo: James Chanos, July 18, 2018, screenshot from CNBC, https://www.youtube.com/watch?v=4F2EigcLlZQ

Almost three months before today’s announcement that Coinbase is laying off 18 percent of its full-time workforce, legendary shortseller James Chanos bet that the stock price of the No. 3-ranked crypto exchange would fall.

Chanos is the hedge fund manager who famously unloaded shares of corporate fraud Enron months before the energy company collapsed.

Chanos told CNBC in March that he was shorting Coinbase, calling it a “bubble stock.” He said he expected fee compression as competition increased among crypto exchanges, and he doubted Coinbase could be profitable in 2022.

“We basically think Coinbase is over earning,” Chanos said in the interview. “If you do the numbers, their revenue base is roughly 3% to 4% of their custodian assets, their customer assets.”

More recently, Chanos said Coinbase is “tremendously overvalued” at current levels. He predicted in a podcast published in May that Coinbase’s fee income would collapse and send its stock price down.

The founder of Kynikos Associates, Chanos described how he makes money during a Securities & Exchange Commission roundtable discussion:

Kynikos, he said “specializes in short selling, an investment technique that profits in finding fundamentally overvalued securities that are poised to fall in price … On behalf of our clients, Kynikos Associates manages a portfolio of securities we consider to be overvalued. The portfolio is designed to profit if the securities it has sold short fall in value.”

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Chanos said his company chooses portfolio securities by conducting “a rigorous financial analysis and focusing on securities issued by companies that appear to have (1) materially overstated earnings; (2) an unsustainable or operationally flawed business plan; and/or (3) engaged in outright fraud.”

Chanos is perhaps most famous for predicting the fall of the U.S. energy and commodities giant Enron before it filed for bankruptcy in 2001. Embroiled in a scandal over accounting and corporate fraud, Enron lost $74 billion in the four years leading to its default. Chanos was a short seller of Enron throughout 2001, increasing his short position as more information surfaced.

Chanos has also taken aim at nonfungible tokens or NFTs and he claims that the NTF market is rife with “nefarious activity” and conflicts of interest.

The price of Coinbase stock has dropped almost 80 percent so far this year as interest in crypto trading recedes and prices fall across the board. The stock lost more than 11 percent in value Monday and was off more than 5 percent in premarket trading Tuesday.

Listen to GHOGH with Jamarlin Martin | Episode 74: Jamarlin Martin Jamarlin returns for a new season of the GHOGH podcast to discuss Bitcoin, bubbles, and Biden. He talks about the risk factors for Bitcoin as an investment asset including origin risk, speculative market structure, regulatory, and environment. Are broader financial markets in a massive speculative bubble?

Coinbase initially said in May it would cut costs by freezing hiring and rescinding new job offers. Laying off around 1,100 employees is part of its cost-cutting plan, the company said in an SEC filing on Tuesday.

In a note to all employees, Coinbase CEO Brian Armstrong said, “We appear to be entering a recession after a 10+ year economic boom.” He warned of a “crypto winter” and said that the company “grew too quickly” during the crypto bull market.

Economist and longtime Bitcoin skeptic Peter Schiff had an I-told-you-so moment on Twitter. “#Coinbase is firing 18% of its employees due to falling #crypto prices and #recession. This is likely just the first round of layoffs, and a harbinger of many more to come throughout the crypto ecosystem and beyond. Without jobs many #HODLers may be forced to sell their #Bitcoin.”

Photo: James Chanos, July 18, 2018, screenshot from CNBC, https://www.youtube.com/watch?v=4F2EigcLlZQ