Coinbase (COIN) reported 2Q21 earnings on August 10, 2021 and beat on both the top and bottom lines. While these results are certainly impressive, they aren’t good enough to justify the stock’s valuation of roughly $56 billion. We expect Coinbase will likely not be able to sustain blowout earnings going forward thanks to rising competition in the cryptocurrency trading space.

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Stock Remains Terribly Overvalued

Even with excellent 2Q21 results, Coinbase’s ideal future is already priced into the stock, which leaves little upside for investors. To justify its current valuation, Coinbase would need to attain higher revenue than established rivals like Nasdaq (NDAQ) and NYSE-parent company Intercontinental Exchange (ICE), which is a highly unlikely scenario, given the reasons we highlight below.

Instead, we expect Coinbase’s margins and revenue growth rates to decline going forward as competition increasingly eats into its business.

Regulatory Risk Looms Large

As cryptocurrency rises in popularity among investors, we expect regulations to increase, which bring a whole new set of risks for Coinbase investors. The recently passed infrastructure bill contains provisions increasing the requirements for cryptocurrency tax reporting, and such regulation could be just the beginning. We expect more regulation, not less, to ensure regulators can enact more control over cryptocurrency. Accordingly, such new regulations could diminish the popularity of cryptocurrency as an asset class, and therefore negatively impact Coinbase’s growth trajectory.

Record Earnings Only Make Industry More Attractive to Competitors

The crypto markets are very young, and we expect many more companies to compete for the profits Coinbase enjoys today. The race to zero phenomenon that took place in late 2019 with stock trading fees will likely make its way to crypto markets, and Coinbase’s record earnings will only accelerate that process. The stronger Coinbase’s earnings are now, the more attractive this fast-growing market looks to larger competitors with greater resources.

Coinbase’s business also has few barriers to entry, as other companies can easily replicate its offerings. Competition is not limited to startups such as Robinhood (HOOD), eToro, Gemini, Binance and Kraken, but also incumbents Intercontinental Exchange, Nasdaq, or even Charles Schwab (SCHW). Should some of the larger stock brokerages enter the space, expect the race to zero to accelerate even faster.

This article originally published on August 10, 2021.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, sector, style, or theme.

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