There's a bull case and a bear case for any stock. As a Coinbase (COIN 2.72%) shareholder, it's important to understand the bear argument against the stock. And for Coinbase specifically, the arguments are pretty strong. 

I laid out the three best arguments against Coinbase long term, and whether you're a bull or a bear on crypto and Web3, these are arguments worth considering in your thesis. 

1. The exchange business isn't this profitable long term

One of the best arguments against Coinbase's current business is that high cash flows aren't sustainable because exchange fees will eventually be squeezed. You can see in the chart that free cash flow has exceeded $1.5 billion in four of the last six quarters, largely on the back of trading fees. 

COIN Net Income (Quarterly) Chart

COIN Net Income (Quarterly) data by YCharts

You can already see that net income and free cash flow are dropping, in large part because trading volume is down. Coinbase hasn't officially changed its fees, but lower volumes are hurting results. In the first quarter of 2022, the company reported a 56% drop in retail trading revenue sequentially, and that led to a 53% drop in revenue overall to $1.16 billion.

Most fees are paid by retail traders, so if those fees go down because competitors are cutting prices or taking market share, it would be bad news for Coinbase's results. 

2. Crypto's future is uncertain

I'm a believer in the future of Web3, and investors who feel the same will likely see a bright future for Coinbase. But the reality is that Coinbase needs crypto overall to be successful, and that's not a certainty. Risks in the system have led to multiple bankruptcies over the past two months, and both traders and developers could leave the space. 

Coinbase is also reliant on trading to make money. Right now, many people see that as a use case for crypto, but long term, we will need to see use cases outside of trading improve -- which is not where Coinbase makes its money today. 

If crypto doesn't have a bright future, neither does Coinbase. It's as simple as that. 

3. There are major risk factors

Two huge risks are regulation and innovation. Regulation hit Coinbase last week when one of its former employees was charged with insider trading. The company was indirectly caught in the crossfire because the Securities and Exchange Commission has said in its charges that some tokens on Coinbase are securities, and thus subject to regulation.

Regulation isn't inherently bad, especially for the crypto market, where more guardrails and rules are needed. But it's a risk that investors need to keep in mind. 

Innovation and competition are harder to define, but the crypto market changes quickly, and there are new exchanges and marketplaces popping up all the time. This is a huge risk to Coinbase because the company is already well behind market leaders in terms of market share. Binance currently has about 10 times the trading volume of Coinbase, and companies like FTX are growing quickly.

We don't know what new companies are going to build that could disrupt Coinbase's business, but with the speed of innovation in Web3, this is a huge threat to the company. 

Coinbase has upside but lots of risk

I think there's value in Coinbase's stock because of $6.1 billion in cash on the balance sheet and a strong position in big markets like the U.S., but that doesn't make the company impervious. We've seen in the last few months how quickly crypto markets can shift, and that risk needs to be understood by investors. For now, I think the reward outweighs the red flags.