September 18, 2021

Coinbase Goes Public: Is It A Buy?

Coinbase Goes Public: Is It A Buy?

Coinbase (COIN), the leading cryptocurrency exchange, has finally made its market debut after confidentially submitting its IPO paperwork in December 2020.

If you don’t know what Coinbase is, it’s the most popular place for retail traders and investors to buy and sell various cryptocurrencies, including Bitcoin, the most popular, and Ethereum.

The San Francisco-based company takes a transaction fee and has been riding high on a boom year for digital currencies like Bitcoin and Ethereum, as people poured money into the assets and pushed their prices to new highs.

The process of buying and selling cryptocurrencies is meant to be as easy as possible, and Coinbase’s high fees reflect that.

Coinbase was founded in 2012 and became a Silicon Valley unicorn just a few years later with its 2017 Series D round of venture capital funding.

The company’s list of investors is pretty impressive, counting venture capital magnates Andreessen Horowtiz, IVP, and Tiger Global as shareholders.

Quick Facts on the Coinbase IPO

  • Coinbase announced that they confidentially filed their S-1 with the SEC on December 17, 2020.
  • The IPO was originally scheduled to take place in March, but Coinbase later announced it would be moving it to April without giving any reasons for the delay.
  • It finally went public on Wednesday, April 13, 2021, becoming the first cryptocurrency exchange to IPO in the United States.
  • As earlier speculated, Coinbase avoided the traditional initial public offering route and instead debuted as a direct listing. By going public through a direct listing, the company didn’t issue new shares or raise any funds and there is no lockup period that blocks existing shareholders from offering their shares.

A direct listing also means that Coinbase didn’t pay huge sums of money to underwriters to handle the IPO, and suggests the company is financially stable enough to forgo any dilution or fundraising as part of the process of going public.

Coinbase Stock Price Action

On its market debut, Coinbase offered 114.9 million shares that opened at $381 each, up 52% from a $250 reference price set by Nasdaq stock exchange. A reference price is set by a stock exchange based on forecasts of where the stock will open.

Coinbase Goes Public: Is It A Buy?

Shares of the company swung as low as $310 and as high as $429 in their first day of trading that reflected the unpredictable nature of cryptocurrency prices.

The stock ended the session at $328.28 a share, giving Coinbase a $85.7 billion valuation after counting all of its outstanding shares. That is more than 10 times its last valuation as a private company.

The Market Environment

Coinbase was clearly strategic in their S-1 filing timing, as today’s market is nearly the perfect storm for a successful IPO for Coinbase’s investors.

For one, the market is hungry for high-growth tech IPOs, which have been relatively scarce in the last few years.

Just look at the performance of recent tech IPOs like Snowflake (SNOW), which not only revised its IPO price upwards multiple times but also went on a tear once it began trading, as well as Unity (U) and Asana (ASAN), which were recently successful IPOs.

The crypto market is also on another wild breakout, with Bitcoin – the world’s most valuable virtual currency – recently hitting all-time high of $64,945 from $29,000 at the start of 2021.

Whenever Bitcoin makes a big run, crypto-related stocks follow lockstep. But there are few pure plays on crypto right now.

You have MicroStrategy (MSTR), a software firm that keeps some of its corporate treasury in BTC, Silvergate (SI), which does banking with crypto firms, and CleanSpark (CLSK), which does some crypto mining, as the popular plays right now, all of which are crypto-adjacent rather than pure plays.

Tesla (TSLA) PayPal (PYPL) and Visa (V) are also incorporating and accepting digital currencies into business plans.

On top of that, Coinbase is the undisputed leader in the crypto space.

If institutional investors deem any company in the space investable, it will most likely be Coinbase with its status as the leading exchange based in the highly regulated US.

As an exchange, increases in crypto trading volume equal increases in revenue for Coinbase.

It’s a direct play on the crypto market’s growth, assuming that Coinbase will be a significant player in the future.

Is Coinbase How Institutions Will Buy Bitcoin?

It’s easy for everyday retail investors to buy Bitcoin.

We might buy a few hundred or thousand dollars worth and store it on a digital wallet on a USB stick or something. We might even leave it on an exchange.

It’s not that easy for institutions.

Should the exchange they stored their coins on gets hacked, or their wallet files get corrupted, they can face massive lawsuits from their investors.

Also, even if a fund is confident enough in their tech skills to store their coins securely, it might not even be legal under many investment fund structures to own unregulated securities like cryptocurrencies.

As such, most institutions stay far away from holding Bitcoin, even if they would like to own some in an ideal world.

As we know, institutional money dominates all financial markets, so these types of structural preclusions will put a severe hamper on the potential of any investment.

It’s like a stock that has everything going for it except that it trades on the OTC Pink Sheets.

There are some notable exceptions, like Paul Tudor Jones investing a “low-single-digit” percentage of his hedge fund into Bitcoin through Bitcoin Futures as an inflation hedge, and Chamath Palihapitiya of Social Capital, who made a case for a $1 million Bitcoin price over the next two decades.

However, for most institutional investors, Coinbase’s stock could be the only acceptable vehicle for Bitcoin exposure.

Being a successful Silicon Valley unicorn blessed by the top names in venture capital, Coinbase is presenting itself as the safe way to invest in the future of crypto without the headaches of buying crypto itself.

Crypto’s Biggest Potential Pitfalls

For most institutional investors, crypto represents too much risk.

The industry is mostly unregulated and is home to too many shady business practices.

One of crypto’s biggest pitfalls is custodianship. It’s far too easy for exchanges or wallets to get hacked or for bad actors to steal the coins. This isn’t practically possible in the stock market.

A rogue employee at an investment bank can’t just steal a handful of stock certificates and try to sell them on an exchange. It just doesn’t work that way.

I’m unfamiliar with the specifics of how Coinbase stores their tokens or secures wallets, and I’m sure most potential investors are.

Even if Coinbase does everything perfectly in this regard, this is still underlying anxiety of investors they can’t get around.

Recently, the famous Australian short-seller John Hempton blogged about how, in crypto, even if you do everything right, you still might lose all of your money.

When interviewing a potential analyst for his firm who suggested he short Ripple (XRP), Hempton explained that it like this:

“The problem is acute. I am most likely to win in this trade in the event of a collapse in cryptocurrencies generally – and that is the time the broker is most likely to default and wind up not paying me. I can imagine it being a really bad trade whatever the market outcome. If I am wrong and crypto just keeps going up I will lose money. If crypto collapses I can’t collect my winnings – indeed I just lose my collateral.”

Consider Mt. Gox, which was the largest crypto exchange at the start of 2014, only to lose 850,000 Bitcoins and file for bankruptcy by the end of February that year.

While that event was in the very early days of an unregulated crypto market, its still stained in the mind of many otherwise interested investors.

Problems with token issuers themselves are also possible, which is on display right now as the SEC is suing Ripple, the company behind XRP. The SEC is basically saying that XRP is a security and that Ripple failed to register them.

Coinbase has done its best to insulate itself from these pitfalls.

They do this by limiting the tokens they list on their exchange and performing deeper due diligence on those they do list.

According to CoinMarketCap, Coinbase Pro has just 47 listed tokens, compared to Binance’s 322 listed tokens.

Bottom Line

We now know a great deal about the Coinbase IPO at this time since its now a public company. The cryptocurrency exchange has impressive 43 million users in over 100 countries across the globe.

Earlier this year, its shares reportedly traded between $350 and $375 in a private market auction, implying a pre-IPO valuation of $90-$100 billion.

Last year alone, Coinbase had $1.3 billion in revenue and a profit of $322 million, thanks to the meteoric rise of bitcoin and other digital currencies. Its revenue and earnings largely depend on the fees from active crypto traders on its platform.

Coinbase recently said it expects first-quarter revenue to come in at around $1.8 billion, surpassing its revenue for all of 2020.

But even with the success of the Coinbase IPO, some policymakers continue to bash cryptocurrencies with U.S. Federal Reserve Chairman Jerome Powell describing them as “vehicles for speculation” that “no one is using for payments, for example, like the dollar.”