When cryptocurrency exchange Coinbase lists its shares on the Nasdaq stock exchange on April 14, it will mark a milestone — becoming the first “pure” cryptocurrency firm to go public directly rather than through a merger.
Although it’s the leading U.S. exchange, Coinbase is not the industry’s largest. That’s Binance, which has almost 20 times Coinbase’s $2 billion 24-hour volume and nearly seven times as many weekly visits — but it is among the most highly respected.
Long known for its particularly vigorous pursuit of regulatory compliance and licensing, Coinbase Pro has earned an 8.5, putting it second only to the world’s largest exchange, Binance — which does not accept U.S. customers — among the exchanges ranked “good” in the CoinMarketCap Spot Exchange Score. That ranks exchanges by the trustworthiness and size of their reported trading volume, as well as traffic and liquidity. Among good-ranked exchanges, Coinbase is No. 4 by trading volume.
Coinbase CEO Brian Armstrong formally announced the company’s long-expected plan to go public on Jan. 28, filing an S-1 form with the U.S. Securities and exchange Commission on Feb. 25.
Expectations Are High
Many estimates have put Coinbase’s post-listing market valuation at as much as $100 billion — although there are skeptics — and expectations are high, with Coinbase having just reported net income of $730 million to $800 million for the first quarter of 2021.
“Coinbase’s direct listing on Nasdaq is a major step forward in bringing legitimacy and mainstream awareness to the digital asset sector as a whole,” said Brad Kam, co-founder of Unstoppable Domains, a Tim Draper-backed company that turns complex wallet addresses into easy-to-use .crypto domain names. “The success of Coinbase in growing to 56 million users and $1.8 billion in total revenue shows that consumer adoption [of cryptocurrency] is real.”
While Coinbase — which will use the ticker symbol COIN — may be the first crypto company to go public, it won’t be the last. Another major U.S. cryptocurrency exchange known for regulatory compliance, Kraken, has said it will likely follow Coinbase with a direct listing in 2022. Like Coinbase, Kraken has seen an extraordinary first quarter, with revenue through the end of February surpassing all of 2020, CEO Jesse Powell told CNBC on April 8.
Yoni Assia, the CEO of Israel-based investment platform eToro — which lists stocks and cryptocurrencies — said last month that his firm will also go public on Nasdaq by merging with a Special Purpose Acquisition Corporation, or SPAC, called FinTech V. The firm could have a market capitalization of $10.4 billion. Another stock/crypto trading platform, Robinhood, also plans to list on Nasdaq in the near future.
But in the meantime, Coinbase is leading the way. Here’s are nine things we know about the company’s stock market debut, and what will impact its outcome.
1. Coinbase Had an Extraordinary Q1
Coinbase’s timing is excellent, as its first quarter results this year were through the roof.
That $1.8 billion in Q1 is more than 50% of the $3.4 billion in total revenue that Coinbase generated from its start in 2012 through the end of 2020.
Beyond the revenue and net income numbers, Coinbase reported 6.1 million active monthly users in its Q1 earnings report, more than twice as many as the 2020 total of 2.8 million it reported in its S-1 statement. And that was nearly three times more than the 1 million active monthly users it had in 2019.
Verified users had climbed to 56 million, up from the 38 million it reported towards the end of Q3 2020.
2. Institutions Are Rushing In
One of the biggest stories of the last six months has been the embrace of Bitcoin by institutional investors led by MicroStrategy, which led the way by publicly announcing its decision to invest $2.2 billion from inflation-prone dollars to BTC — currently worth more than $5.5 billion. Other companies from Tesla to insurer MassMutual followed suit, pouring hundreds of millions, if not billions, of dollars into Bitcoin. And old-line banks ranging from Morgan Stanley to Goldman Sachs have begun offering Bitcoin and other crypto assets to institutions and accredited — wealthy — investors.
Coinbase has been a major beneficiary of this new wave of investors, ending Q1 with $223 billion in assets on its platform, up from $90 billion at the end of the year. More than one half of that — $122 billion — is now from institutional investors, the company revealed. That’s up about 270% from $45 billion at the end of 2020, Coinbase CFO Alesia Hass revealed in the Q1 2021 earnings call.
3. It’s Not an IPO
Coinbase Global — the company’s formal name — will go public with a direct listing of its Class A common stock, rather than the traditional initial public offering of newly created shares. This will allow it to bypass many of the investment bankers and financial underwriters who traditionally oversee IPOs, charging substantial fees in exchange for ensuring that all shares sell.
A direct listing also gives retail investors a fair shot at buying Coinbase stock at the initial offering price. In IPOs, and particularly in high-profile tech IPOs in which the share price is expected to shoot up, the small investor is often locked out by investment bankers and underwriters who give big institutional clients first dibs on buying chunks of the new stock.
That’s a bigger deal than usual in the cryptocurrency community, which sees bypassing the financial industry’s powerful middlemen as a key goal.
“Our mission is to increase economic freedom in the world,” Armstrong said during Coinbase Global’s Q1 earnings call on April 6. “By democratizing financial services in the way the internet democratized access to information, crypto will increase economic freedom in the world.”
4. Coinbase’s Valuation is Controversial
That widely touted $100 million estimate, based on recent private sales of Coinbase stock, has become a source of pride for the crypto industry.
“We look at the Coinbase listing as an additional validation of the space, and a major PR opportunity for the entire industry to shine as the future of finance,” Alex Mashinsky, co-founder and CEO of cryptocurrency lending platform Celsius, told CoinMarketCap Alexandria via email. “Coinbase has more users and more revenues than many of the largest Wall Street players and is more profitable than any major exchange, this validation puts most skeptics at a crossroads having to re-evaluate their denial and frustration with the disruption coming at them from all sides.”
At the same time, that valuation has led to more than a few raised eyebrows.
The Nasdaq stock exchange is only valued at $25 billion, while NYSE owner Intercontinental Exchange (ICE) is worth $66 billion. Coinbase reported trading volumes of $335 billion in its Q1 2021 results announcement — but by comparison, Nasdaq and ICE each have a trading volume of about $25 trillion.
This is a strong indication that Coinbase’s valuation is “ridiculously high,” according to a report by independent equity research firm New Constructs.
Predicting a coming price war over trading fees like that one that forced major brokerages including Charles Schwab, ETrade and TD Ameritrade to slice trading fees to zero in late 2019, the report noted that Coinbase’s financial results were based on transaction fees of about 0.46%, while Nasdaq and ICE only make 0.01%.
New Constructs suggested $18.9 billion is a much more reasonable value for Coinbase. Of course, as anyone who lived through the 1999–2000 dotcom boom knows, reasonable often has little to do with the prices people will pay in the frenzy of a public listing.
5. The Exchange is Embracing Regulation
Along with the early mover advantage, nine-year-old Coinbase has long pursued a policy of aggressively courting U.S., European, and other regulators and licensing agencies in more than 30 countries — most notably by carefully verifying customers’ identities in compliance with anti-money-laundering regulations — and working with law enforcement.
In its S-1 prospectus, one of the first things Coinbase lists as setting it apart from competitors is its “culture of regulatory compliance.”
Investing in compliance is what has made it possible for Coinbase to become the first crypto company to go public with a listing rather than merging with a public company, said Monty Metzger, co-founder and CEO of Liechtenstein Cryptoassets Exchange (LCX) — a new compliance-focused crypto asset and tokenization exchange — in a phone interview with CoinMarketCap Alexandria.
“A lot of the crypto companies out there could never go public because they did not invest in that area,” he said. “Regulators would stop them.”
However, he predicted: “Regulators and governments will embrace companies like Coinbase who take that path — bringing the innovative technology to the market, but in a regulated, compliant way. I think for the crypto industry, this will be the start of a turning point — it will evolve out of the Wild West into something more established.”
6. There Are Risk Factors
As is usually the case in S-1 filings, Coinbase’s summary of the risk factors investors should be aware of makes for interesting and alarming reading — in no small part because many companies throw in everything short of an alien invasion to keep their lawyers happy. Coinbase’s runs to 59 pages.
With Bitcoin having gone from around $4,100 to more than $60,000 in just over a year — and doubling since the beginning of this year — it’s worth noting that Coinbase’s summary of risk factors begins with:
“Our net revenue is substantially dependent on the prices of crypto assets and volume of transactions conducted on our platform” and “[o]ur operating results have and will significantly fluctuate due to the highly volatile nature of crypto.”
Other noteworthy factors include:
- The “highly-evolving regulatory landscape”
- A highly competitive industry with many unregulated competitors
- The booming growth in decentralized exchanges, or DEXs
- The potential for volatile crypto prices to lead to volatile stock prices
- The uncertainty over whether cryptocurrencies are securities
- The potential of losing the “relatively small number of customers” who accounts for a “significant amount” of Coinbase’s trade volume
- The possibility of being hacked and robbed of customer crypto assets
- The loss of private keys needed to access stored crypto assets (QuadrigaCX anyone?)
Then there’s this doozy: “Any significant disruption in our products and services, in our information technology systems … could result in a loss of customers or funds and adversely impact our brand and reputation and business, operating results, and financial condition.”
Considering Coinbase’s recent history — and growing reputation — of going down during periods of intense volatility, this one should either be highlighted in red and underlined. Or ignored, as those outages don’t seem to have hurt its revenues.
7. Not Everything is Decentralized
Armstrong’s passion for “democratizing financial services” doesn’t apply to his own company, Coinbase also noted in its S-1 risk factor section.
“The dual class structure of our common stock” — the Class A shares to be sold publicly have one vote while Class B preferred shares have 20 — “will have the effect of concentrating voting control with those stockholders, including our directors, executive officers, and their respective affiliates,” the prospectus said.
Nor can those Class B shares be sold — owners must first convert them into Class A shares.
8. Coinbase’s Listing Was Delayed
Coinbase intended to list its stock in March, but delayed after agreeing to pay the Commodity Futures Trading Commission $6.5 million to settle charges that two of its automated trading programs sometimes traded with each other, causing the exchange to exaggerate the volume and liquidity of cryptocurrencies traded on its platform. Noting that companies — including CoinMarketCap — report this information, the CFTC said the effect was to provide the market with “false, misleading, or inaccurate” information.
While the agency did not see the practice as deliberately misleading investors, it was an embarrassment for a company that markets itself as a strongly compliant cryptocurrency trading platform.
The CFTC also noted that during a six-week period in 2016, an individual employee intentionally placed wash trades. Coinbase was found to be “vicariously liable” for that employee’s misconduct.
9. The Company Has Had Controversies
In public companies, what the CEO says matters more, as it can directly and immediately affect the share price. So, it’s noteworthy that Armstrong proved himself to be singularly tone deaf at the height of the Black Lives Matter movement last September. In refusing to take a corporate position on BLM, Armstrong announced that the company would have an apolitical stance towards social issues. That led to substantial criticism from both inside and outside the company.
Armstrong doubled down on the policy to the point where he offered unhappy staffers a buyout package — leading to a roughly 60-person rush towards the door, according to reports.
And while it’s not possible to draw a direct line, it’s fair to speculate that the publicity from this stance either led to or facilitated a pair of stories in The New York Times that cited ex-staffers claiming racial discrimination and disparities in pay between male and female staffers.