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Coinbase IPO Explodes, But Fails To Keep Its Momentum

Coinbase

After years of being shunned on Wall Street and by traditional financial markets, bitcoin and cryptocurrencies are finally enjoying their moment in the sun. Bitcoin price is currently trading within touching distance of its all-time high of $64,600 it set a couple of days ago, a far cry from its $3,000 price just a year ago. Bitcoin owes its mad rally to increasing acceptance by Wall Street and some of the world’s biggest and most recognizable institutions and companies such as Visa Inc. (NYSE:V), Square Inc. (NYSE:SQ), PayPal Holdings (NASDAQ:PYPL) and Tesla Inc.(NASDAQ:TSLA).

Which makes the looming public listing of the world’s biggest crypto exchange all the more compelling.

Giant cryptocurrency exchange, Coinbase Global Inc., is about to become a public company--a first for a cryptocurrency exchange.

Coinbase will list on the tech-heavy NASDAQ platform with an implied $68 billion valuation, a huge increase from its valuation only a few years ago.

But investors who can’t wait to make a killing on Coinbase’s listing will have to wait a little longer: On April 14, Coinbase will go public through a direct listing and not the usual Initial Public Listing (IPO) process, taking a leaf from the likes of Palantir (NYSE:PLTR), Spotify (NYSE:SPOT) and Slack (NYSE:WORK).

Direct listings simply mean that early investors and employees get a chance to convert their ownership stakes into stock. With direct listings, no underwriters are involved and no new shares are created with only existing, outstanding shares sold.

Record revenues

Valuing any start-up can be quite difficult, however, valuing a cryptocurrency exchange like Coinbase is far more challenging, least of all because it’s the first cryptocurrency exchange to go public.

Coinbase is currently valued at $100B, thanks to bitcoin’s meteoric rise since 2020. Coinbase takes a piece of every bitcoin transaction on its platform--0.46% in Q1 2021. Last year, the company’s revenues clocked in at $1.28 billion, good for a 139% Y/Y increase with 86% coming from transaction fees. Coinbase also recorded impressive bottomline growth, managing to flip to a $322 million profit in 2020 compared to a $30 million loss the previous year.

The current year is proving to be yet another banner year for the giant exchange: According to an SEC filing, Q1 2021 revenues totaled $1.8 billion--representing a massive 906% Y/Y growth. First quarter trading volume of $335 billion was actually 60% higher than the whole of 2020 while first quarter profit of ~$800 million was 250% bigger.

But that’s just one of several factors working in Coinbase’s favor. 

Hot on the heels of the Coinbase IPO is Bakkt, another crypto exchange which recently announced plans to go public via a SPAC merger.

Other unicorn listings that took place last year including Airbnb Inc. (NASDAQ:ABNB), the popular online home rental marketplace, and DoorDash Inc. (NYSE:DASH), an On-Demand logistics based startup, have been home-runs with ABNB stock up nearly 160% and DASH having gained 90% since their respective IPOs. 

Airbnb is currently valued at $106.6B, significantly higher than the valuation of older peers such as Booking Holdings (NASDAQ:BKNG) and Expedia Group (NASDAQ:EXPE) with market caps of $98.7B and 24.6B, respectively.

Being the first crypto exchange to go public, it’s hard to project how the market will value Coinbase.

That said, Coinbase will have to climb one major wall of worry: Overvaluation.

Steep valuation

To say that Coinbase is overvalued would be an understatement: Coinbase is grossly overvalued going by most traditional valuation metrics.

Indeed, Coinbase’s $100 billion valuation is higher than that by the New York Stock Exchange and the Nasdaq, America’s two largest stock exchanges.

According to MarketWatch, the company’s valuation “implies that its revenue will be 1.5 times the combined 2020 revenues of Nasdaq and NYSE parent, Intercontinental Exchange--two of the most established exchanges in the marketplace.

Coinbase currently boasts 6.1 million monthly transacting users, or MTUs with that metric expected to reach 7 million in the company’s most aggressive estimate. However, it’s going to be a tall order for the company to maintain its dominance and a torrid growth clip amidst growing competition from the likes of Gemini, Kraken, Bitstamp and Binance. Coinbase took in a transaction fee of 0.46% in the first quarter, a staggering 46x higher than the fee charged by NYSE and Nasdaq. Robinhood, the zero-fee stock trading app, already charges zero fees for bitcoin transactions. Who knows, it might only be a matter of time before these exchanges start engaging in a price war leading to a race to the bottom. In the light of these bearish concerns, New Constructs estimates that Coinbase’s fair value should be around $18.9 billion, or 81% below its expected market cap.

In its defense, Coinbase’s dominance might be just getting started. Bitcoin currently sports a $1.1 trillion market cap, which really is a miniscule part of the financial markets. Even a mere 5-10% portfolio allocation to bitcoin could mean massive growth for the leading cryptocurrency. It’s this high-growth scenario that has prompted Susquehanna, a research and trading firm, to assign Coinbase a fair value market cap of $96 billion to $108 billion. 

Controversy

That said, Coinbase’ listing is not without some controversies.

After all , Coinbase is not a stranger to heavy scrutiny by regulatory authorities.

Indeed, Coinbase has had to deal with regulator scrutiny over the years, including having to  submit information on 13,000 customers accounts to the IRS in 2018 who held more than $20,000 in cryptocurrencies between 2013 and 2015.

Further, Coinbase has had to deal with its fair share of disgruntled customers, with Mashable in 2018 uncovering more than 115 customer complaints over issues ranging from site outages and missing funds to lack of customer service.

Coinbase has frequently suffered website outages at critical times including during periods of heavy trading with the outages becoming a reputation hazard for the exchange. Further, Coinbase’s recent decision to halt trading in XRP on Jan. 19 due to the latter’s spat with the SEC has rubbed dozens of customers the wrong which would lead to drawn out court cases.

Given its checkered track record, not least because it’s a big and highly prominent cryptocurrency company, Coinbase might find itself encumbered with regulatory red tape that could lead to many months elapsing before the SEC finally gives the nod for the much-awaited listing.

But crypto bulls have been waiting for this moment for years, and waiting for several more months or maybe even a year cannot hurt too much. In fact, some crypto insiders have welcomed the imminent regulation, seeing it as another step in the crypto legitimization drive which is likely to attract more institutional capital to the industry.

As Flori Marquez, founder of crypto lender BlockFi, has aptly put it:

There’s been an increased focus on regulators, in terms of looking at this asset class. To know that you have a crypto company in front of the SEC, having active conversations in terms of thinking, How do we make it easier for U.S. consumers to invest in this asset class, is just huge news for the space as a whole... I think it bodes extremely well for future development within bitcoin and what companies can do in the space going forward.”

But overall, there’s little reason why Coinbase is not poised for another home run.

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