“It [Coinbase IPO] is a historic moment not just for Coinbase but for the whole crypto-industry overall”
— Katie Haun
Anyone remotely interested in the cryptocurrency world has definitely come across the name Coinbase. The futuristic company founded in 2012 by Brian Amstrong is one of the largest crypto-exchanges in the world with an estimated 11.3% market share and a total of $223 billion in holdings. On April 14, 2021, Coinbase got listed on the Nasdaq stock exchange and currently trades at $224.5 per share with a market capitalization of close to $48.5 billion.
The Origin of Coinbase
Founder Brian Armstrong had already come across the Bitcoin white paper. Later while working as a software engineer at Airbnb, he witnessed the difficulties in the transfer of payments through traditional sources to South Africa and other countries. Thus, he began writing code to store crypto coins and later enrolled in the Y combinator start-up incubator program with $150,000 in funding. Then co-founder Fred Ersham joined Coinbase.
Through a series of acquisitions, Coinbase initially partnered with payment-processing companies like Stripe to process Bitcoin-related payments through Blockchain ledgers. Later the company also started the Coinbase exchange and in 2015, it received $75 million in funding from renowned institutions like NYSE. Through 2014, the company has been on an upward trend with bringing millions of customers to use its app to trade and store currencies. Additionally, it launched products like Coinbase card, a card that allows VISA users to transact in cryptocurrencies along with a USD coin pegged to the US dollar.
How Coinbase Makes Money
Like a traditional exchange broker, Coinbase makes most of its revenue — approximately 86% — through charging transaction fees when trading crypto. Additionally, it also uses a spread where it buys the currencies at a lower price and sells it at a higher price to customers, similar to a traditional broker.
Coinbase’s USP is that it invested heavily in legal documentation and regulatory framework thus being versed with the government authorities and ensuring there is no compliance or crypto-currency issue. Another advantage is that it was very strong towards cyber-security thus enabling trust in its customers, which is imperative given the fact that this asset class is new and unconventional.
The Future of the Company
Being referred to as the Microsoft of the 21st Century, Coinbase is taking up the role of a potential disruptor in the fintech and payments sector. With a simple mission to democratize finance and “create economic freedom for all” where individuals are not bogged down by delays, high fees, barriers, and inequality.
Currently, Coinbase has most of its revenue from trading fees charged when buying or selling crypto-currencies. However, the company is coming up with innovative products that will enable it to provide an “infrastructure to the crypto-economy”. However as these fees will slowly fade away, the company is looking at other sources. These include providing marketplaces for blockchain products such as NFTs and Peer to Peer lending i.e. lending amounts as small as $25 to small investors also known as De-Fi (Democratic Finance Applications). Additionally, it could help cross-border payments and the company claims to “democratize modern financial markets” i.e. quick capital flow without significant red tape.
Moreover, the noise around the IPO brings in huge publicity for Coinbase, which helps receive benefits of the network effect many tech giants like Netflix take advantage of. The spotlight encourages more investors to use the platform hence more companies want to be listed on it, which attracts more investors as more options are available hence forming a virtuous cycle. For Coinbase, it implies higher revenues and more negotiating power with all the parties thus gaining a competitive advantage. Already, we observe that Coinbase is worth more than the NASDAQ exchange and ICE (the parent company of NYSE). Furthermore, it is more profitable per trade than both of them but this may be short-lived due to the increasing competition.
Risks and Valuation
Coinbase is linked to the value of Bitcoin. As the value of Bitcoin surged in the last quarter, Coinbase recorded one of the highest revenues of 1.14 billion dollars with a profit of approx $422 million. However, during the same quarter in 2019, the Bitcoin price fell and thus retail investors withdrew from the platform and its revenues fell quite a bit. In recent events, Bitcoin and Ethereum prices have been falling drastically due to a cryptocurrency crackdown in China as well as Elon Musk making BTC payments invalid for the purchase of Tesla Cars. Hence even the stock price of Coinbase took a hit of 26% in one month, going from $304 to $224.
Another key risk to Coinbase is the increase in competition as we witnessed a spurt of crypto exchanges like Binance coming up, directly threatening the business model of the company. Furthermore, stock exchanges are themselves considering listing cryptocurrencies, making it more convenient for large institutional investors to trade but eliminating Coinbase in the process. It also puts pressure on Coinbase to lower its trading fees i.e. its main source of revenue. Other risks include loss of insurance, cyber issues, and operations in a competitive industry; for example other wallets like Binance.
Regardless, the Company first started trading at $250/share and $54 billion in market capitalization. Its IPO is one of the most historic moments for the emerging cryptocurrency and blockchain market. This could be an alternative exchange and an alternative asset class as its applications slowly merge to propel the modern economy. However, as discussed, it is not without risks relating to cyber and insurance. Therefore to command a valuation of $100 billion is outrageous according to some institutional investors. And with it being linked to Bitcoin, investors are worried that the stock will be as volatile as the cryptocurrency itself. But in the long run, its products and services do look promising in conjunction with applications such as P2P lending.
The Impact on the Cryptocurrency Market
The SEC is particular on the type of companies being listed on the stock exchange. Every firm should provide strong documentation, and undergo thorough audits. This process proves the legitimacy of the business, avoids fraud, ensures that the business complies with laws and regulations, and builds trust in the investors. The IPO implies that SEC and other governing bodies in the state recognize and trust Coinbase as a crypto exchange and deem crypto-currencies legal. As a result, more investors will allocate a portion of their portfolio to this emerging asset class. The significance of this move has already built confidence with cryptocurrencies undergoing one of the best bull runs and Bitcoin’s price moving from $44000 to $62000 since the IPO.