By now, it’s no secret that Coinbase Exchange has filed with the SEC to go public. Based on the reports Coinbase (CB) will be using a direct listing to offer its shares to the public some time this year. The move comes at a great time as crypto adoption is at an all-time high. In fact, the crypto market cap has already surpassed that of Google’s parent company Alphabet.
In addition, institutional investors have also taken a keen interest in Bitcoin. Tesla, MicroStrategy, and Square among others, have all added Bitcoin (BTC) to their coffers. Meanwhile, Canada recently allowed the first-ever regulated Bitcoin ETF in North America.
A growth in crypto adoption has meant a growth for Coinbase as the exchange now has over 43 million users with over $456 million in transactions to date.
Notably, CB chose to list on Nasdaq instead of NYSE. Since CB will be going public using the direct listing approach, Nasdaq started offering Coinbase shares on a Private Market on the 25th of January.
Nasdaq Price Discovery
The Nasdaq private market offering will help CB with price discovery. The shares were issued at $200 each with 254 million shares outstanding. However, the shares have already gone up to $300 each.
In addition, CB to US dollar tokenized shares are currently trading for $400 on crypto exchanges. Thus, Nasdaq expects Coinbase’s valuation to go up from $77 billion now to over $100 billion post going public.
Also, price discovery is very critical for CB. This is because a direct listing requires companies to prove there is a demand for their shares. A direct listing also entails existing investors selling their shares publicly, instead of making an initial public offering (IPO).
As such, Nasdaq launched the private market for employees and initial investors to trade their shares. Also, companies like Spotify and Slack used a direct listing to go public.
Brian Armstrong and Fred Ersham founded Coinbase in 2012. Armstrong is a former Airbnb engineer while Ehrsam is a former Goldman Sachs trader. Since launching Coinbase has grown to be the largest US-based crypto exchange.
Coinbase started with the aim to make trading easy, accessible, and secure for anyone from anywhere. As such, the platform is user-friendly and geared towards novice traders. Coinbase also only requires as little as $2 to start trading. For this reason, the exchange ranks high in terms of traffic, liquidity, and trading volume.
As early as 2017, Coinbase was gaining users at a rate of 100,000 users per day. The exchange has however stopped providing such real-time stats.
CB Exchange offers users access to $90 billion in assets. Users can use either Coinbase Pro formerly GDAX or the Coinbase brokerage to trade. However, CB Pro is geared towards pro-traders and institutional investors.
As such, CB Pro also serves as the exchange’s order-book and thus is cheaper to use. On the other hand, the brokerage is retail investor-friendly and serves as an onramp into crypto trading.
CB brokerage buys cryptos in-house from CB Pro allowing for a secure system that is not vulnerable to hacking. The in-house system also adds to Coinbase’s liquidity.
Apart from trading, CB also offers wallet hosting and custodial services. In fact, virtual assets like cryptos are rather tricky to keep secure. Investors not only need to remember their user ID and access key codes, but also a wallet that is hard to hack.
For this reason, CB offers its users wallet hosting services that include hot and cold wallets. Cold storage wallets, however, are more pricey as they provide higher security by being offline. Also, CB offers custodial services to its high-end clients that include hedge funds, institutional investors, and rumoured Fortune 500 companies.
“We provide hedge funds, money managers, and corporations a one-stop-shop for accessing crypto markets through advanced trading and custody technology,” stated CB in its SEC filing.
Based on a recent Messari report, CB holds about 11% of the crypto market cap in its custody. CB offers custody to about 90 cryptos with BTC and ETH, making up 83% of the cryptos it holds.
Cryptocurrency is highly volatile by nature and its decentralized nature makes it hard to regulate. As such, the industry has suffered from scandals that range from fake ICOs, exchange hackings, and other fraudulent activities. For this reason, it is important to note that CB is very compliant with regards to applicable laws and regulations in the areas it operates.
For instance, CB has registered as a Money Service Business with FinCEN. In addition, complies with various financial services and consumer protection laws that include:
- The Bank Secrecy Act requires the exchange to verify user IDs and maintain transaction records for up to 5 years.
- The USA Patriot Act requires a compliance officer who ensures that CB complies with all applicable laws and controls.
- States’ money transmission laws and regulations.
However, Coinbase has noted that it is challenging to comply with the regulation in an ever-shifting environment. Indeed, compliance is tough, especially since there is no one body to enforce it in the US. However, CB has a high level of compliance, which is a key reason why the exchange is trusted by its users.
With a robust framework and wide user base, it is perhaps only natural that CB is expanding its reach. Some of the benefits Coinbase stands to gain by going public include:
- It will help define how much the exchange is really worth. There have been some conservative guesses that Coinbase’s valuation already exceeds $100,000. However, Nasdaq places CB’s valuation at about $77 million based on trading on its Private Market. Thus, going public will clarify the exchange’s true value.
- CB will gain access to a wider financing base at a lower cost compared to using debt.
- The exchange investors will benefit from greater share liquidity as they will have access to a public market.
- Coinbase shares will become more versatile for example, they can be used as incentives or employee rewards.
- A public listing enhances corporate image, thus, CB will gain credibility by going public.
On the other hand, going public also comes with some cons.
- It’s a costly process. For instance, the Underwriter’s commission alone can range from 4% to 7% of the IPO proceeds. Other costs include legal, accounting, printing, and filing fees. There are also ongoing costs related to listing compliance.
- Listed companies are subject to added disclosure requirements. CB has already come under fire for partnering with the US Secret Service. The contract requires that CB share its analytical software with the security agency. The software enables the agency to track transactions on the blockchain. Users called out the exchange for the partnership as it violates the ‘private’ nature of crypto transactions. A public listing is bound to require more disclosures which might further upset CB users.
- Going public also reduces the owners’ equity and voting rights which can leave it at risk of a hostile takeover. The reduction in stake also limits freedom in decision-making as decisions may require SEC or shareholders’ approval.
- Listed companies have a higher likelihood of facing litigation.
Coinbase Prospectus and Market Sentiment
Coinbase’s S-1 filing, prospectus, and financials were recently made public by the SEC ahead of Coinbase’s public listing. Key takeaways from CB’s prospectus and financials include:
CB made a net profit of $322.3 million for the first time in 2020. The profit was from a revenue of $1.3 billion. CB doubled its revenue in 2020 from only $534 million and a $30 million loss in 2019.
CB revealed that institutional investors were 62% of its total trading volume in 2020. This figure shows steady growth from 28% in 2018 and 57% in 2019.In fact, CB users consist of over 7000 institutions and 115 000 ecosystem partners in over 100 countries.
The exchange allegedly has several Fortune 500 clients including Tesla. CB also helped Tesla make its 1.5 billion purchase earlier this year.
CB has grown steadily from 13,000 users in 2012 to over 43 million users by the end of 2020. Also, CB growth has been in tangent with crypto adoption with a life-time trading volume of $455 billion.
However, CB trading volumes are from about 2.8 million active monthly users. Also, CB has $90 billion in assets on its site for trading and custody. 45 cryptos are currently listed on CB.
Focused Growth Plan
CB plans to focus on growing its non-trading revenue streams. This growth will help diversify CB services thus reducing volatility from crypto exposure. These streams include subscriptions, products, and other services.
As of December 31, subscriptions generated $44.9 billion in revenue for CB, which is about 3.5% of its total revenue. Subscription revenue was up 126% while other revenue streams were up 168% giving $136.3 million in 2020.
“We are committed to growing more stable revenue from subscription products and services, and expect they will contribute a larger portion of our total revenue over time,” the exchange said.
Also, CB offers products like Store, Stake, Save, Borrow and Lend, Distribute, Build and Pay.
Focus on Cybersecurity
CB reported that it invests heavily in regulatory compliance and cybersecurity. “We have a trusted platform owing to our heritage of security and culture of regulatory compliance,” Coinbase said. This includes CB ownership in a proprietary crypto compliance system.
CB executives and directors will retain control with 54% voting power. CB co-founder and CEO, Brian Armstrong will retain majority ownership and voting power. Armstrong has 21.7% control from 10.9% of Class A shares and 21.8% of Class B shares.
Investor Marc Andreessen also owns 24.6% of Class A shares and 14.2% of Class B shares with 14.3% voting power.
However, early CB investors Union Square Ventures (USV) and Ribbit Capital sold part of their stake. USV sold about 28% while Ribbit sold about 5%. According to CB’s SEC filing, USV owns 7.3% of CB’s outstanding shares.
The shares consist of about 13.9 million out of 191.3 million shares. The two have drawn attention not only for selling the shares but also for selling at a below-market price.
USV sold 3.35 million shares at $23 per share late in 2019, and 2 million shares at $28.33 mid-2020. In contrast, CB co-founders Armstrong and Ehrsam sold shares for $32.57 in 2018. However, it seems that the two investors sold their shares to other CB Series A investors like a16z and Paradigm.
Of note, USV’s Fred Wilson revealed in a blog that it’s okay to sell a stake in a profitable asset. Wilson said,
If you are sitting on 20x, 50x, 100x your money on a crypto investment, it would not be a mistake to sell 10%, 20%, or even 30% of your position. Selling 25% of your position on an investment that is up 50x is booking a 12.5x on the entire investment while allowing you to keep 75% of it going. I know that many crypto holders think that selling anything is a mistake. And it might be. Or it might not be. You just don’t know.
Possible Impact of Coinbase Going Public
Coinbase will be the first crypto to go public, but how will the move likely impact the crypto-verse?
At the moment crypto adoption is at an all-time high. However, there are many who are still skeptical about the value of crypto as an asset and investment. Coinbase listing on a public exchange is like a seal of approval from the SEC. Thus the move might help boost the image of crypto and pave way for its wider adoption.
Crypto adoption in the US has been hindered by a lack of clear regulation. In addition, the SEC has taken legal action against several cryptos including ongoing litigation against Ripple. However, Ripple’s XRP has managed to hold its ground despite the legal battle.
The crypto industry also hopes that the Biden admin will be friendlier than to the Trump one. Thus, Coinbase listing might help sway sentiment towards crypto.
Also, crypto fans view Coinbase as a kind of crypto kingmaker. Once CB list a crypt the asset’s price goes up. This is due to CB’s excellent security and high regulatory compliance. Both its security and compliance are bound to go up post-Coinbase going public.
CB is also popular due to its ease of use. Thus when a crypto gets the Coinbase ‘seal of approval’ that crypto gains exposure to millions of traders. Added exposure in turn drives up the crypto’s price.
For instance, user @itsALLrisky listed a Coinbase listing as the top factor that could help Dogecoin to the moon.
#Dogecoin has lots of potential waiting to propel it to the moon
– Future Coinbase listing
– Robinhood allowing withdrawals
– New celebrity endorsements
– Mainstream crypto adoption$DOGE will continue to be a fan-favorite crypto with practical application as digital cash
— 💸💸💸 (@itsALLrisky) March 2, 2021
Finally, Coinbase recently got a buy rating from Wall Street firm D.A Davidson. Analyst Gil Luria called the pending direct listing the crypto Amazon moment. Luria stated,
We see the upcoming Coinbase direct listing as the ‘Amazon moment’ for crypto- the milestone point in time when the world of crypto and the traditional financial system become truly intertwined and crypto moves from a large curiosity to becoming the future path for much of the financial system.”
However, a Bloomberg columnist called the Coinbase IPO ‘risky business’ and issued a warning against it.
Only time will reveal whether the Coinbase IPO will surge or sink. However, no one can deny that this is history in the making.