Coinbase, the biggest U.S. cryptocurrency exchange, started in 2012 with the radical idea that anyone, anywhere, should be able to easily and securely send and receive Bitcoin. Today, it offers a trusted and easy-to-use platform for accessing the broader crypto economy.
After seeing profits surge from just $32 million to over $730 million, Coinbase was estimated to have earned revenues of $1.8 billion in the first quarter of 2021, a ninefold increase from the same period a year earlier. Subsequently, on April 14, 2021, Coinbase went public with a direct listing on Nasdaq. Recently, we have seen a handful of crypto companies become publicly trading with many more indicating a desire to do so in the near future; however, Coinbase is the first major player in the cryptocurrency space to go public in the U.S., and it did so with a level of fanfare befitting its fame and importance in the space.
Despite having a $250 reference stock price assigned by Nasdaq, Coinbase stock (“COIN”) opened significantly higher at $381 and, within the first two hours of trading, reached a high of $429.54 and a low of $310 before ultimately closing at just over $328. Although, in a manner all too familiar to crypto investors, Coinbase continued to show volatility over the following days, the public offering of COIN constitutes a significant milestone for the cryptocurrency community, with a large and established crypto centered company giving traditional investors an indirect opportunity to invest in cryptocurrency and increasing access to future capital investments in the space.
While COIN has yet to return to its opening price and many investors that purchased COIN in the early hours of trading may be feeling disappointed, it is still far too early to know how the market will adapt to this fairly novel investment opportunity. Specifically, while seasoned investors expect volatility following a direct public offering, it is less certain whether or not COIN will be able to escape from the wild price swings of the cryptocurrency upon which its business relies.
Notably, as a major cryptocurrency exchange, Coinbase derives the vast majority of its revenue from transaction fees (86% of its 2020 revenues), which are determined by the value of the cryptocurrency involved in the that transaction; accordingly, for the foreseeable future, the fortunes of Coinbase will likely move in lock-step with the prices of the major cryptocurrencies. Essentially, as crypto prices go up, the fees for using Coinbase to will also rise, allowing Coinbase to increase its revenue without incurring additional expenses. On the other side of the coin, a prolonged dip in crypto prices would likely reduce the value of COIN stock as Coinbase would be seeing less revenue while incurring the same expenses.
Riding the recent wave of record high crypto prices, it was not too surprising that COIN was able to generate significant hype and trade at nearly twice its assigned reference price before the markets adjusted and the stock’s price moved closer to its Nasdaq valuation. While BTC’s recent nosedive seemingly correlated with COIN opening at its lowest price on Friday, we are reminded that correlation is not causation and only time will tell the extent to which COIN can establish independence from fluctuations in the price of BTC.
Regardless of the price of COIN and its potential reliance on the price BTC, we are excited to see how other crypto companies will react to Coinbase registering with the SEC and listing on the Nasdaq Stock Exchange. Namely, we largely anticipate that the Coinbase offering will serve as test case for public offerings of crypto based companies and provide a template for other companies to follow. Among other candidates, it is speculated that we may soon see a public offering from Kraken, Blockchain.com, Bakkt, eToro, BlockFI, and Gemini. However, the majority of these companies would likely go public through a direct listing or via merger with a SPAC, and we will be watching how the uncertain future of the SPAC market, the initial success of Coinbase’s listing, and the ability of Coinbase to maintain Wall Street’s interest will impact these companies’ decisions to go public.
At least for the time being, regardless of the method by which it goes public, crypto companies will likely remain beholden to the value of the cryptocurrency from which they generate fee revenue, and, as we have seen time and again, the value and market interest in cryptocurrency largely hinges on the actions of regulators. As such, the evolving regulatory landscape in which cryptocurrency exists, will not only determine the process that crypto companies must follow when raising capital and going public but may also play a major role in determining whether doing so would even be a viable option.
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