On Thursday 17 December, digital currency exchange Coinbase Inc announced on its blog that it had ‘confidently submitted a draft registration statement on Form S-1 with the Securities and Exchange Commission (the “SEC”). It’s probably no coincidence that the announcement came as the best-known crypto currency, Bitcoin, posted higher prices than ever.
After much speculation earlier this year that Coinbase is preparing to go public, the filing has fired the starting gun on a potential IPO. Quoting an anonymous source, Reuters reported that Goldman Sachs Group Inc. has been hired to prepare for the company’s stock market listing of San Francisco.
Because the registration is under review and is confidential, investors do not yet know when the IPO might take place, what shape it will take or what valuation Coinbase is aiming for. If it goes ahead, the IPO would make Coinbase the first significant crypto exchange in the US to be listed on the stock market and would represent a seismic shift in the perception of the legitimacy of crypto currency.
As Barry Silbert, founder of the Digital Currency Group, tweeted: ‘Thanks to the Coinbase IPO, the price of acquiring a bunch of crypto companies is set to go higher’.
Founded in 2012, Coinbase is a giant of the crypto sector with more than 35 million people in over 100 countries using the platform to buy, sell, store, use and earn crypto currency. In July the company published its Crypto H1 2020 institutional review in which it stated that it was operating ‘the largest regulated exchange in the world’. Some estimate it has gained 5M users in the past year alone. Offering more than 30 crypto currencies, the company holds more than $ 25B in assets on its platform and its total traded volume exceeds $ 320B.
The last time Coinbase made a funding round, in 2018, the value of the company was $ 8B. Given the recent rallies in Bitcoin, that valuation seems to have increased sharply since then. Certainly many big names have faith in the company and are ready to support it. Coinbase has attracted more than $ 500M of investment from financial institutions like BBVA and the New York Stock Exchange as well as venture capital firms like IVP, Tiger Global and Greylock Partners.
Possible $ 28 billion valuation?
Working from publicly available information, research firm Messari estimated that Coinbase’s potential IPO valuation was $ 28B. More significant to the broader crypto sector is that, whatever Coinbase’s true valuation is, it will serve as a baseline for future crypto valuations.
Although it has diversified into acquiring or investing in other crypto companies, Coinbase generates much of its revenue by charging commission fees on trades. Bitcoin’s surge valuations will boost that revenue although, interestingly, Brian Armstrong, CEO and Co-founder of Coinbase, recently blogged that ‘this is not only a time of high volumes, but also price volatility’ and not is ‘investing in crypto without risk’. Of course, while high asset valuations mean larger commissions, Coinbase will generate revenue on all trades, regardless of the price of Bitcoin, Ethereum or Litecoin.
Take advantage of crypto adoption
Crypto volatility can be attractive to retail day traders but it is also one of the reasons why institutional investors were at one time wary of the sector. Those attitudes are changing fast and Coinbase is capitalizing on the increasing adoption of crypto. Its July review states:
Today, many more and more conservative institutional investors are allocating for the first time, using Coinbase to build direct positions and support crypto fund managers as part of their alternative strategy. We saw a marked decline in the growth of our institutional business in H1 and continued to add leading university endowments, traditional multi-strategy hedge funds, VCs, and large family offices to our list of clients who purchase digital assets directly. ‘
To put that growth in figures, Brett Tejpaul revealed the company had Coinbase $ 6B in institutional assets in April 2020. By November, that figure had grown to $ 20B.
Many questions remain about Coinbase’s IPO strategy. If the SEC greenlight illuminates the Coinbase proposal, and is not granted, it will be interesting to see what form it takes. Direct listing was referred to as an alternative to a traditional IPO. There is also speculation that the company could follow the path of the special purpose acquisition company.
More traditional investors may want to see more financial information from Coinbase before making any decisions. Business Insider notes that Coinbase has ‘never disclosed any profit or revenue figures’. The same investors may be reassured that the exchange is banking with JP Morgan and being audited by Deloitte.
Time it right
The time frame for the potential IPO will be interesting. Right now, Bitcoin’s impressive surge is casting a rosy tide over the entire crypto sector. Brushing the 2017/18 boom and bust, the crypto currency is up more than 200% in the last twelve months and is currently trading at around $ 23,000. There are many causes of this new rebound in its popularity.
Central banks that are printing money to compensate for Covid 19 financial damage have led many investors to look for alternatives to fiat currency. Big global currencies are depreciated by their own governments and crypto currency has long been regarded as a way to move value beyond the reach of state policy.
The flip side of this is that the unregulated nature of crypto currency has made governments very icy towards them and the institutions that deal in them. In the past, there was an idea that the sector was in some way corrupt. Donald Trump famously weighed in on the subject and insisted that crypto currency is ‘thin air’ and that ‘unregulated crypto assets can facilitate illegal behavior, including drug trade and other illegal activity’. The policies of the President-Elect may be more innovative.
Certainly many disagreed with President Trump. Over the past few years, the perception that crypto money is of most use to money launderers and dark web users has changed significantly. There is a growing feeling that crypto currency is becoming more respectful in the eyes of previously disregarded financial institutions and dubious regulators.
When PayPal’s household name and its 346 million users announced their entry into the crypto currency market, they joined other established payment companies like Square and Revolut. Crypto currency is becoming mainstream. These developments have given rise to some ambitious prospects for Bitcoin and have come from highly respected voices in the investment world. In November, a report uncovered by a senior analyst at Citibank calculated that Bitcoin could potentially trade at $ 318,000 by December 2021. More recently, Guggenheim Investments recently predicted that Bitcoin could rise to $ 400,000. A recurring phrase is that crypto has the potential to be ‘digital gold’.
If Coinbase launched its IPO in such an encouraging climate, then investors could be looking at spectacular returns. Alternatively, the volatility of the crypto currency could come into play in a slightly less profitable way. It might be worth remembering that Bitcoin was trading at around $ 7000 at the start of the year and fell to less than $ 5000 as the pandemic hit. It has only risen in the past three months from around $ 10,000 to its current $ 20,000 + levels. That’s largely the definition of volatile. If Bitcoin’s price retreated sharply from its current highs then any potential public listing by Coinbase would have a knock-on effect.
How big of an impact? Who knows? Whether crypto currency continues to rise or be corrected, Coinbase’s potential public listing could be a popular way for investors to gain exposure to the crypto sector without directly holding crypto currency. Possibly the first major exchange to list on the US stock market, Coinbase appears to be a coalition for the sector.