There are hundreds of IPOs every year, but only a small amount of them capture the public’s attention. 2021 has already seen the big players go public such as Bumble, Coupang, and ROBLOX. However, 2021 might be upgrading with one of the biggest IPOs in modern history: the direct listing of cryptocurrency company Coinbase.
Coinbase’s come-to-market moment is a monumental one for the cryptocurrency space. Institutional support for crypto has been rising, which is evident in the massing wall of Bitcoin ETF filings and interest from Fortune 500 companies. The cryptocurrency market has been the object of criticism by Wall Street for years, who have ascribed cryptos such as Bitcoin and Ethereum as “having no value.” But Coinbase’s valuation is very real. Shares of Coinbase on Nasdaq Private Market are trading at valuations varying from $90 to $100 billion. There’s a lot of things influencing that astronomical valuation, but here’s a few things you should know:
1. Coinbase knocked it out of the parks in Q1 earnings
Just days before their direct listing, Coinbase announced their first quarter 2021 earnings and reiterated their outlook for the year. The company announced they had 56 million verified users, over $223 billion in assets on the platform and revenues of nearly $2 billion. When you work all those numbers out, the company walked away with approximately $730 to $800 million in net income in just the first quarter of 2021.
Coinbase makes nearly all their money from transactions on their consumer and Coinbase Pro product. In each transaction, they levy a fee on the end-user: either a set amount or a percentage of the trade. 2021 has seen unprecedented retail interest in crypto, which is why Coinbase is making more money now. However, they observe that transaction numbers (their revenue-driver) are likely to drop off if the crypto bull run gets into some trouble in the months ahead.
If there’s one thing you should know though, it’s that Coinbase’s Q1 earnings are better than their entire FY 2020 earnings. Seriously.
2. After COVID, crypto is king
In light of the COVID stimulus packages throughout the past year, people are revisiting crypto’s potential as “a new money” — a potential alternative to FIAT currencies like the dollar. The government printed trillions of dollars to shore up the economy (and the stock market). And many are concerned about what that could mean. Inflation accelerated as the economy started to recover in March of this year. Whether that trend will stick will be known in the months ahead as the economy reopens, but some crypto maximalists aren’t waiting for a sign. Binance CEO Changpen Zhao told Bloomberg that he “just want[s] to keep crypto.”
While weakening currencies definitely are bullish for crypto, it’s very unlikely that the dollar will collapse like your weird libertarian uncle keeps suggesting. However, cryptocurrency has been appreciating since the stimulus packages were passed. Maybe that’s just a coincidence, but it’s hard to argue with the five-fold returns in Bitcoin and Ethereum. But don’t mistake those returns for the potential upside in the Coinbase IPO. After all, they are just an intermediary for accessing the market.
3. Coinbase’s IPO is a catalyst for the crypto market
Avid crypto traders might have noticed crypto prices moved upward aggressively in the week leading up to the Coinbase IPO. Bitcoin and Ethereum rose nearly 9%. Other DeFi tokens and altcoins tended in the double-digits. The reason why is simple: the Coinbase IPO will test equity traders’ appetite for crypto.
Since Coinbase’s IPO is a direct listing, the valuation is set by existing shareholders. This means that Coinbase’s valuation out of the gate could be anything. It’s very likely that crypto markets will move optimistically if the stock is well-received and the demand accommodates the price. However, we might see crypto markets fall if the opposite happens and Wall Street rejects crypto.
4. Direct listings can be volatile, retail beware.
On Jan. 29, Coinbase was worth $54 billion. Going into the direct listing, Coinbase was believed to be valued at nearly $100 billion in Nasdaq Private Market. Despite that perceived valuation, the company’s reference price was set at a valuation just shy of $50 billion. What gives? Well, direct listings are functionally different from IPOs. In an IPO, a company will traditionally issue new shares. This will dilute existing shareholders, make them sit in the corner for about 45 days before selling their shares and raise money for the company.
Direct listings are just built differently. In a direct listing, a company will generally not issue new shares. Instead, they’ll let existing shareholders sell a certain amount of their stake in the company to people on public markets. In principle this sounds good, but the fact that existing shareholders are helping decide the price could mean that Coinbase’s valuation is already artificially higher. This could be a real problem for retail, according to SPAC legend Chamath Palihapitiya, who warned that direct listings seem “manipulative.”
In short: millions of shares will be sold on the market. It’s untold what value they will be sold at. But if the market eventually starts to believe that Coinbase is overvalued, it will be retail who is left holding the bag.