Should Investors Buy Coinbase IPO?
It’s no secret that cryptocurrency exchange Coinbase has filed for a direct listing (not an initial public offering) to bring shares to the public market. For traditional investors who are starting to warm up with the digital space, Coinbase is a San Francisco-based company that made its inception in 2012. Founded by Brian Armstrong and Fred Ersham, the platform now has over 43 million users worldwide and has transacted more than $456 billion to date, according to the company’s latest filing with the SEC.
The company aims to bring cryptocurrency-based financial services to anyone with a smartphone, representing a market size of 3.5 billion people. If Bitcoin or other cryptocurrencies achieve widespread adoption, the user base would likely multiply. When that happens, you could be looking at a multibagger in the making.
From its filing, the company’s shares will trade under the ticker ‘COIN’ on the Nasdaq. Now, no official date of the listing is available. But the company has already attracted a lot of attention. In fact, the company’s shares have been traded on the Nasdaq Private Market. Unfortunately, this is not generally accessible on retail trading platforms.
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Coinbase has just released a prospectus that has Wall Street re-evaluating the valuation. The trading activities on the Nasdaq Private Market indicated a value as high as $77 billion within the past week. That’s about $300 per share which’s up roughly 33% from the Private Market-IPO. And now the value is edging upward of $100 billion. Meanwhile, tokens of the Coinbase/USD tokenized-shares are trading for $400 in crypto exchanges.
At $77 billion, Coinbase would have a higher market cap than the $63 billion Intercontinental Exchange (NYSE: ICE), the parent of New York Stock Exchange, among other assets. Of course, Coinbase’s surge in value comes alongside the surge in Bitcoin, which broke out to a new all-time high in recent weeks. It’s also not a surprise if the IPO could fetch a valuation of more than $100 billion. But these valuations are not unwarranted. In fact, they make perfect sense if you take a closer look at the fundamentals. Here’s why.
Coinbase Has Millions Of Verified Users On Its Platform
If anyone has been in the crypto space in the early stage, you might have come across some exchanges giving out free altcoins to induce more investors to trade on their platform. For those unfamiliar, altcoins refer to alternatives to Bitcoins. They are cryptocurrencies that utilize the blockchain technology which allows secure peer-to-peer transactions. The reason for such giveaways is to attract more investors to trade on their platform. That will lead to increased revenue from a surge in trading activities. And since it is still a largely unregulated space, the transparency of these trading activities is questionable.
Coinbase, however, had 43 million verified users on its platform. As of December 31, 2020, Coinbase had 2.8 million monthly transaction users. That compares to 13,000 users back in 2012. The company has seen its user base explode over the years as cryptocurrency continues to gain interest from retail investors and institutional investors. All told, the company has handled transactions worth $456 billion over its life span as a company.
While Coinbase may appear as a venue for retail traders wanting to trade cryptocurrency, Coinbase has seen strong growth of institutional customers as well. “We provide hedge funds, money managers, and corporations a one-stop-shop for accessing crypto markets through advanced trading and custody technology,” the company said in the filing.
The Cryptocurrency Exchange Is Already Profitable
For the full year of 2020, Coinbase has generated more than $1.3 billion in revenue. That was more than double the $534 million in 2019. Most importantly, the company was profitable for the first time last year with a net income of $322.3 million. That compares to a loss of close to $30 million the year before.
No doubt, the cryptocurrency exchange generates the vast majority of its revenues from transaction revenues. Adding to that, Coinbase also has a comparatively modest “subscription and services” revenue category. That brought in around $20.7 million in Q4 2020 revenues.
Perhaps you are an investor in traditional asset classes looking to venture into the blockchain space. If so, you will first have to familiarize yourself with the acronyms. There may be times when you speak to someone from the blockchain space, and it sounds like it’s all Greek to you. You might even start questioning your own intelligence. One of these jargons is DeFi. For those who are new to the space, DeFi or decentralized finance is a host of financial applications built on top of smart contracts. The primary advantage of DeFi is cutting out middlemen from all kinds of transactions.
One notable number worth mentioning is the amount of money Coinbase is holding in its custodial accounts. The total value of crypto assets grew 200% from $1.2 billion to $3.76 billion over the past year and is supported by growth in DeFi. The key takeaway here is that DeFi is poised to be the next generation of cryptocurrencies. And that could be driving the market. Certainly, Coinbase is in the middle of this revolution.
Right now, no one knows exactly when Coinbase’s direct listing will take place or what the company’s valuation will be. With its recent valuation from the private market, it’s safe to say that this stock certainly won’t come cheap. It’s also challenging to value Coinbase considering there are so many factors at play.
Some investors see Coinbase as a way to tap on the rise in cryptocurrencies without buying cryptocurrencies directly. At a valuation of around $100 billion, it could appear less risky than smaller companies with crypto plays. In fact, different investors will have different ways of looking at Coinbase. In large part, that depends on the expectations of its potential future businesses. Considering the interest in Coinbase, it won’t be surprising to see the stock doubling on the first day of trading. Thus, if you are looking to get a piece of COIN stock when it trades, pace yourself.