Coinbase made it into history Tuesday when it became the first notable crypto player to go public, with an eye-popping $100 billion valuation that moves the digital currency market closer to the mainstream.
The San Francisco-based exchange’s direct listing on the Nasdaq is being viewed as a test run with the potential to add a new layer of legitimacy to digital currency. In the past year, cryptocurrency has been adopted by such brands as Tesla and Square. In contrast, Wall Street giants such as Goldman Sachs and Morgan Stanley have taken steps toward offering bitcoin and other digital assets to investors, CNBC has announced.
“Coinbase is not just any crypto play, they’re one of the linchpins to the global crypto ecosystem,” stated Dan Ives, managing director of equity research at Wedbush Securities.
“Ultimately, how the Coinbase IPO and reception plays out is important for many other companies that are potentially following on the crypto front. It’s more than just Coinbase.”
Though interest in virtual currencies has skyrocketed — the market has doubled since January and smashed past $2 trillion this week — the landscape is peppered with risk. Cryptocurrency is well known to be volatile, and lawmakers have displayed an urgent need for regulation to combat criminal activity. In 2020, global “darknet” markets brought in a record $1.7 billion in crypto revenue, according to ChainAnalysis.
Founded in 2012, Coinbase presents a range of crypto-related financial services and aims to “create an open financial system for the world,” according to the prospectus it filed with the US Securities and Exchange Commission. At the end of last year, Coinbase had 43 million users from more than 100 countries, as well as 7,000 retail and financial institutions on its platform. It has roughly 1,700 employees and $1 billion in cash on hand.
Coinbase’s fortunes are closely aligned with bitcoin, which has more than doubled in value since the start of the year and swelled past the $63,000 mark for the first time Tuesday. The exchange, which gets more than 95 percent of its revenue from transaction fees, has raked $1.3 billion in the past year as bitcoin made its meteoric rise.
Danni Hewson, a financial analyst with AJ Bell, published in a commentary Tuesday,
“[Crypto] is still seen by many as a risky proposition and for good reason, but it’s also become a part of the global cash conversation.”
About a third of adults worldwide — 1.7 billion — are unbanked, according to The World Bank. But global access to financial services is deepening in low- and middle-income economies, according to the International Monetary Fund’s 2020 financial access survey. Progress made in bringing more people into the financial system is partly due to “innovations such as digital financial services, including mobile money,” the survey said, which has taken “deep root” in sub-Saharan Africa and Asia.
Ukraine, Russia, Venezuela, and China led the world in cryptocurrency adoption in 2020, according to research from ChainAnalysis. About a third of small and medium-sized US businesses accept cryptocurrency as payment, according to a 2020 HSB survey.
In a letter included in the prospectus, chief executive Brian Armstrong said Coinbase could help foster greater economic freedom by creating a more accessible financial system that complements, rather than replaces, the traditional economy, “much like e-mail was to paper mail.”
Coinbase’s public debut could land Armstrong among the world’s 100 wealthiest people, given his 20 percent stake in the company. He currently is No. 404 on the Forbes list, with a net worth of about $6.5 billion.
“People are using cryptocurrency to earn, spend, save, stake, borrow, lend, vote … companies are being funded, getting early customers, and will eventually go public, all on blockchain,” Armstrong published. “The cryptoeconomy is just getting started.”
Coinbase acknowledged the risks ahead in the prospectus, “many of which are unpredictable and in certain instances are outside of our control.” They include the unknowns of the regulatory environment and its dependence on cryptocurrency, its ability to “attract, maintain and grow” its customer base, and potential competition.
Crypto emerged stronger after the devastating blows to trading in the pandemic’s early days pushed many investors to seek assets outside the traditional financial system. It’s also been lifted by the hysteria or euphoria (depending on whom you ask) that has characterized trading in 2021, starting with GameStop’s dizzying run after regular investors vowed to take the ailing retailer “to the moon.”
Bitcoin has claimed the headlines, but other digital currencies have soared, too: Ethereum, the second-largest cryptocurrency by market capitalization, is up 221 percent year-to-date, according to Coindesk. Dogecoin, a meme-based currency created as a joke, is up more than 2,700 percent to 13 cents a share. Tesla CEO Elon Musk has used his Twitter account to become Dogecoin’s biggest cheerleader — potentially putting himself back in the SEC’s crosshairs in the process.
Since its creation in 2009, bitcoin has been riding primary boom and bust cycles, and many analysts believe another bubble burst is inevitable. In a research note last week, UBS Global Wealth Management warned clients that “empirical evidence” suggests greater participation among institutional investors could increase volatility “due to their more opportunistic investment approach,” Markets Insider reported.
Coinbase has registered more than 261 million shares for its listing. But the massive valuation is more a reflection of “flare and hyperbole” than substance, said David Trainer, chief executive of New Constructs. He notes that it was an $8 billion company just three years ago. To live up to a $100 billion valuation, Coinbase would have to eclipse the revenue of the biggest exchanges on the planet.
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