Who Will Follow Coinbase’s Path To Wall Street?
Is there any doubt now that crypto is going mainstream? Even my mom is tired of me saying “how’s my Bitcoin?” (as I show her my Bitcoin wallet just to be that guy.)
We are moving fast into a digital economy. Cryptocurrencies are the new stocks.
I will undoubtedly buy Coinbase when it goes public. I just won’t be a buyer of the country’s premier cryptocurrency exchange on Wednesday, because I don’t like to chase. I suspect it will rise by double digits. I want to see where it ends up trading after a month or two on the market before I think about it.
“It is another step for cryptocurrencies being perceived as shifting further into the mainstream,” says David Jones, chief market strategist for Capital.com, a commission-free trading platform for traditional and crypto markets. “If this continues, and there are no signs yet of that stopping, then exchanges for buying and selling should do well. It is by no means a perfect comparison of course, but listed shares of exchanges such as Nasdaq NDAQ +0.1% and the London Stock Exchange have respectively done very well over the years.”
Coinbase filed its Form S-1 Registration Statement for its initial public offering in February after saying in December that it was going to list on the Nasdaq under the symbol COIN. It goes public on Wednesday, April 14.
Coinbase isn’t exactly the E*Trade of cryptocurrency, but they reportedly have around 43 million retail investors plugged in, along with 7,000 institutional investors in over 100 countries. As of Dec. 31, 2020, Coinbase did $456 billion in trading. Investors have at least $90 billion worth of assets stored on its platform thanks to the fact that Bitcoin is up 769% over the last 12 months and the Nasdaq is up a mere 65%.
The market has them valued at $100 billion pre-IPO. It’s easy to see how cryptocurrency-related IPOs look like a dot-com bubble ready to inflate.
For comparison, Morgan Stanley bought E*Trade in October 2020 in an all-stock deal valued at just $13 billion.
Coinbase is the first large crypto exchange to take its place on Wall Street. What has been most notable so far is the very high price-to-earnings multiple it got on futures markets, says Brian Kerr CEO and Co-founder of Kava Labs (KAVA). Kava runs a decentralized, financial services designed for cryptocurrencies. “It bodes well for other U.S. exchanges like Kraken which seems to be preparing to follow suit. Shares of Coinbase and Kraken are already trading well on secondary markets like Sharespost and Linqto with heavy multiples,” he says.
Last Thursday (April 8), Kraken confirmed they’re next, CNBC reported. Gemini, co-founded by the Winklevoss brothers, is also rumored to be a perfect candidate to go public.
“The market wants crypto exposure,” says Kerr. “As for personally investing in Coinbase, it has a great business, huge revenues, and is the leader in the U.S. with a huge regulatory moat, but…there is just so much risk with looming inflation and regulatory uncertainty that I prefer to sit back.”
Coinbase & the Competition
In the short term, Coinbase will continue to grow on the fees it charges for trading crypto. In the long-run, though, it’s really anyone’s game.
What’s stopping E*Trade or Charles Schwab from getting in on the act and bringing their commission-free trading to cryptocurrencies? Or just buying the Kraken?
“This is the real risk here for Coinbase,” thinks Max Breus, founder of Moscow-based UBIX Network, a blockchain platform. “The market will continue to evolve and margins will inevitably tighten over time. There is also the possibility that a game-changer in the form of a new trading model or a disruptive technology will emerge. I see exchanges moving towards the hybrid model where they support both public and private crypto simultaneously,” he says, meaning more of a crypto lending or investing platform that isn’t just for buying and selling cryptocurrencies, or acting like PayPal PYPL -1.5% where you can pay your friend in Bitcoin (if they have a Bitcoin wallet, of course).
For now, the biggest thing Coinbase has is trust and brand recognition. “Other exchanges will have to find other ways to compete with them. If another company can find a way to monetize in other ways and make it easy, it could be a blow for Coinbase,” says Brandon Burgason, founder & CEO of Mobie, a mobile app allowing for payments in crypto and fiat.
There are so many exchanges out there, some allowing for more sophisticated trading like swaps and currency pairs, but the one that goes commission free, has access to the top coins, and is easy to set up could blow Coinbase up, investors that are sitting this one out have said. Then again, what is stopping Coinbase from doing that themselves?
Other than operating in a crowded market, Coinbase’s price to earnings might look a lot like Tesla’s TSLA +0.1%. And while Tesla was once the only, sexy EV in town, it now has all of the major car companies breathing down its neck. Coinbase will be in a similar situation.
“I’m skeptical about Coinbase’s valuation,” says Ivo Georgiev, CEO of display advertising company AdEx Network (ADX), which I liken to the anti-Google AdSense. “I find it to be a bit high based on their technology, user base and trading volumes alone. But they do have a relatively good reputation and the trust of the cryptocurrency community,” he says, recalling a Commodities and Futures Trading Commission investigation that found Coinbase guilty of false reporting and wash trading. They were ordered by the CFTC to pay around $7 million in fines on March 19.
Their brand recognition and first-to-market positioning will be enough to send Coinbase stock price soaring on day one. Investors are already looking for the next crypto-related business to go public.
“If you compare Coinbases’ operations to the operations of other exchanges such as Binance for example…their market valuation should raise your eyebrows,” says Georgiev.
Successful IPOs of competing companies often push other companies in the sector to do the same, says Oleg Fakeev, a private investor and founder of Kit Investments in Russia. “I think Coinbase is far from being the last crypto company who will IPO,” he said. He mentioned Binance as a possible candidate. Binance is the world’s largest cryptocurrency exchange, founded by Forbes listed billionaire Changpeng Zhao, aka CZ.
Like Coinbase, Binance has the brand name recognition among cryptocurrency traders; it has a user-friendly interface, the ability to easily deposit into an account, and security. “All of this makes the Binance exchange an excellent ‘who’s next?’,” says Fakeev.
Companies that go public have to be more transparent. For Coinbase, that will bring with it more serious investors – from institutional endowments to RIAs managing individual accounts of clients looking for growth. In that regard, Coinbase’s IPO makes them the only cryptocurrency exchange to own.