The Coinbase IPO is creeping ever closer and one analyst thinks that the crypto exchange company is worth much more than previously thought.
In the coming days you can buy the company that helps you buy Bitcoin. Coinbase, the largest cryptocurrency exchange in the US, has announced plans to go public on April 14 with the ticker COIN—but it will eschew the traditional initial public offering (IPO) process of hiring investment banks to drum up interest and finance the deal.
Instead of IPO, Coinbase aims to post its shares straight on the Nasdaq stock exchange via a so-called direct listing, a technique pioneered by big names such as Spotify and Palantir in recent years.
This nontraditional yet trendy choice makes a certain amount of sense for the Coinbase narrative, given that the firm has aided and abetted the similarly non-establishment crypto craze over the past decade. Whether BTC itself replaces dollars or develops further as a speculative asset remains to be seen.
What Does Coinbase Do?
Let’s imagine you want to purchase Bitcoin. You’ve got two options: Deploy sophisticated, powerful computers to mine Bitcoin by solving complicated math problems or purchase it on an exchange. The former is extremely costly and demands a ton of technical know-how while the latter needs nothing more than opening an account with the said exchange.
That’s why most people end up buying BTC, instead of mining it, and that’s where Coinbase comes in.
For many crypto enthusiasts, Coinbase operates as an easy online exchange, enabling retail buyers and sellers to meet in the middle and find a price. For more experienced users, Coinbase provides a robust trading platform—called Coinbase Pro—with a full set of features and charts to help you plumb the depths of the crypto market. It also provides a free wallet service that allows its customers to store their cryptocurrencies in a safe place.
Coinbase has succeeded not only by doing these tasks efficiently but also by keeping its users’ data secure. Lots of similar crypto exchanges have come and gone, and many have failed the test of securing their users’ accounts.
One of the most spectacular failures was the 2014 hacking of Japanese exchange Mt. Gox, which led to the company’s bankruptcy and the loss of billions of dollars worth of BTC. There have been others.
In a July 2020 report, Coinbase disclosed that it had more than 35 million users, both retail clients and institutional companies, up 5 million users from a year earlier.
How Does Coinbase Make Money?
Coinbase doesn’t charge you to store your crypto assets in its well-known wallet service. Instead, it earns fees and commissions when you buy and sell cryptocurrencies, such as Bitcoin and Ethereum. These include:
- Margin fee. Also known as the spread, Coinbase charges about 0.50% for crypto purchases and sales, although it varies depending on market conditions. The margin fee depends on the change in price between when you get a price quote and when the order is completed.
- Coinbase Fee. This is a commission on all crypto transactions, charged in addition to the spread. How much you pay depends on your location and the total amount of your transaction.
Coinbase has lots of other lines of business in addition to its exchange services.
- Coinbase Commerce. This service provides online retailers with software that lets them accept cryptocurrency payments. It’s like PayPal, but for crypto—Coinbase’s plugins are used on a variety of e-commerce platforms.
- Coinbase Card. Coinbase is in the early stages of giving its users a physical Visa debit card and an accompanying app to spend crypto in the physical world by converting crypto to USD when used.
- USD Coin (USDC). Coinbase offers its very own cryptocurrency, USD Coin (USDC), which is built on the Ethereum blockchain. Its value is tied to the U.S. dollar, so 1 USDC is always worth $1.00.
According to a recent SEC filing, Coinbase took in about $1.3 billion in revenue in 2020, more than twice as much as the year earlier.
How Much Is Coinbase Worth?
Valuing start-ups can be challenging. As private companies, we only get a view into the valuation of a start-up when they accept new outside investments. Coinbase’s last formal valuation was in 2018 when it accepted $300 million in new financing. According to CrunchBase, at that time the firm was worth $8 billion.
Until Coinbase releases fresh financial information after going public, we won’t know how profitable the business is or what kind of revenue it’s pulling in each year. Don’t be surprised if Coinbase ends its first day as a public company well north of that number. The popularity of Bitcoin has increased significantly since 2018, delivering outstanding returns to investors—and Coinbase.
But Bitcoin’s popularity has meant more competitors for Coinbase. The commission-free trading platform Robinhood, for example, allows investors in most states to buy cryptocurrency as have PayPal and Square. Investment giant Fidelity is even offering wealthier customers a Bitcoin index fund.
Recent reports peg Coinbase as worth well north of its 2018 valuation. A report from Axios found that the company was valued at $100 billion when it sold shares on the private market. What its market capitalization will be when Coinbase is open to the public remains unknown.
How Is Coinbase Going Public?
An initial public offering or ICO is how Wall Street describes the process by which a private company makes its debut on the public stock market.
With an IPO, a firm hires big investment banks to help it sell shares of stock to the public. The bankers don’t come cheap, but they do help a private company navigate unfamiliar waters and set a viable IPO price per share.
With a direct listing, companies can skip the expensive investment bankers and their fees and simply list the stock on an exchange. The current owners of the company convert their shares to stock, and then investors can purchase shares on the exchange.
In an IPO, a company going public normally issues new shares of stock to raise new capital. In a direct listing, a company isn’t looking to increase additional capital—its employees and investors are selling their existing shares of stock to the public.
What Does Coinbase IPO Mean for Bitcoin’s Future?
There are lots of cryptocurrencies, but Bitcoin has captured the greatest share of public attention. The reason is simple: Its value has increased significantly.
The interest and discussion around Bitcoin have strayed over the past decade. Back in 2013, the slogan at the top of Coinbase’s website read “Welcome to the Future of Money.” As of 2017, this had changed to “Buy and Sell Digital Currency.” There’s more to this change than marketing.
Bitcoin gained notoriety as a possible replacement for USD as the main means of exchange and payment. In some future world, the idea went, you’d get paid in Bitcoin and pay your mortgage in crypto. This would be enabled by blockchain, which would account for all transactions and keep everything secure.
Why would you choose Bitcoin? Its value wouldn’t be secured or managed by a central party, like when the Federal Reserve, which sets interest rates. Bitcoin as a replacement for governmental currency was the future Coinbase was talking about back in 2013.
But by 2017, those dreams had dimmed. BTC had not become the primary means of exchange in the economy but rather an investment asset, like gold. People talked about its “market cap,” which makes no sense for a currency but is the term people use to describe a company’s size and clout. This suggests Bitcoin has become more of an investment than anything else. Investors would flock to it when they had a risk appetite, rather than use it as a direct form of money.
A bet on Coinbase IPO is, at least right now, a bet that Bitcoin will continue its surge as a speculative asset rather than a replacement for the almighty dollar. Don’t fight the Fed, indeed.