Coinbase has built its business on the idea of transforming the financial system. It believes bitcoin and other cryptocurrencies can turn into legitimate alternatives to traditional money. And the company thinks its platform can turn into a sort of alternative to traditional stock markets, where the assets bought and sold in huge quantities are shares of digital tokens, rather than shares of companies.
Nine years after Coinbase was founded, it's all still a bit revolutionary. But there's a rather rich irony at play: To make the dream a reality, Coinbase first has to thrive in that old world of traditional money and the traditional stock market. Before it can create a new future, the company might have to beat the past at its own game.
So far, so good.
Coinbase filed for a direct listing this week on the Nasdaq, an enormous crossover event between the crypto market and the stock market that could value the company at more than $100 billion...
1. Coin of the realm
Excuse me for the dorm-room philosophy on a Sunday morning, but money is a social construct. In a slightly different reality, no reasonable person would exchange a tasty hamburger and fries for a piece of strangely decorated paper with Alexander Hamilton's face on it. Fiat currency isn't intrinsically valuable. But because our society has agreed that strangely decorated piece of paper has a certain value, the trade works. Ever since the abandonment of the gold standard, that's been the bargain on which our whole economy rests.
On the one hand, it seems kind of ridiculous to try to create that same grand bargain again from scratch, completely digitally, a whole system of payment and trade based on nothing but lines of ones and zeros on a screen. But on the other hand, why not?
I can't sit here and explain the nitty-gritty details of cryptocurrencies and blockchains, just like I can't give a detailed breakdown of the many minute processes going on inside my laptop that allow me to push buttons on a keyboard and see these words appear on a screen. I'm not a technologist. But as with other technological breakthroughs, I can certainly see the appeal. The ideal vision of bitcoin and other cryptocurrencies could provide people around the world with a safe way to operate financially without regard to national borders or financial institutions, cutting out middlemen and bankers to create a new sort of economic freedom.
When Coinbase was founded in 2012, that idea was still in its infancy. The overall market cap of all cryptocurrencies was less than $500 million. Slowly but surely, though, it caught on. The first real boom came in 2017 and 2018, when the price of a bitcoin, by far the most popular cryptocurrency, soared from less than $1,000 to more than $19,000. But the boom ended, and for the next two years or so, cryptocurrencies receded from mainstream consciousness.
Then, last year, during the first months of the pandemic, a new, bigger boom began. The price of a bitcoin crept up again past $10,000, past $20,000, past $30,000. The prices of other cryptocurrencies also skyrocketed. By the end of last year, the overall crypto market cap topped three-quarters of a trillion dollars.
And by the time bitcoin rose above $50,000 for the first time earlier this month, a growing chorus of major institutional investors were thinking about cryptocurrencies as a legitimate asset class worthy of their long-term attention.
All of which has been very good for business at Coinbase, which has emerged as the most popular portal for those looking to cash in on the crypto gold rush. Between 2016 and 2018, the company's valuation grew from $500 million to $8 billion, according to PitchBook data. And earlier this month, Axios reported that private investors recently valued the company at more than $100 billion. That staggering sum could be a rough target valuation for the company's coming direct listing, which would make the move one of the largest stock-market debuts of all time by a VC-backed company.
There are plenty of other metrics from Coinbase's new S-1 filing that demonstrate just how swift the company's recent growth has been. Median quarterly trading volume on its platform increased from $17 billion worth of assets in 2018 to $38 billion in 2020. The value of the assets stored on its platform, meanwhile, has grown from $7 billion to $90 billion over that same span. Total revenue in 2020 was nearly $1.3 billion, up nearly 140% year-over-year.
After that banner year in 2020, the company was sitting on $1.1 billion in cash and equivalents at the end of December, likely a factor in its choice to go public through a direct listing that won't raise any new capital, rather than opting for an IPO.
But the company's filing also suggests reasons for wariness. Coinbase readily acknowledges that another cryptocurrency crash could be bad for business, reducing both the value of the assets on its platform and trading volume among its users. And that volume is the key to Coinbase's model. In 2020, more than 96% of its net revenue came from transaction fees.
In the prospectus, CEO Brian Armstrong says the current good times likely won't last. "We may earn a profit when revenues are high," he wrote, "and we may lose money when revenues are low, but our goal is to roughly operate the company at break even, smoothed out over time, for the time being." Even in an era when profitability is optional for massive startup IPOs, "break even" probably isn't what most investors are looking for in a $100 billion company.
But then again, Coinbase is not most companies, and the crypto market is not most industries. The segment has its skeptics, to be sure. But it also has a significant population of true believers, people for whom investing in cryptocurrencies is nothing more or less than a bet on trying to create a new, more equitable financial system. It also has a significant population of pure speculators trying to make a quick buck on a highly risky investment with the potential for huge returns.
...And the timing for the listing couldn't be better. Another operator of a cryptocurrency exchange, Kraken, is raising new funding that could come at a valuation of more than $10 billion, Bloomberg reported this week, another sign of surging investor interest in the space.
For the past nine years, Coinbase's value has been determined solely by a relatively small group of venture capitalists. What will happen when the company's shares are at last available to a much broader base? We're about to find out.
https://pitchbook.com/news/articles/coinbase-direct-listing-bitcoin-wall-street
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