On Thursday 17 December, the digital currency exchange Coinbase Inc announced on its blog that it had ‘confidentially submitted a draft registration statement on Form S-1 with the Securities and Exchange Commission (the “SEC”)’. It is probably no coincidence that the announcement has come as the best known crypto currency, Bitcoin, has posted record prices.
After much speculation earlier this year that Coinbase was preparing to go public, the filing has fired the starting gun on a potential IPO. Quoting an unnamed source, Reuters reported that Goldman Sachs Group Inc had been hired to prepare for the San Francisco-based company’s stock market listing.
As the registration is under review and confidential, investors do not yet know when the IPO might happen, what shape it will take or what valuation Coinbase is aiming for. If it does go ahead, the IPO would make Coinbase the first significant U.S. crypto exchange to be listed on the stock market and would represent a seismic shift in the perception of crypto currencies’ legitimacy.
As Barry Silbert, founder of the Digital Currency Group, tweeted: ‘Thanks to the Coinbase IPO, the acquisition price of a bunch of crypto companies is about to go way way higher’.
Founded in 2012, Coinbase is a giant of the crypto sector with more than 35 million people in over 100 countries using the platform to buy, sell, store, use and earn crypto currency. In July the company published its Crypto H1 2020 institutional review in which it noted that it operates ‘the largest regulated exchange in the world’. Some estimate that it has gained 5M users in the last year alone. Offering more than 30 crypto currencies, the company holds more than $25B in assets on its platform and its total volume traded exceeds $320B.
The last time Coinbase did a funding round, in 2018, the company was valued at $8B. Given the recent rallies in Bitcoin, that valuation seems likely to have increased sharply since then. Lots of big names certainly have faith in the company and are prepared to back it. Coinbase has attracted more than $500M investment from financial institutions such as BBVA and the New York Stock Exchange as well as venture capital companies such as IVP, Tiger Global and Greylock Partners.
Potential valuation of $28 billion?
Working from publicly available information, research company Messari estimated Coinbase’s potential IPO valuation as $28B. More significantly for the wider crypto sector is that whatever Coinbase’s actual valuation turns out to be, it will act as a baseline for future crypto valuations.
Although it has diversified into acquiring or investing in other crypto companies, Coinbase generates much of its revenue through charging commission on trades. Bitcoin’s surging valuations will be inflating those revenues although, interestingly, Brian Armstrong, CEO and Co-Founder of Coinbase, recently blogged ‘that this is not only a time of high volumes, but also price volatility’ and that ‘investing in crypto is not without risk’. Of course, while high asset valuations mean bigger commissions, Coinbase will generate revenue on every trade, irrespective of the price of Bitcoin, Ethereum or Litecoin.
Capitalising on crypto’s adoption
Crypto’s volatility may be attractive to retail day traders but it is also one of the reasons why institutional investors were once wary of the sector. Those attitudes are changing quickly and Coinbase is capitalising on crypto’s increasing adoption. Its July review states:
‘Today, many larger and more conservative institutional investors are allocating for the first time, using Coinbase to build direct positions and backing crypto fund managers as part of their alternatives strategy. We saw a noticeable uptick in our institutional business’s growth in H1 and continued to add leading university endowments, traditional multi-strategy hedge funds, VCs, and large family offices to our roster of clients buying digital assets directly.’
To put that growth in figures, the company’s Brett Tejpaul revealed that Coinbase had $6B in institutional assets in April 2020. By November, that figure had grown to $20B.
Lots of questions remain about Coinbase’s IPO strategy. If the SEC green lights the Coinbase offering, and that is not a given, it will be interesting to see what form it takes. A direct listing has been mooted as an alternative to a traditional IPO. There is also speculation that the company might take the special purpose acquisition company route.
More traditional investors might want to see more financial information from Coinbase before making any decisions. Business Insider notes that Coinbase ‘has never disclosed any profit or revenue figures’. The same investors may be reassured that the exchange does its banking with JP Morgan and is audited by Deloitte.
Time it right
The time frame for the potential IPO will be interesting. At present, Bitcoin’s impressive surge is casting a rosy glow over the entire crypto sector. Brushing aside the 2017/18 boom and crash, the crypto currency is up more than 200% in the last twelve months and currently trading at around $23,000. This new rebound in its popularity has several causes.
Central banks printing money to offset the financial damage of Covid 19 has led many investors to look for alternatives to fiat currencies. Major global currencies are being devalued by their own governments and crypto currencies have long been espoused as a way of moving value beyond the reach of state policy.
The flip side of this is that the unregulated nature of crypto currencies has made governments distinctly frosty towards them and the institutions which deal in them. In the past, there was a notion that the sector was in some way tainted. Famously, Donald Trump weighed in on the subject and pronounced that crypto currencies were based ‘on thin air’ and that ‘unregulated crypto assets can facilitate unlawful behavior, including drug trade and other illegal activity’. The President Elect’s policies may be more nuanced.
Certainly many disagreed with President Trump. Over the last couple of years, the perception that crypto currencies are of most use to money launderers and dark web users has shifted considerably. There is a growing sentiment that crypto currencies are becoming more respectable in the eyes of previously dismissive financial institutions and suspicious regulators.
When household name PayPal and its 346 million users announced their entry into the crypto currency market they joined other established payment companies such as Square and Revolut. Crypto currencies are becoming mainstream. These developments have led to some ambitious forecasts for Bitcoin and they have come from respected voices in the investment world. In November, a leaked report from a senior analyst at Citibank reckoned that Bitcoin could potentially trade at $318,000 by December 2021. More recently, Guggenheim Investments recently predicted that Bitcoin could soar to $400,000. An oft repeated phrase is that crypto has the potential to be ‘digital gold’.
Were Coinbase to launch its IPO in such an encouraging climate, then investors could be looking at spectacular returns. Alternatively, the crypto currency’s volatility could come into play in a rather less profitable way. It might be worth recalling that Bitcoin was trading at around $7000 at the start of the year and fell to below $5000 as the pandemic struck. It is only in the last three months that it has risen from around $10,000 to its current $20,000+ levels. That is pretty much the definition of volatile. Were Bitcoin’s price to retreat sharply from its current highs then there would be a knock-on effect for any potential public listing by Coinbase.
How great an effect? Who knows? Whether crypto currencies continue to rise or undergo a correction, a possible Coinbase public listing may be a popular way for investors to gain exposure to the crypto sector without directly holding crypto currency. Potentially the first major exchange to list on the US stock market, Coinbase looks set to be a bellwether for the sector.
