Coinbase Global Inc. will be the first major crypto company to go public when it lists its shares directly on Nasdaq today. Riding the wave led by Bitcoin and the overall cryptocurrency market retail and institutional boom, the global exchange has reported some eye-watering profits in the first quarter — bringing in more earnings and revenue in the first three months of 2021 than it did for the entire 2020 fiscal year.
Coinbase’s reported estimates indicate revenue soared 847% in the first quarter to US$1.8 billion, and that it now has 56 million verified users.
Instead of following the traditional initial public offering (IPO) route, Coinbase plans to post its shares straight on the Nasdaq exchange via a direct listing. The company will trade under the ticker COIN and list 114,850,769 shares on the Nasdaq. Due to its Q1 results, Wall Street analysts and Bitcoin-loving investors are also forecasting that Coinbase could debut at a US$100 billion valuation.
As Coinbase’s Wall Street flotation creeps closer, many investors are chomping at the bit for a piece of the action — but it also raises some questions. First, what implications will the Wall Street direct listing have on the global crypto markets, and specifically the Asian crypto markets, where exchanges like Binance have the lion’s share of the trading volume?
Second, but probably most important, is Coinbase really worth US$100 billion?
Impact of Coinbase listing
Coinbase has been the talk of Wall Street as it prepares for its public debut on a traditional exchange today. The Nasdaq has given Coinbase a reference price of US$250 per share ahead of its planned direct listing, which would value the cryptocurrency exchange at about nearly US$64 billion on a fully diluted basis.
If Coinbase has a successful public launch, the price of other major cryptocurrencies will likely go up as a result of bolstered investor confidence and the influx of new players willing to partake in the crypto market.
There is no doubt that, as the largest crypto platform in the U.S., Coinbase and its direct listing are seen as a potential tipping point for the world of crypto becoming mainstream. Should Coinbase reach a US$100 billion market cap, it will instantly become one of the 85 most valuable companies in the United States.
During an episode of CNBC’s “ETF Edge” this week, Amplify ETF’s founder and CEO Christian Magoon said that Coinbase’s valuation and public market debut could force investors and institutions to take a closer look at the entire digital asset space.
Magoon said, “We’re going to see more private companies go public because they see the path, hopefully, that Coinbase takes that recognizes the value in the public marketplace.”
During the same “ETF Edge” interview, Matt Hougan, chief investment officer of Bitwise Asset Management, also argued that investors cannot ignore a company that grew its earnings exponentially on a year-over-year basis
Coinbase’s current valuation is all well and good as Bitcoin continues to surge to new all-time-highs — recording a new one today at US$64,717 according to CoinMarketCap. But what would happen if the crypto bull run ends?
Is Coinbase worth $100 billion?
The reality is that Coinbase’s prospects in many ways are quite uncertain, and its staggering first quarter profits are the direct result of external factors, namely, a booming cryptocurrency market.
Coinbase provides a variety of financial services, but is fundamentally a Bitcoin and cryptocurrency exchange service. With Bitcoin more than doubling since the start of the year and other cryptocurrencies like Ether rising sharply from public and institutional interest, the exchange’s Q1 earnings — estimated between US$730 million and US$800 million on revenue of US$1.8 billion — completely overshadowed its entire earnings for 2020, where the company earned just US$322 million on revenue of US$1.3 billion.
According to a New Constructs report published on April 9, Coinbase “has little-to-no-chance of meeting the future profit expectations that are baked into its ridiculously high expected valuation of US$100 billion.” The report argues that given how young the cryptocurrency markets are, it should be expected that more companies will compete for Coinbase’s customers and eat into its market share in the very near future.
Coinbase charges nearly 0.5% in fees for any trades on its platform and trading volume in the first quarter of 2021 rose to US$335 billion as cryptocurrencies like Bitcoin soared to new all-time highs. This essentially means that of the US$1.8 billion in revenue it collected, around US$1.657 billion was the direct result of the bullish crypto market conditions. Should the crypto bull run come to an end, so, too will Coinbase’s staggering profits.
The report also makes the logical argument that if the cryptocurrency market continues to mature, other rival exchanges will likely lower their own fees to take market share away from Coinbase, which will force the exchange to adjust its own fees charged on any trades.
Per the new constructs report, “To get a sense of just how untenable Coinbase’s competitive position is, Coinbase’s estimated transaction revenue as a percent of trading volume in 1Q21 is 46 times higher than Intercontinental Exchange, which runs the New York Stock Exchange (among others) and Nasdaq Inc., which runs the Nasdaq.”
If Coinbase were forced to adjust its revenue share of trading volume to 0.01%, like the traditional stock exchanges, it’s estimated 1Q21 transaction revenue would fall from the projected US$1.5 billion, to a meagre US$35 million.
The New Constructs report also argues that in order to justify the US$100 billion valuation, Coinbase would need to produce compound annual revenue growth of 50% over the next seven years. Historically, the Nasdaq’s greatest 10-year revenue growth rate was just 21%. If Coinbase can even match the previous record of 21% it would make COIN shares worth just US$18.9 billion.
In Asia, Binance rules — not Coinbase
As referenced in the New Constructs report, should Coinbase lose market share to rivals it would make it almost impossible for it to maintain its projected evaluation.
In Asia, and on a global scale, Binance clearly has the bigger active user base with around 13.5 million users compared to Coinbase, which has around 13.3 million active users. In a cryptocurrency exchange fee comparison, Binance also appears to offer lower trading fee at 0.10%, while Coinbase — which offers more assets and some say, is more user-friendly — has fees of up to 3.99%.
As Coinbase’s profits seem almost entirely reliant on fees, should Binance follow in the U.S. crypto exchange’s footsteps in products and services offered and list on a public exchange, this could wreak havoc on Coinbase’s profit projections.
According to Lennix Lai, head of financial markets at OKEx, the Coinbase listing has created the blueprint for other exchanges to follow.
“The Coinbase listing is a really iconic industry event,” said Lai, in an interview with Forkast.News. We have had several blockchain-based concept companies that have already been listed on a public exchange, like the mining company Bitmain, but Coinbase is very different. Coinbase is the only crypto exchange right now that is [a direct listing] on a top exchange like the Nasdaq.”
According to Lai, Coinbase may be setting an example of what regulators are looking for in a cryptocurrency exchange that hopes to list.
“They have also set up a valuation that other analysts can model because until now, everyone’s been thinking it’s very difficult to value a crypto business because of the Bitcoin inventory and all the related factors. So right now we have a Coinbase example […] that can be used as a benchmark to value all the other future crypto companies, especially crypto exchange businesses,” Lai said. “I would say the regulators would be happy, those trying to evaluate their crypto exchanges would be happy because we finally have a benchmark that is globally endorsed by both the financial market and crypto market as well.”