Coinbase, Direct Listings, and the Legitimacy of Crypto
Humans have come a long way from trading sheep for bricks. In 9000 BC, it may have been common practice to trade your cattle for some stone tools. In 2040, it may be common practice to trade some lines of code for a PlayStation 9 or a copy of Settlers of Catan. The way we exchange goods and services has evolved throughout human history, and we expect this trend to continue. I believe we are currently living through one of the most radical transformations in this phenomenon.
I’m sure by now, if you had enough interest to click the link to this article, you at least have a cursory understanding of what Cryptocurrency, Bitcoin, and Blockchain are. If not, this YouTube video might be a good place for a refresh. Among the many crazy stories of early 2021, one of the most notable has to be Bitcoin crossing $50,000 in value.
This boom in the value of cryptocurrencies has accelerated due to many institutional investors finally buying-in. In the past year, large financial companies, such as PayPal and Fidelity, have made significant moves in crypto. Square and Tesla have even announced to use cash off of their own balance sheet to buy bitcoin. Some are even beginning to accept bitcoin as a medium of exchange, a huge step in its viability.
This rise has notably coincided with one of the largest cryptocurrency exchange platforms — Coinbase — announcing it will be going public on April 14, becoming the first crypto exchange to go public. These events could have a huge impact on the future of how we perceive and use money.
What is Coinbase?
Coinbase is the largest consumer-facing cryptocurrency exchange in the United States. More than 45 million users across 100+ countries use it to buy, sell and hold various cryptocurrencies. Coinbase was founded in 2011 by former Airbnb engineer Brian Armstrong and funded early on by famous incubator Y Combinator. Because it was one of the first-movers to the crypto space, many people, including yours truly, had their first experiences with cryptocurrency on Coinbase.
Coinbase was well-positioned for the rise of Bitcoin, other cryptocurrencies, and decentralized finance. It was already a well-known platform by the time Bitcoin had its first mainstream run in 2017 and then again in 2020 allowing Coinbase to be the largest Crypto exchange in the US. These rises led to an array of other trading platforms for Crypto and spurred other stock trading platforms, like Robinhood, to offer cryptocurrencies on their platforms.
Taking advantage of the bull market cycle, Coinbase has announced it will go public this year. They filed their Form S-1 and received SEC approval to list their stock on the Nasdaq under the symbol ‘COIN’. Because of the massive run in crypto, Coinbase is expected to be valued at well over $100 billion when it goes public.
In addition to being the largest company in the crypto-sphere to go public, Coinbase’s offering will also be historical because the company has decided to go public via a direct listing.
What is a Direct Listing?
In January, Coinbase shared this blogpost to announce they would directly list their shares. This means that when it goes public, Coinbase will only list existing shares on the Nasdaq. This is quite different from the traditional IPO process.
In a traditional initial public offering (IPO), new shares are created for the company going public. Typical alongside an underwriting investment bank, the company will go on a roadshow — a series of pitches to potential investors to get them familiar with the company and the team leading it. How well or poorly this process goes often determines the success of the company’s IPO. Additionally, because new shares are created, the original stock of the founders, employees, and private market investors may be diluted.
A direct listing circumvents most of this. A direct listing skips the IPO roadshow and allows the company to directly list its existing shares (and new shares if it chooses) on the public market. This enables the original shareholders to avoid dilution from huge numbers of new shares. However, there is quite a bit of risk involved as well. Without the IPO and the associated roadshow, large institutional investors may not feel comfortable enough with a company and its stock to purchase. This could cause the stock's value to plummet once it goes public, and the original shareholders to be left holding the bag.
Why is Coinbase using a direct listing?
This begs the question then, why would Coinbase choose to go public via this riskier method? There are a number of reasons they may have opted to do this, but the most evident seems to be this: they think they are well-known enough to draw investors on the public market without an IPO.
In their S-1 filing, Coinbase showed that they have 43 million “verified” users, and 2.8 million monthly active users. These users have made almost half a trillion dollars in trades since Coinbase started. In their freshly released Q1 financials, Coinbase actually boosted these numbers to 56 million users, and an astounding $1.8 billion in revenue (up ~9x year-over-year) and ~$800 million in net income for the quarter alone. These are exceptional stats, especially when you consider that only 6 out of 73 unicorns ($1B+ valuation) companies have been profitable when they went public.
Coinbase is confident that it can ride the strong trajectory of cryptocurrency and the market as a whole in its direct listing. They likely believe the stock is poised to skyrocket in their listing, and therefore, they had no need to dilute their shares and get an underwriter involved. However, as crypto becomes more mainstream, there is fair reason to doubt that Coinbase will always dominate the US market.
What else is out there?
A decentralized exchange (DEX), like Uniswap, is an alternative way for users to get into cryptocurrency tokens which have been growing exponentially. It is governed by the smart contract protocol to facilitate the buyer and seller without the reliance on an intermediary which increases the security and is more cost-effective. In August 2020, the daily trade volume of Uniswap actually surpassed Coinbase’s volume for the first (but likely not the last) time. Decentralized exchanges like Uniswap could pave a new and different path for the future of crypto than Coinbase. In the long-term, this could negatively impact the success of centralized exchanges, like Coinbase, or at least force them to adapt.
Following Bitcoin for the last few years and seeing the meteoric rise of tech stocks in the past year as well, I agree with Coinbase’s confidence and choice to go public via a direct listing. While they will see more challengers gain steam, they are still far and away the most well-known Crypto exchange in the US today. It will be interesting to see how the market reacts when Coinbase finally does go public this month. Regardless of the outcome, Coinbase going public is another giant leap in the ever-increasing legitimacy of cryptocurrencies as a source of value and will trigger more crypto-based companies to go public in the future.
