Will Facebook Buy Coinbase?
As governments & regulators around the world were taking drastic measures to prevent the 2008 global financial crisis getting out of control, a ground-breaking paper entitled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ aimed at challenging the status quo was published by an author under the pseudonym Satoshi Nakamoto. A new tech jargon ‘chain of blocks’ was also introduced in the paper — which over the years has evolved into what is now the buzzword ‘blockchain’.
Interest in blockchain technology has soared in the last few years and some of the largest organisations around the world, including incumbent financial services players, have spent hundreds of millions of dollars in research and development to try to adopt & experiment with blockchain technology.
What is Coinbase?
Coinbase is part of one of the first wave of pioneering start-ups in the cryptocurrency exchange space. The company was originally founded in 2011 by former Airbnb engineer Brian Armstrong before taking part in Y Combinator’s 2012 summer batch.
Today, Coinbase is without a doubt one of the top consumer-facing cryptoasset exchanges in the world — allowing users to buy, sell and store cryptoassets such as; Bitcoin and Ether (ethereum).
The company’s aspirations extend far beyond the trading of digital currencies, with the stated vision of becoming the platform at the center of a revolutionary “open financial system”. In fact, Coinbase is now an active investor in the crypto space via it’s VC arm ‘Coinbase Ventures’.
In October 30, 2018, the company announced a $300M investment at a $8bn valuation in their blog.
Today, we’re pleased to announce that Coinbase will add an additional $300 million of investment at a valuation of over $8 billion to accelerate the adoption of cryptocurrencies and digital assets. The Series E equity round is led by Tiger Global Management, with participation from Y Combinator Continuity, Wellington Management, Andreessen Horowitz, Polychain and others. Coinbase will use this financing to accelerate:
Global expansion–building the infrastructure between fiat and crypto in regulated markets around the world.
Offering more crypto assets, quickly — we see hundreds of cryptocurrencies that could be added to our platform today and we will lay the groundwork to support thousands in the future.
Utility applications for crypto — like the recently announced support for a stablecoin (USDC) on Coinbase and our continued development of Coinbase Wallet.
Bringing institutions into crypto — adding features and crypto assets to our Custody offering to bring more institutional funds into the space.
Coinbase is, and will remain, a crypto-first company. More than anything, we’re proud of the millions of people that have turned to Coinbase as their entry-point into crypto. We take that responsibility very seriously. We strive to be the easy, trusted way for anyone to get started with cryptocurrencies. We see Coinbase’s growth as validation that the ecosystem will only continue to grow in size, influence and impact — ultimately ushering in a more open financial system for the world. Asiff Hirji, COO at Coinbase.
Why should Coinbase consider a Facebook offer?
At the latest valuation of $8BN and the crypto winter that seems to have arrived for the long haul, there are probably not many investors (even SoftBank) who would be willing to back another growth round at a higher valuation than this. Equally, Wall Street investors are not very keen on adventuring into companies operating under great regulatory uncertainty and high market volatility. So, an IPO or even a direct list is probably out of question. Hum, maybe ICO?! Well, even that would be too risky for the company to adventure into.
Even though Coinbase’s CEO recently disclosed that the company has been “profitable” for the past three years (2017, 2018 & 2019). The company will still be burning a lot cash to execute what their COO highlighted above. This probably gives it a runaway of at least 18–24 months, possibly more if some credit lines are added and existing investors decide to inject further capital. However, this would not provide enough confidence to the founders, early employees and existing investors about its growth aspirations, as to whether the company will resume its massive growth in revenue and user base similar to what it achieved at the peak of the last crypto fever. Of course, the company could take drastic actions and start layoffs to reduce costs, but these actions may come at the price of deterring new potential investors and talent from joining the company.
There is one other option on the table for Coinbase. That is an acquisition by a deep pocketed company desperate to enter the crypto the market. The company that fits this description best is Facebook of course!
Facebook would overnight become a key player in the crypto space as Mr. Zuckerberg has been dreaming of for some time. With its mass distribution power and expertise in other areas such as; distributed systems, big data and artificial intelligence, Facebook could unlock unprecedented growth opportunities for Coinbase. Regulators could also create an opportunity for the company to still remain independent from Facebook (see the obstacle section below) and with the financial backing from the tech giant, Coinbase could potentially buy enough time to IPO further down the line when the crypto market matures a little bit more.
Finally, some of the notable investors in Coinbase such as Andreessen Horowitz are thought to be under pressure in terms of their fund IRR. A large exit via Facebook could provide these investors with breathing space and make their LPs very happy indeed! :)
What could the price tag be?
The latest private VC round valued Coinbase at around $8Bn. The crypto winter was back then not as cold as it is now! Moreover, we predict the following acquisition value range is what Facebook could be willing to pay (in stock + cash) without feeling too much heat from Wall Street.
What obstacles could be there for Facebook?
One immediate obstacle is from regulators around the world. These could certainly block this acquisition due to Facebook’s bad reputation in terms of user data when the company acquired Instagram and WhatsApp. Although, the Trump administration will probably give the green light, the acquisition may still take a while to close due to the scrutiny that the lawmakers in the US may require before they approve. In Europe, the situation can be 3X worse, as EU regulators will want to make sure Facebook will not repeat the same situation that happened as in the case of the WhatsApp acquisition i.e. promise regulators one thing and do another after the acquisition.
As part of their plans to break up Facebook, regulators may also demand that Coinbase remained independent from its new parent company. Or impose very strict conditions to make it harder for Mr. Zuckerberg to exercise the same level control he does with Facebook. They would also likely demand deeper data privacy and governance changes before the deal is approved. Past bad reputation is hurting Facebook!
Another thing that could potentially raise the eyebrows of regulators is the fact that one of Facebook board members, Marc Andreessen, is the co-founder of one of the largest investors in Coinbase (Andreesssen Horowitz). The notable VC firm also happens to be one of the founding members of project Libra!
Finally, we estimate a user backlash against Coinbase for selling to Facebook could over the time cost 8%-13% of its current user base. However, this can easily be offset by the newly gained distribution power from Facebook that will enable Coinbase to reach new users.
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