Coinbase IPO: $100 Bn listing, will the momentum continue for the crypto giant?
Coinbase is a US-based cryptocurrency secure exchange that makes it easy to buy, sell, and store cryptocurrency like Bitcoin, Ethereum, etc. It offers products for both institutional clients and retail clients. The platform provides trading and storage services for 58 cryptocurrencies. Coinbase Prime is a platform dedicated to institutional clients. It also offers a debit Visa which enables clients to spend cryptocurrencies anywhere Visa is accepted.
Coinbase is going for a direct listing on Nasdaq under the ticker ‘COIN’. A direct listing is an alternative to an IPO, and it provides investors and employees the liquidity to their ownership stakes on the listing. This may not be beneficial for the company as no new capital is raised or shares are being issued. However, Coinbase will save millions of dollars in costs usually incurred in IPO.
Snapshot
Founded: 2012
Notable Investors: Andreessen Horowitz, Paradigm, Ribbit Capital, Tiger Global, and Union Square Venture
Headquarters: San Francisco CA, United States
Total Funding: $847 Mn
CEO/Management Experience: Brian Armstrong is the co-founder and the Chief Executive Officer. Brian previously founded UniversityTutor.com. Fred is also co-founder and serves as a managing partner at Paradigm (Crypto Fund).
Business Model
Coinbase makes money by charging fees for its brokerage and exchange services. In addition to the brokerage fees, Coinbase also charges variable spreads on purchases and trades. There is also a “Coinbase Fee” in addition to the spread and the cost of depositing money mentioned below in the chart. This fee is dependent on the value of the purchase, payment type (debit/credit), and region you are purchasing from. Customers can upgrade to Coinbase Pro for free after they have sufficient knowledge and experience. For advanced clients, Pro services offer research charts and more complex trading options.
Competitive Advantage
Coinbase’s strategy has been to secure virgin markets by focusing on rapid customer volume growth, being the first to implement no fee for the first $1 Mn of cashouts. This has been a great strategy leading to rapid customer growth. It also developed a pricing model that takes advantage of bitcoin price volatility by monetizing cashouts, which protect bitcoin users against volatility.
Over the years hacking has been one of the major risks leading to bankruptcy to many exchanges. Coinbase boasts an industry-leading security system to protect crypto assets and user data to avoid such ill fate. There has been no reported case of hacking for the company to date.
Market Sentiments
Coinbase is poised to list at a multiple of over 50x revenues. The market is bullish on Coinbase and the future of crypto assets. Crypto Assets have traditionally been highly volatile and have had multiple boom and busts in just one decade. Post the pandemic, the acceptance of crypto-asset has led to prices and trading volume rise exponentially with more acceptance by institutional investors, Coinbase on its part has also planned its listing when the market sentiment is at an all-time high with bitcoin touching a record ATH $60,000 and investors being super bullish on cryptocurrencies. The market is expecting the listing of Coinbase at a very high valuation of around $70Bn — $100 Bn.
Key Risks
· In the past, there have been many security breaches and loss of crypto assets held by users ex: Mt. Gox. Such a catastrophe could adversely impact Coinbase’s brand and financial condition.
· Cryptocurrency is highly regulatory and evolving and with many counties banning cryptocurrencies, any adverse regulation can be detrimental to the running of Coinbase.
· The crypto market is highly innovative, the competition will further intensify in the future as existing and new competitors introduce new products or enhance existing products leading to lower revenues for Coinbase. Exchanges such as Binance, Kraken, Bybit, Bitmex, and Bitflyer have much larger trading volumes than Coinbase and differentiated products such as derivatives and crypto financing.
Financial Highlights
· Total Revenue (2012–2020): $3.40 Bn
· Revenue Break-up: 96% — Transaction volume-based fee, 4% — Subscription products and services
· Subscription and Services growing 126% YOY and more stable than the transaction-based fee.
Other Information
Coinbase has two classes of common stock, Class A common stock and Class B common stock. Each share of Class A common stock is entitled to one vote. Each share of Class B common stock is entitled to twenty votes and is convertible at any time into one share of Class A common stock. In the Listing, only the Class A of 114.9 Mn common stock is available.
· Supports 90 crypto assets
· Monthly Active Users: 2.8 Mn
· Lifetime Trading Volume: $456 Bn
· Total Assets on Platform: $90 Bn
· Retail Users: 43 Mn, Institutional Investors — 7000
Market Opportunity
The Growth of Crypto Assets has grown at a CAGR of 195% over the last decade, the size of the market has hit $2 Tn in April 2021 and is poised to continue growing at an accelerated rate with increasing institutional and retail participation. Coinbase today has around 12% of the total crypto assets in its users’ wallets and will look to increase its market share.
Market Competitors
The Top 10 Crypto Exchanges have only ~25% Market Share, Overtime, Coinbase, and other big crypto exchanges will be leading market share gains at the expense of smaller players.
Valuation
The Valuation of Coinbase is in line with other fast-growing exchanges such as Robinhood at 56x revenue multiples. Being the first crypto exchange to be listed, there are no direct competitors to compare Coinbase with. Hence, we are using Robinhood which is a private startup and fast-growing with innovative products and services, and has recently started providing a crypto exchange on its platform.
Being listed directly, there is a possibility of scarcity premium due to limited supply of Coinbase shares leading to higher valuations.
In the S-1 filing, Coinbase reported that the average share trading price was $343.58 in the private market in the Q1 of 2021 which is valued at $68 Bn, However, In the secondaries, the shares of Coinbase were trading at a valuation as high as $100 Bn, this would bring the multiple to around 77x multiples. Assuming an estimated 266.2 Mn outstanding shares, the shares are expected to trade in the range of $360 — $370. For now, 114.9 Mn shares have been registered to trade on the exchange.
Investing in Coinbase! Should you be cautious?
With investor sentiments at an all-time high, Investors looking for a quick buck can buy the shares during the direct listing and continue holding Coinbase as long as the crypto momentum continues. Long-term Investors however should understand that Coinbase fortunes are directly linked to the value of crypto assets. Expect the stock to be volatile and with some periods of underperformance when crypto assets are in the bust phase. We recommend the investors to be optimistic about the long-term prospects of Coinbase but understand that there would be periods of underperformance from time to time.
This article has been co-authored by Nihal Yerramsetti and Ayush Dugar, who are in the Research and Insights team of Torre Capital.
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