On Wednesday morning, Coinbase, a major cryptocurrency exchange, hit public markets with a direct listing. It's yet another huge milestone in the latest saga of our completely normal, sanguine economic situation that is not a bubble.
At a private valuation of $100 billion, the company would be one of the most valuable Silicon Valley unicorns in years. With $322 million in net profits in 2020 on $1.8 billion in revenue, the company would belong to an even more exclusive group: profitable unicorns. By contrast, other tech companies that have raised huge sums by going public—such as Uber and DoorDash—had to warn investors that they may never turn a profit.
Whether or not the highly-valued listing will result in a huge payday for investors is still shaking out in the market, but it’s likely to make many initial investors in Coinbase wildly rich quite literally overnight. For weeks ahead of the listing, market watchers positively salivated at what is anticipated to be a festival of profit; basically capitalist Christmas.
Coinbase’s highly-valued listing is also a watershed moment for the cryptocurrency industry, as Coinbase has been one of the most visible and respectable outfits for years as a popular on-ramp to cryptocurrency use. At the same time, this business model poses a risk thanks to the volatile nature of cryptocurrencies.
Indeed, Coinbase lists cryptocurrency as a huge risk in its prospectus. "Our operating results have and will significantly fluctuate due to the highly volatile nature of crypto" the company warns, listing some volatility factors such as: the company's "dependence" on cryptocurrency trading activity since it collects fees, regulatory action, changes to legislation, technical difficulties, security breaches, "negative publicity", investor and user confidence, monetary policies pursued by national governments, "macroeconomic conditions" and "political conditions," among other factors.
Regardless, Coinbase will be offering 114.85 million shares according to the prospectus. Goldman Sachs and Nasdaq have pegged the “reference price” at $250, which would mean a valuation of $66.5 billion if shares trade at that price--a huge haircut from its private valuation and that of analysts with price targets as high as $600. It's important to note, however, that a reference price is not actually what price the shares will be traded at. In fact, while IPO prices are what shares will be sold at initially, in a direct listing no shares are traded at the reference price. Reference prices are reached with some input from investment bankers (like Goldman Sachs) and past private market trades, but as CNBC points out the past five major direct listings on the New York Stock Exchange all opened at prices 37 percent higher than their reference prices, on average.
There is also the question of whether Coinbase’s valuation is on the money, or if it will take an unexpected hit once it begins trading. Marketwatch crunched the numbers and concluded that the math doesn’t add up, for example. According to Marketwatch, a $100 billion valuation suggests its revenue will be 1.5 times the combined 2020 revenues of "two of the most established exchanges'' in the stock market: Nasdaq Inc and Intercontinental Exchange, which owns the New York Stock Exchange. To do this, Coinbase would need to grow its revenue by 50 percent compounded annually for seven years. The authors peg Coinbase's real valuation at $18.9 billion, arguing that its fees will be a liability when fending off future competition.
However, Coinbase bulls see the firm’s dependence on cryptocurrency not as a potential weakness but its greatest strength—assuming cryptocurrencies subsume the world financial system.
"You don't think about bitcoin volatility, trading fees and revenue," Matthew Le Merle, managing partner at investment firm Fifth Era and Blockchain Coinvestors, told CNBC. “You have to start with—what’s the profit pool of the world’s digital monies and assets? In that context, this is trillions and trillions of dollars that’s going to be shifting hands."
We’ve heard the defense of massive untapped markets before, especially with other Silicon Valley unicorns like Uber which labeled itself “the Amazon of transportation” and pursued an IPO valuation of $120 billion at one point. Uber once insisted it was uniquely poised to tap into trillions of dollars of transactions, namely by offering a diverse portfolio of goods, services, and allowing for a range of market participants to use its platform. Today, it has abandoned nearly all of those dreams and set its sights on a more modest goal of achieving a monopoly (or oligopoly) of ride-hail and food delivery in a few key markets.
Coinbase insists its real value is in the “cryptoeconomy” which it defines as a "new open financial system built upon crypto.” Coinbase’s mission, then, is to help develop a diverse set of goods and services in pursuit of "a more fair, accessible, efficient, and transparent financial system for the internet age that leverages crypto assets: digital assets built using blockchain technology." That requires the company "further diversifies the ecosystem" whether that be the "composition of our Trading Volume" or "support for more crypto assets.”
Whether any of this will actually be possible is an open question, as the company admits multiple times at length in its prospectus. Despite Bitcoin being around for more than a decade, cryptocurrency is still developing and so is the legal and economic regime around it. Whether Coinbase’s valuation makes any sense at all is another open question that will likely be answered later on Wednesday, but the Bitcoiners are clearly expecting the best: the price of Bitcoin hit a record high price of north of $60,000 on Tuesday.