The First Bitcoin Stock Is Likely to Be This Front-Runner

The case for Coinbase becoming the first Bitcoin stock to go public keeps getting stronger.

Less than three weeks ago, Coinbase, a digital currency wallet and exchange, raised $100 million in Series D venture capital funding.

Bitcoin stock

It was the second-largest funding round for any Bitcoin startup to date, bringing the total amount invested in the company to $217.2 million. And the round boosted Coinbase's valuation to $1.6 billion - making it the first Bitcoin "unicorn."

Institutional Venture Partners was the VC firm that led the round. IVP focuses on tech startups, having backed such names as Snap Inc. (NYSE: SNAP), Twitter Inc. (NYSE: TWTR), Zynga Inc. (Nasdaq: ZNGA), and Dropbox Inc.

IVP wasn't the only heavy hitter in the round, either. Also participating were Draper Associates, headed by Tim Draper, as well as Greylock Partners, which put money behind Facebook Inc. (Nasdaq: FB), Airbnb, and Pandora Media Inc. (NYSE: P).

But having a lead in VC funding is just one reason Coinbase is a near-lock to be the first Bitcoin stock. For instance, its business has exploded this year...

Why Coinbase Needed $100 Million

Coinbase is made up of several related businesses that operate in 32 countries. The best known is the wallet, which allows customers to buy, sell, and store three of the top cryptocurrencies - Bitcoin, Ethereum, and Litecoin.

Coinbase also runs a Bitcoin exchange, GDAX (Global Digital Asset Exchange), where customers can trade the same three cryptocurrencies.

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Finally, Coinbase offers a service to merchants allowing them to accept Bitcoin as payment. Among its 46,000 customers are Inc. (Nasdaq: OSTK), Dell Inc., and Expedia Inc. (Nasdaq: EXPE).

The wallet and exchange businesses in particular have been growing at an exponential rate.

Throughout 2017, the Coinbase wallet and its GDAX exchange have facilitated about $15 billion worth of transactions - more than five times last year's total volume.

Coinbase Growth a Nice Problem to Have

And the number of customers has skyrocketed. The customer base has nearly doubled in less than nine months, from just over 5 million at the end of 2016 to 9.7 million now.

Of course, such rapid growth is a double-edged sword. Coinbase hasn't been able to upgrade its systems fast enough to handle all the volume, especially at peak times. This results in slow response times or worse, temporary system outages.

Such issues have struck Coinbase several times over the past year. Major Bitcoin price swings, as happened in May and June of this year, are accompanied by spikes in volume that stress all Bitcoin exchanges.

The company says it will use the $100 million to scale its business to accommodate its growing number of customers.

But Coinbase will need to keep spending steadily to keep up with the kind of growth it's likely to see over the next few years.

Related: What's the Best Cryptocurrency to Invest in Today?

Rising revenue will help; Coinbase collects fees from each of its three businesses. But it's unclear if the company is yet making a profit (CEO Brian Armstrong admitted one year ago on Reddit that Coinbase was not profitable at that time).

That means over the next couple of years Coinbase will have plenty of incentive to have an initial public offering to raise the capital it's going to need.

In fact, Coinbase is an ideal candidate for an IPO - and in so doing, could become the first Bitcoin stock...

Why Coinbase Is Destined to Be the First Bitcoin Stock

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Companies that make it through four or more rounds of venture funding typically are thinking about their next step.

A few will stay private, but most either get acquired or go public.

If we can believe CEO Armstrong, Coinbase has no intention of seeking a buyer.

"Coinbase is not trying to make a quick flip and sell to a bigger company. We are playing for the long term," Armstrong said on Reddit last year. "We are planning to grow revenues from this initial service we've built, continue scaling it around the world, and then invest that money in new projects that will help the world move to an open financial system. This will take 10-plus years."

Generally speaking, companies go public for four reasons:

  • Raise money: I've discussed this above. It's the most obvious reason for a company to go public, and Coinbase certainly has a demonstrated need. And a Coinbase IPO would likely raise hundreds of millions of dollars.About David Zeiler
  • Reward existing stakeholders: Venture capitalists sink money into startups in the hope of an eventual payday. If the startup isn't acquitted, that payday comes in the form of an IPO. In addition, an IPO is a great way to reward the employees who hold shares and options. No doubt both the venture capitalists who have backed Coinbase as well as employees who have helped build the company are eager for the kind of windfall a Coinbase IPO would deliver.
  • Create acquisition currency: If Coinbase plans on being a big dog in the cryptocurrency universe, it will at some point seek to grow through acquisition. A publicly traded company can use its stock to buy other businesses, making acquisitions easier.
  • Building the brand: Going public attracts a lot of media attention, particularly for companies in the tech sector. It's millions of dollars' worth of free marketing and promotion. For a company with Coinbase's long-term ambitions, that's gold. And with the financial world's obsession with anything Bitcoin and blockchain-related, you can bet that a Coinbase IPO would be one of the most-hyped in Wall Street history.

While you're not hearing much about a Coinbase IPO now, you will over the next year. As its valuation continues to grow, the IPO whispers will start, just as they did with companies like Facebook and Twitter.

Back then, social media companies were all the rage. But Coinbase represents the first of a new brand of Wall Street darling - the cryptocurrency IPO.

When this thing hits the markets, it's going to be huge.

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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