With the Coinbase stock offering scheduled for April 14, investors will soon have a new way to get some exposure to the red-hot cryptocurrency markets.
The best-known U.S.-based cryptocurrency exchange, Coinbase, has 56 million users across 100 countries and reported $1.3 billion in revenue last year.
Coinbase Global Inc. (NASDAQ: COIN) will be the first big crypto company to have a U.S. stock offering and will fire the starting gun for many more to follow. Think of how LinkedIn's IPO in 2011 opened the door for a wave of social media IPOs over the next several years.
That Coinbase is leading the way is no surprise to me. I've had it on my crypto IPO watchlist since 2014. In 2017, I named Coinbase the frontrunner in the race to be the first big crypto IPO.
With Bitcoin up about 450% over the past six months and trading not far below its all-time high of $61,556.59, this event is bound to attract a lot of attention from investors. Frankly, it's an ideal time for a crypto company to go public.
But proper research is the cornerstone of smart investing. Today, we're going answer all of your questions about the Coinbase stock listing...
Why Is Coinbase Doing a Direct Listing Instead of a Standard IPO?
Coinbase is going public via a direct listing, the same method that Spotify Technology S.A. (NYSE: SPOT), Slack Technologies Inc. (NYSE: WORK), and Palantir Technologies Inc. (NYSE: PLTR) used. In a direct public offering (DPO), existing investors make their shares available for sale to the public. Unlike in an IPO run by investment banks, no new shares are created, so existing shares are not diluted. This route is also faster and cheaper. A DPO is a good choice for a company like Coinbase that doesn't need additional capital at the moment. The SEC filing said the company plans to offer 115 million shares of Class A common stock.
Is Coinbase Really the First U.S. Crypto Stock? I've Seen Others
Yes, other crypto stocks do exist, such as Hive Blockchain Technologies Ltd. (OTC: HVBTF) and Riot Blockchain Inc. (NASDAQ: RIOT), but they got listed by doing a reverse merger rather than any kind of stock offering. Coinbase will be the first major U.S. listing.
What Is the Coinbase Valuation?
According to Barrons, Coinbase was most recently valued at $68 billion. Since the company's founding in 2012, it has attracted $547.3 million in venture capital from such firms as Andreessen Horowitz, Draper Fisher Jurvetson, and Tiger Global Management. No price has been set for the stock, but on private markets, shares were selling for between $200 and $375 a share in the first quarter. When Coinbase goes public on April 14, analysts have predicted COIN stock will trade at between $300 and $350 a share. That suggests a stratospheric valuation of about $100 billion.
How Does Coinbase Make Money?
As you might expect, Coinbase makes the bulk of its money - 96% in 2020 - from the transaction fees it charges customers to buy and sell crypto. The exchange has proven a popular on-ramp for people just getting started in crypto, as it is generally considered the easiest to use. The rest of its revenue comes from fees from other services it offers, such as custody and staking. Over the past couple of years, Coinbase has attracted more institutional customers, which now number more than 7,000. Revenue rose from $533.7 million in 2019 to nearly $1.3 billion in 2020. Last year, Coinbase finally turned profitable - another reason why now is a good time for the company to go public. After losing $30.4 million in 2019, it had net income of $409 million in 2020.
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What Kind of Growth Can I Expect?
Coinbase has been growing rapidly in just about every respect. Total assets on platform grew from $90 billion in 2019 to $223 billion last year. Assets on platform from institutions helped feed that growth, increasing from $45 billion in 2019 to $122 billion in 2020. Median quarterly trading volume on the exchange has increased from $17 billion in 2018, to $21 billion in 2019, to $38 billion last year.
The number of Coinbase users grew fivefold between 2015 and 2017 (from about 2 million to 10 million) and has nearly doubled, from less than 30 million to 56 million, over the past two years. And there's a lot of runway in front of this company. According to a CivicScience survey, the percentage of Americans invested in crypto has risen from 6% to 9% since 2019. And that's just in the United States. The company definitely has lofty ambitions, judging by this statement in its S-1 filing: "Our objective is to bring crypto-based financial services to anyone with a smartphone, a population of approximately 3.5 billion people today."
Didn't Coinbase Group Just Report Earnings? What Did That Tell Us?
Coinbase reported estimated first-quarter earnings April 6. Revenue was a staggering $1.8 billion, an increase of 842% from the same quarter a year ago. Net income was between $730 million and $800 million. That range is far higher than the net income of $31.9 million in the year-ago quarter. It's clear the booming crypto market this year juiced the numbers, but they're still impressive.
Should I Buy the Coinbase IPO?
All indications are that Coinbase Global will be a solid company. It has a powerful brand in a rapidly growing market. It's enjoying dramatic growth. It's making a profit. That's all good.
But because it's tied to the crypto markets, Coinbase also figures to be a highly volatile stock. Don't imagine those killer Q1 earnings estimates will be the norm. The company is very up-front about it.
"We may earn a profit during periods of strong crypto asset prices when our revenues are high and we may lose money during crypto winters when revenues are low," Coinbase Chief Financial Officer Alesia Haas said in the Q1 earnings call.
Still, given Coinbase's impressive growth, many will be tempted to buy shares on the first day of trading. But that's not the best way to play this.
For one thing, buying a stock on the day of its debut rarely works out for retail investors. The price jumps at the opening bell, and retail investors end up paying a steep premium for buying early. I expect the Coinbase stock offering will be a prime example of this.
We already know the company's fortunes will rise and fall with the crypto markets. That's valuable intelligence. Anyone who's been involved with crypto for a long time knows that nasty bear markets tend to follow the crazy bull markets.
The current bull market is likely to end either in the fall of this year or early in 2022. And a punishing crypto winter will almost surely follow. Don't be surprised if the prices of Bitcoin and other cryptocurrencies drop as much as 50% to 75% by 2023.
I expect the Coinbase stock price to start high and go higher. But when the crypto markets go south, so will COIN. The time for retail investors to buy COIN stock will be some time during the next crypto winter.
When the crypto market recovers, so will Coinbase stock.
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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.