Coinbase is set to make history for cryptocurrency companies everywhere this week, as it prepares to list its shares publicly on the Nasdaq.
Its 14 April IPO will be the first of any major cryptocurrency firm, and has already got the market in a buzz after the company released its first quarter financials last week.
The largest exchange for digital currencies in the US benefited significantly from bitcoin’s rally in the first three months of 2021, as investors piled onto the exchange to get a slice of the crypto pie.
The platform’s success and present appeal is undeniable. Coinbase attracted 13 million new users during the quarter, taking the total up to 56 million, with estimated earnings of $800m representing more than double the profit it made for all of 2020.
Meanwhile, revenue came in at $1.8bn — up 900% year on year, more than double the $584m it made in the final quarter of 2020, and recording the nine-year-old company’s best-ever quarter. Trading volumes, a marker of how active the platform has been during the first three months, swelled to $335bn from $30bn in the same period last year.
Lofty valuations persist across the sector. The entire cryptocurrency market surpassed $2tn last month, while Coinbase was valued at more than $91bn earlier this year.
But this time last year, the idea of a cryptocurrency company being considered mainstream enough to make a stock market debut of that size was inconceivable. While demand for Coinbase shares is expected to be high, what remains to be seen is whether the firm can achieve a market capitalisation of a similar calibre once the public has its say.
Tech darlings have already weathered a rough time on public markets, straining to keep their market capitalisations in line with earlier outsized valuations from venture capital investors. Food delivery app Deliveroo, once thought to be a star jewel in the UK’s crown, struggled to convince retail investors it was worth the £7.6bn price tag, with shares falling as much as 30% on its first day of trading earlier this month.
Some analysts forecast that perhaps Deliveroo’s woes were unique to the company, given the difficulties it is facing with regulators concerning employment rights. But while Coinbase is in a different sector entirely, it is also facing the scrutiny of governments as regulators globally size up how they might treat cryptocurrencies in the future.
“The bigger question is whether any valuation is sustainable, particularly given how many governments aren’t particularly enamoured of cryptocurrencies, which means future regulation is likely to be a clear and present danger and a probable headwind,” said Michael Hewson, chief market analyst at CMC Markets.
Coinbase also faces another double-edged sword. Last year, it made around 96% of its net revenue from transaction fees. However, Coinbase charges far more than its competitors, with fees at rivals such as Kraken and Bitstamp undercutting the exchange by more than half.
Market players in fintech have questioned whether Coinbase will be able to maintain its high prices once others catch up in prominence. As cryptocurrencies enter the mainstream as a diversifying asset, investors could start to prioritise searching for the best deal over using an expensive exchange with a trusted brand image.
Coinbase has recognised that this may be an issue in future, stating in a February filing that it anticipates pressure on its prices “to emerge over time”. However, it said its position as a well-known company, as well as diversification into other products such as crypto storage, will “offset the effects of any future fee pressure”.
Matt Weller, global head of market research at City Index, said investors are likely to view Coinbase as a way to gain exposure to cryptocurrencies without the immediate risk of price volatility for assets such as bitcoin and ethereum “for better or worse”.
In filings, Coinbase said it expects growth in 2021 will be driven by increasing institutional interest, adding that $122bn of the $223bn in assets on its platform came from such investors.
“If (and it’s a big if) large institutions continue to accumulate cryptoassets in the coming quarters, Coinbase should be a major beneficiary,” said Weller. “One way or another, [the Coinbase IPO] will be a key measure of investor appetite in cryptoassets and IPOs generally.”
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