Coinbase Global Inc. will list its shares on the NASDAQ stock exchange on Wednesday, in what is the most highly anticipated stock listing this year for the crypto-currency community globally.
The San-Francisco based crypto-exchange was founded in 2012 by former Airbnb engineer Brian Armstrong and former Goldman Sachs trader Fred Ehrsam. It is the largest crypto-exchange in the United States and will be the first crypto-exchange to list on a stock exchange. More than eight years after starting the company, Coinbase could be valued at over $100 billion if all goes well with the listing.
According to Coinmarketcap.com, Coinbase is the second largest crypto-exchange in the world supporting around $4.3 billion in crypto-trading every day. In the last few months, Coinbase has led the way for the mainstreaming of crypto-currencies by launching a debit card with VISA, issuing a stablecoin called USD Coin and creating a new payments service for merchants. The company has so far raised $847 million from Andreeson Horowitz, Union Square Ventures, Ribbit Capital Polychain Capital and several banks, according to Crunchbase.
“Today’s listing is a milestone, but it’s not as important as every new day in front of us. Coinbase has an ambitious mission: to increase economic freedom in the world. Everyone deserves access to financial services that can help them build a better life for themselves and their families. We have a lot of hard work to do to make this a reality”—Brian Armstrong, Chief Executive Officer, Coinbase
Here are some key takeaways from its S1 filing with the Securities and Exchange Commission in the US and other regulatory disclosures:
1) Scaling products and building competitive advantage
The company offers several products and makes its revenue from transaction fees it charges on crypto trades by both retail and institutional investors. While retail crypto-currency users can use Coinbase for its trading platform and digital wallet, institutions have turned to the crypto-exchange for crypto-trading and custody services. Today, around 7,000 institutions including several banks, hedge funds, insurers and corporations, use Coinbase as their crypto-currency broker that can execute large and complex trades.
“Our unique approach draws retail users, institutions, and ecosystem partners to our platform, creating a powerful flywheel: retail users and institutions store assets and drive liquidity, enabling us to expand the depth and breadth of crypto assets that we offer, and launch new, innovative products and services that attract new customers,” the company said in its S1 filing. As a result of this approach, Coinbase will work towards building tailor-made solutions and services on its platform which will generate value over the long term, it said.
At present, Coinbase supports 15 blockchain protocols, over 90 crypto assets and can facilitate fiat to crypto-currency transactions in three major sovereign currencies.
Going forward, the crypto-exchange will add more assets to the the retail trading platform and plans to open the platform so that third-party apps or decentralised finance applications can integrate themselves. On the institutional side, Coinbase will invest to scale and develop its main brokerage product and at the same time, it plans to build crypt0-infrastructure for the wider community of developers and companies, Armstrong said in an investor call.
He told investors that Coinbase has four major competitive advantages: 1) product experience, 2) investment in compliance infrastructure across 30 countries, 3) large focus on cyber-security and 4) the largest number of blockchain integrations.
2) Business and Operational Risks
- Volatile crypto-asset prices: The company’s financial results and revenue will fluctuate depending on the prices of crypto assets and volume of transactions conducted on our platform. Since a majority of the net revenue comes from trading in Bitcoin and Ethereum, a decline in the price of these crypto-assets could affect Coinbases’ business and financial results.
- Concentration of users: Since the majority of revenue comes from retail investors, Coinbases’ revenue stream is concentrated. “A significant amount of the Trading Volume on our platform is derived from a relatively small number of customers, and the loss of these customers, or a reduction in their Trading Volume, could have an adverse effect on our business,” it said.
- Decentralised exchanges: Coinbase competes with a number of decentralised and noncustodial platforms, which connect a buyer and seller through an intermediary but generally lack the speed and liquidity of centralised platforms. Given the low startup costs and barrier to entry, some of these decentralised platforms now report similar trading volumes to that of regulated crypto-exhanges. The growth of these new crypto-exchange models can affect Coinbases’ business.
- Crypto-asset risks: Coinbase says that negative publicity associated with crypto asset platforms, customer disputes or loss of customer assets, blockchain or crypto forks and imperfect smart-contracts can affect its business. Further, if crypto-mining becomes too expensive it will affect trading on the platform.
- Credit and Investment Risk: Coinbase provides consumer and commercial loans to qualified customers secured by their crypto asset holdings on the platform. This exposes the company to credit risk. It has also investments in various decentralised finance protocols, which if they do not work out could lead to losses.
There are also other general risks the company highlighted:
- Evolving regulations and legal compliance: The regulatory landscape for crypto-currencies is still at a nascent stage, therefore there could be compliance issues going forward as regulations keep evolving. Further, as Coinbase expands internationally and complies with regulations across a variety of jurisdictions, the company could become subject to investigations and enforcement actions by regulators and governmental authorities. The company aslso added that it can be subjected to material litigation, including individual and class action lawsuits.
- Product development: Coinbase says that given that there differences in regulations across jurisdictions for the same crypto-asset, it has to ensure categorise a particular crypto-asset. This could be a regulatory risk going forward, said. It added that its performance could be affected if it cannot develop new products and improve existing ones that effectively competes with the products of other crypto-exchanges.
- Security: While cyber-security is a major risk area for any business today, especially digital-only businesses like crypto-exchanges, Coinbase says that it has to also ensure that its users’ wallets are not compromised. “If we are unable to access our private keys or if we experience a hack or other data loss relating to our ability to access any crypto assets, it could cause regulatory scrutiny, reputational harm, and other losses,” it said.
- Partnerhips and Service providers: If certain relationships and services provided by banks, insurers or third-party to Coinbase cease, it could impair the company’s operations. “Any significant disruption in our products and services, in our information technology systems, or in any of the blockchain networks we support, could result in a loss of customers or funds and adversely impact our brand and reputation and business, operating results, and financial condition,” it said.
Other risks include: 1) inability to grow user base, 2) governance risks, 3) how unregulated companies behave in the crypto-market, 4) disruption in information technology systems or blockchain networks, 5) losses due to fraud, money laundering, gambling, tax evasion, and scams committed by users on the platform and 6) accounting and taxation risks since there is limited guidance from regulators.
3) Fee-based Revenue model
The company charges a transaction fee against volume-based trades performed by retail users and institutions, which accounts for 96% of its annual revenue, it added. Coinbase has not provided any revenue projections to its investors, since a crypto-exchanges’ revenue is highly correlated with the price of Bitcoin and other cyrpto-currencies.
“We cannot forecast the price of bitcoin any better than you can and as a result, it is very difficult to accurately forecast our revenues…We do not extrapolate the most recent quarter, nor do we think a run rate of a single month or quarter is the right way to forecast our potential financial performance,” said Alesia Haas, chief financial officer, Coinbase. Instead, she presented three different scenarios to investors on how the platform will grow on an annualised basis:
- 7 million Monthly Transacting Users: if market cap of cryptos grows and there is moderate-to-high crypto asset volatility
- 5.5 million MTUs: if market cap of cryptos remains flat and there is low-to-moderate crypto asset price volatility
- 4 million MTUs: if market cap of cryptos decreases and there is low crypto asset price volatility
“Over the last 2 years, we have seen average annual net revenue per MTU range between $34 -$45 per month, with the low end of this range occurring in 2019, a period of low Bitcoin price and low crypto asset price volatility, and the high end of the range occurring in 2020, a period of rising Bitcoin price,” Hass told investors. Adding that with a strong rally in the prices of various crypto-currencies, it is likely that annual average net revenue per user this year will exceed this historical range.
According to the S1 filing, Coinbase has multiple revenue streams:
- Retail transaction fee: $1.04 billion in 2020 vs $432,919 in 2019
- Institutional transaction fee: $55,928 in 2020 vs $30,086 in 2019
- Custodian fee: $18,561 in 2020 vs $3,009 in 2019
- Subscription and services fee: $44,993 in 2020 vs $19,944 in 2019
- Crypto-asset sales: $133,688 in 2020 vs $39,863 in 2019
While subscription fee constitutes a small portion of Coinbases’ annual revenue, demand for these products services grew substantially in the last year, the company said. “We are committed to growing more stable revenue from subscription products and services, and expect that they will contribute a larger portion of our total revenue over time as our customers connect with the broader cryptoeconomy,” it said.
4) Staggering growth post pandemic
A year after the pandemic, Coinbase has 56 million users globally with more than $223 billion in assets, which represents around 11.3% of the crypto-asset market, it said in a recent press release. The total trading volume on the platform stood at $335 billion for the January to March 2021 quarter of this year.
For Q1 of this year, Coinbase reported $1.8 billion in revenues, compared to $1.3 billion in revenues for the whole of 2020. It posted a net-profit of $730-800 million during Q1 this year, compared to $32 million in the same period last year. In 2020, the crypto-exchange more than doubled its revenue to $1.3 billion in 2020 from $533 in 2019. It reported a net-profit of $322.3 million in 2020 compared to a net-loss of $30.4 million in the previous year.
“Looking to full year 2021, in order to scale our operations and to continue to drive product innovation, we expect our technology and development expenses and our general and administrative expenses to be between $1.3 billion to $1.6 billion, excluding stock-based compensation, in 2021. Additionally, we plan to augment our historically strong organic growth with customer acquisition and engagement by meaningfully increasing our investment in sales and marketing. We plan for sales and marketing to be between 12% and 15% of net revenue in 2021. Lastly, we anticipate transaction expenses will be in the low-to-mid teens as a percent of net revenue in 2021″—Coinbase Press Release
5) Direct listing, not an IPO
Coinbase has chosen to go for a direct listing since an initial public offering (IPO) process is generally more expensive.
Unlike in an IPO where companies offer investors to buy fresh equity shares in their entity, Coinbase has opted to go for a direct listing on the NASDAQ to raise liquidity for its shares. While the price of a share in an IPO is pre-determined by bankers based on their assessment of the markets’ interest, in a direct listing the market determines the price of the stock on the initial day of trading.
So on Wednesday at 9:30 am (Eastern Standard Time), investors will enter their bids during a 10-minute “display only” period, based on which NASDAQ will calculate a “reference” price. The banker to the issue— in Coinbase’s case, Goldman Sachs —will then decide whether the listing goes ahead or not.
Another key difference between an IPO and direct listing, is that an IPO helps a company raise fresh equity capital from the public whereas a direct listing is a liquidity instrument used by companies in order to allow existing shareholders to trade their shares on a public exchange. A direct listing basically means that Coinbases’ investors can buy and sell shares of the company, under the ticker ‘COIN’ without any lock-in restrictions like under an IPO.
While the company will not receive a fresh infusion of capital under the direct listing route, if the price of COIN moves upward through the course of trading the crypto-exchange’s valuation will grow. While a direct listing opens the existing pool of equity capital in the company to public trading, Coinbase can choose to issue fresh equity share to raise more capital, if needed, in the future.
On Tuesday, NASDAQ announced that the reference price point for COIN is set at $250 per share. In an amendment to its S1 filing last month, Coinbase said that it has allocated 114.85 million Class A common shares for the proposed listing.
MediaNama has prepared a guide on crypto-currency regulations in India, listing the government’s position over the last few years and various policy recommendations; read it here: A complete low-down on crypto-currency regulation in India.
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