Andrew Urquhart, Associate Professor of Finance, ICMA Center, Henley School of Business, University of Reading.
Instead of going the traditional route of the initial public offering (IPO), Coinbase plans to list its shares directly on the Nasdaq exchange via direct listing, a technique pioneered by big names like Spotify and Palantir during the last years. While a IPO involves a company creating new shares and having an underwriter who buys them at a fixed price and then sells them in the market, as part of a direct listing, a company sells existing shares and does no subscriber.
But what is Coinbase and why is it such a big development in the cryptocurrency market?
Coinbase’s business model
Coinbase was founded in 2012 by Brian Armstrong, a former engineer at Airbnb, and Fred Ehrsam, who was a trader at Goldman Sachs. Their mission was to make investing and trading in cryptocurrencies easier, more efficient and fairer.
The company has since grown into the largest crypto exchange in the United States. Even though there are many other exchanges around the world with significantly larger trading volumes, including Binance, Huobi, and OKEx, Coinbase’s growth has been incredible lately.
He just reported preliminary results for the first quarter of 2021, with revenue up to $ 1.8 billion. This is a nine-fold increase from the first quarter of 2020 and more than the $ 1.3 billion the company achieved for the full year of 2020. First quarter net income is expected to be in the order of $ 800 million, up from $ 322 million in 2020 schedule. In the past three months alone, the verified user base has grown 30% to 56 million people.
So how does Coinbase make money? It earns fees and commissions when clients buy or sell cryptoassets, although there is no charge for storing cryptoassets in clients’ wallets. the the costs include margin fees, where Coinbase charges 0.5% for both purchases and sales, although this figure may vary depending on market conditions.
It also charges a “Coinbase Fee,” which is a commission on all crypto transactions that depend on your location and the total amount of your transaction. The company also has other lines of business, including the international payment system Coinbase Commerce, a Visa Coinbase card, and USD Coin (USDC), a stable cryptocurrency priced 1: 1 to the US dollar. Coinbase co-founded USDC with the Circle crypto financial services platform, and makes money through stablecoin by reinvesting dollars that users exchange for safe assets like short-term U.S. Treasuries.
How sustainable is this?
When it comes to investing in Coinbase, the same rules apply for buying any stock – there is risk and the performance of the stock will depend on demand and future success of the stock. the company. The fate of Coinbase is obviously tied to the performance and adoption of Bitcoin and other crypto-assets. If investors lose interest in these assets, Coinbase’s business will be in trouble. Coinbase also has to contend with new competitors arriving every day, many of whom are getting big very quickly. Binance, the market leader with $ 39 billion in daily volumes, was only launched in 2017 for example.
But given the surge in crypto-asset prices, especially bitcoin, over the past year there are more and more individuals and large institutions such as Mass Mutual and You’re here seeks exposure to this alternative investment. And with the COVID-19 pandemic forcing governments to spend a lot on supportive measures and central banks creating a lot of extra money to boost their economies, many investors are worried on the inflation that this could cause, which would devalue “Fiat” currencies like the dollar and the pound. Since bitcoin is designed to never have more than 21 million at most in circulation, it is seen by these investors as a store of value to protect their wealth from this problem.
Brian Armstrong himself is very optimistic about the adoption of cryptoassets. In a letter celebrating the platform’s filing to go public, he wrote:
Trading and speculation were the first major use cases to take off in cryptocurrency, just as people rushed to buy domain names in the early days of the internet. But now we are seeing cryptocurrency evolve into something much bigger. People use cryptocurrency to earn, spend, save, wager, borrow, lend, vote, and perform many other types of economic activity.
Still, much of this is an argument for owning cryptocurrencies themselves, so why would investors want to buy stocks in a crypto exchange instead? It’s a way to take advantage of the huge rise in this market without actually buying cryptoassets directly. For investors who are concerned about high volatility in crypto prices, as well as the fact that it can be stressful trying to store cryptoassets securely, Coinbase could be an interesting alternative. This could be of particular interest to financial institutions like pension funds that take a very conservative approach to investing.
There is no doubt that when Coinbase is listed under the symbol COIN, it will attract a lot of attention. Demand will be high and with any listing of this size there will be major fluctuations over the next few days as trading volumes will be large. But if you want to invest in cryptoassets, it is probably best to invest in the digital coins themselves, as their performance depends only on the level of demand for them.
COIN’s performance will depend on whether Coinbase stays ahead of the pack and provides cheap and secure access to cryptoassets, so it has an underlying vulnerability distinct from the assets themselves. Nonetheless, the list will expose more investors to the crypto world and is another sign that the financial ecosystem is starting to take note of cryptoassets.
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