It’s one of the hottest IPOs of the year. Driven by the cryptocurrency bull market, Coinbase comes to Wall Street on Wednesday. It’s the first cryptoexchange on the floor, and many industry hopes are pinned on the US’s biggest digital currency trading platform.
The 9-year-old platform is well-positioned to succeed as it gained more than 13 million new customers in the first quarter of 2021. It posted revenues of $1.8 billion (€1.5 billion) in that time, nine times more than the same period last year. It has been boosted by the ongoing Bitcoin boom, the price of which has doubled to more than $60,000 since January.
Coinbase opened at $381 on Wednesday, up 40% from a reference price of $250 per share, making its implied value more than three times that of exchange operator Nasdaq.
Valued at $91 billion on its debut, Coinbase may end up being the most successful IPO of the year. It has more than 56 million users in more than 100 countries and after Binance and Huobi Global, two Chinese crypto exchanges, the marketplace is the third-largest in the world.
Stepping stone towards acceptance
The listing is a milestone on the way to wider acceptance of cryptocurrencies, says Charles Hwang, a cryptoexpert and blockchain professor at New York’s Baruch College. So far, the sector has struggled to gain the trust of mainstream investors, regulators and the general public. “Many people still argue that this space has no intrinsic value,” said Hwang. “This IPO might demonstrate to the markets that crypto is here to stay.”
Coinbase had already applied for a so-called direct placement with the SEC, the American stock exchange regulator, in January. In contrast to a classic IPO, the securities are listed on the stock exchange without a prior pricing process. Such a process is much cheaper for Coinbase, as it does not have to use the services of investment banks. However, no new shares are thrown onto the market, only those from existing investors.
The IPO might convince those who have so far held off on the subject of cryptocurrencies to invest. Investors who participate in Coinbase can ultimately benefit indirectly from the rise of cryptocurrencies. “If they’re more comfortable investing in stocks and putting their money behind a company with cash flow, a board of directors and the whole traditional infrastructure, they’ll appreciate the opportunity to invest in Coinbase stocks,” Chris McAlary, head of CoinCloud, a provider of ATMs for cryptocurrencies, told the online magazine NerdWallet. That way, investors could avoid the price fluctuations so common in the industry.
Just a few days ago, the sector set a new record. At Easter, the market capitalization of digital currencies surpassed the $2 trillion mark for the first time. The rise was fueled by the increasing acceptance of banks and companies. In addition to the payment service provider PayPal, credit card companies such as Visa or car manufacturers such as Tesla now also allow payment with digital currencies.
Although Coinbase is headquartered in San Francisco, it is also a contact point for cryptofans in Europe. Users can buy around 50 different digital currencies, including Bitcoin, Ethereum and Litecoin, for fiat money such as dollars or euros, as well as trade with one another. The selection of currencies, of which there are now more than 4,000 worldwide, is comparatively small in order to keep operations simple.
After trading, the digital currencies are stored in a so-called wallet, i.e. a digital purse. Theoretically, this can then be used to pay. Coinbase, in turn, earns money from the model like a classic broker on the capital market. After each transaction, the company receives a corresponding fee.
Coinbase generates 96% of its income through such trading fees. It picks up around 3% per transaction from investors. “Coinbase currently has much higher margins than existing exchanges,” says Hwang. “However, that is expected to decrease over time as we witness more competition.”
Despite the risks, here come the good times
However, experts warn investors against comparing trading in cryptocurrencies with traditional investments. In addition to significantly higher fluctuation ranges, investors are threatened by not insignificant cyberrisks. Hacked accounts, for which exchanges like Coinbase do not feel responsible, are common. Laws that oblige classic brokers and banks to take strict security measures to protect their customers often do not apply to cryptoexchanges.
However, the industry does not have to fear more regulation, Hwang believes. The risk of money laundering appears to be lower than previously feared, according to studies. In addition, Gary Gensler, soon-to-be head of the American Securities and Exchange Commission (SEC), is a strong advocate of the cryptoscene.
Coinbase has faced more standard criticisms over things such as its customer service. It recently hired 2,000 new customer support employees to improve them. It was also recently fined $6.5 million by the US derivatives regulator CFTC for inaccurate reports on transactions in digital assets between 2015 and 2018.
Problems like these are only likely to be stumbling blocks for Coinbase on the way to massive growth. The cryptomarketplace is already worth more than the time-honored New York Stock Exchange. Hwang compares its current status to that of the internet decades ago. “Leveraging the internet analogy, nobody in the early 1990s could have predicted the positive disruption the internet would have on our lives,” he says.
This article was originally published in German and has been adapted into English.