Coinbase’s IPO

By Kritika Venkat, Akhil Vajjhala and Siddharth Tripurani (NYU)

 

Summary of IPO


Coinbase, the best known American cryptocurrency exchange with over 56 million users across 100 countries went public via a direct listing on April 14, 2021, and is listed on Nasdaq. The company’s stock shot up nearly 72% to $429.54 before closing its first day of trading at $328.28, up 31.3%, for a valuation of $87.3 billion. Coinbase followed the footsteps of Spotify and Palantir by choosing to go public via a direct listing where existing investors make their shares available for sale to the public, as opposed to a traditional IPO run by investment banks.


The crypto company debuted at $250 per share and closed at $328.28 on its first day of trading. Since launching on the IPO, its stock has traded in a range between $282.07 and $429.54 and has a market capitalization of $55.43 billion. The company’s goal is to build a more fair, accessible, efficient and transparent financial system that uses blockchain technology to leverage its crypto assets. Coinbase simplifies the financial infrastructure required to buy, sell or receive Bitcoin and believes that it will eventually be the leading company to democratise access to the crypto economy.


Company and IPO Profile:

  • Sector: Cryptocurrency

  • Exchange floated: NASDAQ

  • Amount raised: $99.6 billion

  • Offered price and number of shares: $381 per share and 261.3 million shares outstanding

  • Notable investors:

  • Fred Wilson, Union Square Ventures

  • Marc Andreesen, Andreesen Horowitz

  • Queensbridge Venture Partners

  • Reid Hoffman, Founder of PayPal & LinkedIn

  • Bradley Tusk

  • Key Figures:

  • EV: £6.17B

  • EV/Revenue: 8.00x

  • EV/EBITDA: -19.79x

Strategic Rationale


Coinbase positioned itself as the optimal player in the cryptocurrency space to IPO and utilize the funds raised. Coinbase offers features for separate cryptocurrency user segments: a straightforward online exchange, an analytic equipped trading platform, and a secure wallet to store cryptocurrencies. Given Coinbase’s market standing, an IPO would prime it for the current inflexion point of cryptocurrency indexes as the bubble is set to grow even further. As volume trades and commissions on the same are set to grow, Coinbase’s expected revenue is incentivizing the market to support its funding. Features such as security, trade times and live updates on price/volume statistics can be further enhanced with the capital raised through the IPO. Coinbase was taking advantage of its established market share along with global market conditions surrounding cryptocurrencies to support the rationale behind the IPO.


Market Reaction


Build Up

Coinbase was founded in 2012 by Brian Armstrong, ex Airbnb engineer, and Fred Ehrsam, an ex Goldman Sachs employee, and is one of the few prominent companies that operate remote-first without any official physical headquarters. While the company started almost a decade ago, Bitcoin was the first cryptocurrency ever, created in 2009. Coinbase was founded as part of Paul Graham’s startup incubator, the Y Combinator, a company that gave rise to other startups like Reddit and Airbnb. The company initially raised venture capital of $5 million from angel investor Fred Wilson in 2013 followed by another round of financing in December 2014.


Since its inception, the company has done an excellent job in diversifying its services whilst also keeping them easily accessible to the common man. They started as a transaction-based business model and gravitated towards a service and subscription-based business model by 2020. Their customer demographic is divided into 43 million retail users, 7,000 institutional users and over 115,000 ecosystem partners.


Potential Risks and Downsides


The biggest risk is that of the crypto market in general. A New York University - Stern School of Business professor, Nouriel Roubini, who predicted the 2008 housing market crash has called bitcoin the ‘mother of all bubbles’ in 2018. Many say that bitcoin requires correction, an inevitable phenomenon that could occur anytime over the next 2-3 years – and the longer we wait, the harder the crash. With a crash of the crypto market, experts predict that all companies that depend on crypto for their revenue will fail as well. Considering that Coinbase generates over 90% of its revenue from cryptocurrency transaction fees, a crash will almost inevitably cause the company to bust.


Another major risk to consider is massive regulation on cryptocurrency markets, and lack of prospect for globalization. Coinbase had to wait several months before it could have its IPO due to regulations of the NASDAQ and the SEC. For Coinbase to globalize, it has to convince countries’ governments to allow for crypto transactions, something that India and Turkey, for example, are vehemently opposed to.


Lastly, Coinbase has an immense amount of competition from other cryptocurrency trading applications and websites. Companies like Metamask and Kraken offer altcoins that Coinbase doesn’t offer (Dogecoin, VeChain, and others), and better staking rates on Ethereum and other tokens (6.4-6.6% APR vs. 6.00% offered by Coinbase). This alone makes Coinbase less competitive and attractive than other crypto trading platforms, and is a major uncertainty for the company going forward.