This week’s arrival of Coinbase on the public markets throws some intriguing new light on the rapidly-growing field of digital assets.
The company is one of the largest global cryptocurrency exchanges; its fintech platforms enable retail investors and institutional clients to trade and store digital assets such as Bitcoin and Ethereum. Most of the company’s revenues come from transaction fees for trading and storage, with about 10% from sales of its own assets to customers. Transaction revenues are heavily dependent on the asset price movements, which influence the number of transacting users each day, and the total value of their transactions.
The beneficial trading margins derive from the relatively high transaction fees that Coinbase can assess — typically about 0.5% of trade value with lower fees for larger trades — which is well ahead of other exchanges, such as Nasdaq. The company also benefits from the rising prices of crypto assets that it holds for clients.
This is the context in which Coinbase became revenue-positive in 2020, but the company acknowledges that it may be some time before it sees consistent profitability. For example, its earnings could decline if the market price of digital assets — and Bitcoin in particular — drop sharply.
From its origins in 2012, Coinbase emerged from San Francisco’s prestigious Y Combinator startup incubator and rapidly attracted almost $32M investor funding, including an allocation from Andressen Horowitz at the end of 2013 that valued the company at $150M. Subsequent investment rounds resulted in a ten-fold increase in valuation, to $1.6B by mid-2017. Just a year later, Andressen Horowitz participated again in a final, Series E funding round, at a valuation of $8B or about $36 per share.
With its recent debut on the public market, COIN has settled into a price range of about $330 per share, which gives it a market capitalization of about $62B. The company opted for a direct listing on the Nasdaq market, rather than a traditional IPO (initial public offering). With this approach, existing stockholders can publicly trade their shares, and no new stock is issued by the company. In this regard, Coinbase has followed in the footsteps of other tech ventures like Spotify (SPOT), Palantir (PLTR), and Slack Technologies (WORK), each of which selected direct listings on the NYSE market.
Among the beneficiaries of the new public listing for COIN are the Linqto unit holders who gained access to a tranche of Coinbase equity in July 2020, at a per-share price that was commensurate with the Series E round in 2018. The relatively modest pricing level at that time probably reflected some of the business challenges that Coinbase had been experiencing.
Mainstream investors’ perceptions of Coinbase’s current valuation trends seem closely linked to the recent surge in Bitcoin pricing, which has risen by 40% in the last 12 months. The company’s retail offerings have provided professional financial advisers with a convenient mechanism to offer their clients potential upside opportunities in the digital assets market. Indeed, according to a recent Barrons report (Jasinski 2021), almost one-fifth of advisers surveyed will probably recommend allocating part of their individual investor clients’ funds to this asset class in 2021.
As one adviser noted (Edelman 2021), a 1% portfolio allocation to opportunities like Coinbase can help build wealth in a rising market, with minimal exposure to the downside risk of digital assets.
Concerning institutional investors, Zak Prince, CEO of BlockFi observed that the Covid-19 pandemic has accelerated the shift towards corporate adoption of digital assets as an acceptable investment class, since his company has successfully weathered this once-in-a-decade global economic shock. (Salzman 2021) Coinbase has offered regulated custodial services for institutional investors since 2018, whereas many other crypto-only exchanges have struggled to meet the compliance and custody criteria that are required by most of these organizations. (Jasinski 2021)
The “Next” Coinbase
Also waiting in the wings are several other promising privately-held fintech companies in the digital assets space, including Kraken, Ripple, and Uphold. Kraken, for example, provides an online platform for cryptocurrency trading. The San Francisco-based company made history when it formed the world’s first digital assets bank about six months ago, having received a banking charter in the state of Wyoming. The new bank will enable US clients of Kraken to transact seamlessly between digital assets and national currencies. Ripple also, a real-time settlement system which enables financial institutions to carry out global transactions faster and cheaper for any form of digital assets, holds promise. In fact, XRP, Ripple’s own native cryptocurrency, is used to support this service. Last but not least, Uphold, based in the UK, offers an electronic wallet product that enables “Anything to Anything” trading, including national currencies, digital assets, precious metals, and US stocks.
These fintech companies are just three of the privately-held firms whose secondary-market equity can be accessed at the moment through the private market. Their trajectories, in many ways, align with that of Coinbase. Looking towards the future, although this asset class carries with it certain inherent risks, the public market foray of Coinbase has certainly paved a way for these pre-IPO unicorns as well.
Linqto enables accredited investors to invest in pre-IPO companies like Kraken, Tealium, and ThoughtSpot in a matter of minutes using our mobile-app or website. We invite you to register on the Linqto website or on our free app on your Apple or Android device.
To continue learning about digital assets and trends in private investing, we also invite you to register for our Global Investor Conference, taking place on June 22nd.
DeCambre, Mark. “Coinbase IPO: The 5 Things to Know About the US Cryptocurrency Exchange.” MarketWatch, 2021, www.marketwatch.com/story.
Kindig, Beth. “Palantir IPO: Deep-Dive Analysis.” Forbes, Forbes Magazine, 2021, www.forbes.com.
Newton, Casey. “Why Coinbase Will Struggle to Ban Politics from the Workplace.” The Verge, The Verge, 30 Sept. 2020, www.theverge.com.
Ric Edelman, RIADAC. “How to Incorporate Digital Assets into Client Portfolios”, Investing in Crypto, Marketwatch Symposium, April 14 2021. https://events.marketwatch.com/crypto/
Avi Salzman, “Why Companies are Buying Bitcoin”, Barrons, April 12 2021, pS11.
Nicholas Jasinski, “The Smart Way to Wade Into Bitcoin”, Barrons, April 12 2021, pS7.