The Echo-nomist

Another major, highly anticipated stock debut. COINBASE!

First, what is Coinbase? It’s an app that lets you buy and sell cryptocurrencies like Bitcoin, Ethereum, Stellar, Litecoin etc. Other than trading, you can convert one crypto to another, or send and receive crypto to and from other people. It can be used to make payments as well. It’s aim is to make buying and selling of cryptocurrencies easier by providing the buyers and sellers a platform to connect. Like stock trading apps, it shows you the current prices of various crypto’s, helps you maintain a portfolio and keeps you up to date on any news related to crypto. It is an exchange, broker and custodian for all cryptocurrencies, all in one place!

Coinbase was founded in 2012 during a time when cryptocurrencies weren’t nearly as big as they are today. It was a radical idea to start this company. There was no easy way of buying and selling cryptocurrencies before Coinbase. It simplified this for the users and acted as a broker. It also led the way for other companies like it.

They earn money by charging the customers a certain transaction fees which depends on the volume of their trade. It’s basically a broker. They had about 56 million retail users in Q1 of 2021.

By starting a business so exceptionally different, Brian Armstrong and Fred Ehrsam were taking a huge risk. They were the first company to test this idea and had no idea how the public would perceive it. Clearly, they weren’t afraid of taking risks. Even while listing his company on Nasdaq, he chose the road less travelled by.

They went public on 14th April 2021 on NASDAQ, making them the first Bitcoin trading platform to be publicly listed. If they didn’t go through the usual IPO route, what route did they take? They went public on a “direct listing”.

The IPO route is lengthy and includes lots of technicalities. The first step is to get a valuation. This valuation determines the value of shares and the number of shares you’ll allot. The application money is to be received by the bankers of the company. The brokers try to sell the shares to institutional investors like Mutual Funds, Pension Funds etc and encourage the public to apply for the shares. They market the shares and hype them up so that investors and public can subscribe to shares. If a company isn’t sure about public response to their IPO or wants to play safe, they appoint underwriters. Underwriters promise to subscribe to the shares, if no one else does, at a price lower than what they’re offering to the public. Obviously they don’t entail this risk for free, they’re paid some commission. When they have all of this in order, they can offer their shares on a stock exchange.

That sounds tiring😅

Direct listing is less common, but it’s a more dramatic entrance to the stock market. Without going into much detail, direct listing doesn’t involve application money, brokers, intermediaries, underwriters. They directly sell their shares to the public. Today the company is private, and next day it is suddenly public with its share trading on the stock exchange. Companies usually take this route when they don’t have enough money or don’t want to spend too much money on underwriters.

Coinbase decided they didn’t want to spend money on underwriters and intermediaries. And possibly they just wanted to do things differently! They marketed the fact that they’re going public and hyped it up in the market, got a bumper private valuation and directly listed on Nasdaq.

They took the risk of going public by direct listing but how did it turn out for them?

It was one heck of a debut. After opening at $381 on Nasdaq, it shot up as high as $429.54 initially, when trading started. This gave them a bumper valuation of more $110 BILLION, briefly! They closed at $328.28. So overall they closed 14% down. It’s now the new 7th biggest listing in the U.S of all time!!!

Ahead of its listing, Coinbase was valued at $90 billion on Nasdaq’s private market. It’s valuation when the market closed on 14th April was $86 million (that’s nearly $100 million!). A few people thought this was ridiculously high and it should be on the lower side.

The company has little to no chance of meeting the future profit expectations that are baked into its ridiculously high expected valuation of $100 billion…

Our calculations suggest Coinbase’s valuation should be closer to $18.9 billion — an 81% decrease from the $100 billion expected valuation.

MarketWatch

But haven’t all valuations been inflated lately?? Maybe they’re just jealous of their valuations🤭

Such a high valuation can be justified right now because the company has been doing really well. They are a profitable tech company and their revenue in Q1 was more than their revenue in 2020. But one reason for them doing so well is seasonal investors. They’ve pushed up the prices of cryptocurrency which in turn is increasing their revenue. And when seasonal investments go down, so does their revenue.

There has been a rumour going around that the American government will crackdown on cryptocurrencies. People got scared and are trying to sell of whatever cryptocurrency they own. This has led to a sharp fall in prices of various cryptocurrencies and will invariably impact Coinbase negatively.

Coinbase investors are sure to have a roller coaster of a ride, the trick will be when to get in, and when to get out. It is a fascinating story, and will continue to be one for some time!