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The Direct Listing of Coinbase

Coinbase Global Inc, the biggest US cryptocurrency exchange, is now aiming to go public on the 14th of April. The crypto company will not use the conventional way of going public with an IPO, rather they plan to post its shares straight on the Nasdaq via a so-called direct listing (DPO). The company plans to issue nearly 115 million shares of Class A common stock, which will be traded under the ticker symbol COIN. Coinbase is a company operating in the crypto currency sector, it allows private households to buy and sell cryptos with low transaction costs. Since 2012, its main goal has been offering a trusted and easy platform on which users can exchange cryptocurrencies. Coinbase is a San Francisco based company that opened its doors in 2012. The crypto exchange was founded by Brian Armstrong (CEO) and Fred Ehrsam. Today it counts more than 43 million verified users, and, since its inception, registered more than $455b in total transactions.


BUSINESS STRATEGY


· GDAX for advanced traders

Coinbase operates:

- Global Digital Asset Exchange (GDAX): Institutional players such as cryptoasset hedge funds buy and sell on GDAX and determine the mid-market price

- A brokerage firm called Coinbase: retail investors can directly trade from Coinbase’s brokerage paying fees ranging from 1.5% to 4%

Note that Coinbase’s brokerage company buys cryptoassets directly from GDAX, instead of from an outside exchange allowing it to pay lower fees.


· HOSTED WALLETS

Coinbase offers hosted wallets alongside its exchange and brokerage firm. These allow users to store cryptoassets on Coinbase. Users generally have more than one wallet, each for a different cryptoasset. Coinbase encourages investors in transferring funds into its “cold storage”, offline crypto-vaults impervious to hackers.


· CUSTODY

Custody provides financial controls and storage solutions for institutional investors to trade cryptoassets. It is geared toward larger players on Wall Street and costs $100,000 in initial setup fees, a management fee of 10 basis points monthly on AUM, and a minimum balance of $10M.


Main global investors:



DPO

The Direct listing or direct public offering (DPO) is a type of offering in which a company offers its securities directly to the public in order to raise capital. The particularity of this method is the fact that a listed company using a DPO eliminates all intermediaries who are typically involved in initial public offering (IPO) like Investment banks, brokers-dealers and underwriters. Recently the number of direct listing is exponentially growing but let’s analyze the reason of this trend:


- Cutting out the intermediaries from an offering substantially lowers the cost of capital, therefore a DPO is particularly attractive to small companies.

- Raising capital independently allows the firm to avoid the restrictions of banks and venture capital funding - the terms of the offering are uniquely established by the issuing company.

- The existing shares aren’t diluted: Because new shares aren’t created during direct listings, existing shares aren’t at risk of being diluted once the company goes public.

- Pre-DPO the company must present compliance documents to regulators but unlike an IPO, the firm doesn’t usually need to register with the SEC.


How does it work?

The issuer (the company) sets the offering price, the minimum number of shares that an investor can buy, the settlement date, and the offering period. The terms of the offering are solely up to the issuer who tailors the process according to the company’s best interests.

After this initial phase and the acceptance of the listing market, investors will be able to buy the shares on the secondary market.


Examples:

The most popular music streaming service Spotify launched its direct listing on April 3, 2018. Spotify’s DPO is considered a success since it allowed the company to raise capital avoiding the usual listing costs. On June 20, 2019, software company Slack debuted on the NYSE via a direct listing. The stock opened at a share price of $38.50, more than 48% above the $26 per share reference price set by the NYSE.

We have seen Coinbase’s latest financial statements that revealed the company profitability, setting it apart from many other startups when they make their public debuts. Now we want to discuss if it is worth investing in at its IPO on the 24th of April. Coinbase swung from a loss to a profit of $322 million last year on net revenue that more than doubled to $1.14 billion. The trading volume has increased drastically in the past years as well. The numbers going from 13,000 users in 2012 to 43 million in 2020. Furthermore, they also have 7,000 institutional clients and operate in more than 100 countries worldwide.


On the one hand, Coinbase is a fast growing and profitable company. It has good future prospects also due to the current importance of cryptocurrencies. Cryptocurrencies are a $1.5 trillion market, bitcoin having a $900 billion share; with the rising prices of these currencies, Coinbase has a good probability of continued growth. Due to the massive allocation of bitcoin by institutional investors, over-the-counter trading (OTC) is playing an increasingly important role in the crypto market. These important institutional investors are for example MicroStrategy that acquired $2b in bitcoin. Moreover, choosing to invest in Coinbase instead of cryptocurrencies has the advantage of investing in a productive asset, in a real business with transaction revenue.


On the other hand, Coinbase is a cryptocurrency exchange, and as such it thrives on their volatility. This can be a disadvantage as well as an advantage. Lately the cryptocurrency market has been bullish and thus positively influencing Coinbase, but this could not always be the case. If the price of Bitcoin were to collapse, Coinbase’s shares will suffer. Cryptocurrency regulation are also an impending risk that might dampen its trend. For this reason, Coinbase spends millions of dollars on compliance. Precisely because it is an extremely uncertain asset, which escapes the laws that regulate other "traditional" assets, Coinbase could also be affected in its corporate performance. Moreover, as seen, the operations on the Exchange focus mainly on Bitcoin and secondly on Ethereum, which is not very diversified.


Although Coinbase is a very secure website, that is constantly improving the security of their data, the hacking risk still persists. Furthermore, Coinbase has also many competitors, for instance there is the cheaper alternative Binance, that operates with more volume, yet has smaller margins. In addition, alternative trading methods such as Decentralized Finance with its peer-to-peer trading, may make exchanges down the line completely redundant.

In February 2021 Coinbase was valued at $100 billion, which makes it the highest-valued financial exchange in the world. This valuation ascent is staggering for many reasons, including the fact that it was valued at 8$ billion in October 2018 and $54 billion in January 2021 in secondary selling. In the private market since December 2020 the price of the shares has more than doubled, going from 225$ to 455$ today. Therefore, there are worries that the prices might be inflated.

Next, we compare Coinbase to other companies to get a benchmark; the companies being the NYSE, NASDAQ, Square and Schwab. When analyzing the ratios, one can observe that the revenues multiple for Coinbase is extremely high. Subsequently, the PE ratio is overall very high, the benchmark being 21, which is caused by the current strange environment and the frothy market. Especially the PE ratio of Square and Coinbase are excessive. Square’s PE ratio is overdue due to the strong investments in the future of the company. Finally, the revenue per user and profit per user is great overall.



Generally, all global markets are valued at 12x their sales, so from a revenue perspective Coinbase is extremely overvalued, notwithstanding they are exceptionally profitable as well.

Looking at the course of IPOs in the past 30 years, more than 60 percent of more than 7,000 IPOs render negative returns after five years in the secondary market (Professor Jay Ritter). In the IPOS of the past 40 years there seems to be a universal trend of an average 18% increase on the first day. The opening IPO Cost per share of Coinbase will be $490.20, which can easily reach $578 on the opening day.

In conclusion Coinbase is a solid and constantly growing company with great revenues. Nevertheless, it is very dangerous to buy IPOs, and the valuation seems frothy. This sector is always subject to a crypto winter risk and high competition. Furthermore, as highlighted by Chamath Palihapitiya, there is the risk that the market might have been manipulated from the initial valuation of 2018 to that of January 2021 and subsequently doubled within a month, which is very suspicious. In light of the above, it might be wise to wait and see what transpires subsequent to the IPO and then investing months after, maybe during a market dip.


Written by: Anna De Gaetano, Riccardo Papesso, Andrea Forte


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