Coinbase is unlike any launches Wall Street has ever seen


Coinbase is poised to achieve an astronomical rating when the digital currency exchange goes public on Wednesday. But ask 10 market experts what the company is supposed to be like being and you will likely get 10 different answers.

That’s because Coinbase’s current business – which had estimated first-quarter sales of a whopping $ 1.8 billion and net income of up to $ 800 million – is based almost entirely on the performance of Bitcoin and Ethereum .

These cryptocurrencies have soared more than 800% and 1,300% respectively over the past year. As a result, Coinbase, the most popular place for US investors to buy these assets, has grown nine times over that time.

Should Coinbase hit the public market, considering a fully diluted stock count around the latest private market valuation of $ 100 billion, it would immediately be one of the 85 most valuable US companies.

Here’s the key question for investors ahead of the Nasdaq debut: What if a crypto company with historically anomalous growth, massive uncertainty, and no official headquarters with the rigors of Wall Street and familiar metrics like price-to-sales and price-to-market? Relationship collided? -Winning Odds?

“Valuing a start-up can be a challenge, but I think valuation is far more complex for a company like Coinbase,” said Natalie Hwang, founding director of investment firm Apeira Capital. She is currently not involved in the company.

Predicting crypto prices has proven to be a foolhardy game. Swings can be so fast in either direction that Coinbase has 27 bullet points in its volatility risk prospectus. These include changes in investor confidence, negative publicity and coverage on social media, regulatory issues, and service disruptions related to the technology.

Because the underlying assets that make up Coinbase’s financial history are so unpredictable, a fundamental analysis of earnings quality, loyalty and efficiency won’t get you very far. Coinbase evangelists don’t spend a lot of time doing this.

Rather, they are looking to a future in which financial intermediaries will be downsized and transactions will predominantly take place on the blockchain. Online e-commerce, travel, and home buying marketplaces will use a variety of cryptocurrencies to connect buyers and sellers, with the blockchain serving as the universal source of truth.

Coinbase calls it “crypto-economy”, a word that appears 163 times in its prospectus. It stands for a software-based world of payments, trading and all types of peer-to-peer transactions that take advantage of the blockchain’s ability to give everything a unique identifier.

If the cops at Coinbase are right, the company is at the center of a critical internet transformation. Some compare it to Netscape, which introduced the browser to consumers. Others look at how Amazon brought physical retail to the internet, or how Facebook became the way people connect.

Matthew Le Merle, managing partner of Fifth Era investment firm and Blockchain Coinvestors, said tying the value of Coinbase to Bitcoin would be like evaluating Amazon in its early days based on book sales or placing a multiple on Airbnb five years ago, by looking at the number of rental nights booked.

“They don’t think about bitcoin volatility, trading fees and revenue,” said Le Merle, whose firm specializes in crypto and is in contact with Coinbase through investing in some venture funds. “You have to start with this – what is the profit pool of the world’s digital money and assets? In that context, these are trillions of dollars that will change hands. “

Today it’s all about Bitcoin transactions

No matter what the future holds, Coinbase’s revenue, at least this year, will largely be determined by the volume of transactions, which is currently closely tied to Bitcoin prices. Coinbase charges a fee for trades, which varies based on the size of the transaction.

In its earnings report for the first quarter last week, Coinbase said it had 6.1 million monthly transaction users, or MTUs. Should crypto prices rise, MTUs could hit 7 million for the year, Coinbase’s most aggressive estimate. In the middle range, with a flat crypto market, MTUs would land at 5.5 million. The most conservative forecast assuming a price decline is 4 million MTUs.

Coinbase skeptics see a company that relies on fees in a market where a growing number of competitors can get aggressive with pricing policies. For example, the popular Robinhood app does not charge a fee for crypto purchases.

Stock research firm New Constructs wrote in a report last week that competition from companies like Kraken, Gemini, and Binance will eat up Coinbase’s future fee income, leading to a “race to the bottom” much like stock trading. The company said its analysis said Coinbase should be valued at $ 18.9 billion, or 81% below its expected market cap.

“As the cryptocurrency market matures and more companies inevitably pursue Coinbase’s high margins, the company’s competitive position will inevitably deteriorate,” New Constructs wrote. Competitors “are likely to offer lower or no trading fees to gain market share.”

Susquehanna, a research and trading firm, is far more optimistic about Coinbase, estimating a fair value market cap of $ 96-108 billion. That’s a price-to-sales multiple for Coinbase’s 2023 sales between 11 and 12, a premium over the peer group average of seven due to the company’s “high growth”, Susquehanna wrote last week.

Almost all of Coinbase’s growth comes from the high volume of Bitcoin and Ethereum trades. The company goes public during a crypto super bull market that saw Bitcoin jump from under $ 30,000 in late 2020 to $ 60,000 today.

But Bitcoin lost 75% of its value in 2018, and there are no rules against it from happening again. In the Risk Factors section of the Coinbase prospectus, the first two points take exactly this point into account.

The first is that financial results will fluctuate depending on the crypto market. The second says that revenue “is materially dependent on crypto prices and volumes” and that “if such price or volume declined, our business, operating results and financial condition would be adversely affected”.

Beyond day trading Coinbase

But maybe these reviews are all wrong.

Roger Lee, a partner at Battery Ventures who invested $ 1.6 billion in Coinbase in 2017, calls Bitcoin the “least interesting thing” about crypto right now. So there is no meaningful sales multiplier.

The right way to think about Coinbase, Lee says, is to imagine where the internet was in 1994, before Netscape effectively turned on the lights for the average consumer by offering a browsing option. Similarly, Coinbase is bringing the complex concept of crypto into the mainstream and allowing the masses to learn about and invest in it.

The more people start reading and hearing about various projects that are cropping up within the crypto-economy, the less they focus on the Bitcoin charts, Lee said.

“A lot of people who daytrade Coinbase will be fixated on the price of Bitcoin,” Lee said in an interview. “For people who are long-term investors and see everything going on not just with Bitcoin, but with the 40, 50, 60, 100 tokens over time that make all of these other use cases possible, they will see that Coinbase an index for which other things are being built. “

As an example, Lee referred to Rally Network, a service that allows creators and artists to launch their own coins on the Ethereum blockchain without knowing how to encode. Creators can reward their fans with tokens that can then be used to purchase goods such as merchandise or concert tickets. Unlike most artist websites, there are no hosting fees.

“This is diametrically opposed to a traditional platform that has to ‘tax’ or ‘charge’ creators in order to generate revenue,” said Lee, whose firm is an investor in Rally, in a follow-up email.

Rally has its own network token that investors like Bitcoin can buy and sell, although it is only available on Coinbase through the institutional buyer custodian service.

In addition to the many altcoins on the market, there is the recent explosion of non-fungible tokens, or NFTs, digital assets that live on the blockchain. Athletes have sold video clips with highlights for up to hundreds of thousands of dollars each, while works of art have sold in the millions.

“Everydays: The First 5000 Days” by the digital artist Beeple.


In February, Justin Blau, the 3LAU DJ and musician, auctioned a number of songs, artwork, and videos as NFTs, raising nearly $ 12 million in the process. For NFT technology, he partnered with Origin Protocol, which operates crypto marketplaces and e-commerce sites.

The Origin token can be purchased on Coinbase and currently costs $ 2.39. That’s up more than twenty-fold in 2021, even after falling more than 20% in the last week.

Origin’s co-founder Josh Fraser is in the camp of true crypto believers and awaits rapid market adoption in finance and commerce. He points out that PayPal has a market capitalization of over $ 300 billion, with a growth rate of around 20%.

“There is no reason to say that Coinbase with almost 300 billion” The addressable money market itself is gigantic and Coinbase would be one of the best ‘Pick and Shovels’ games for that. “

SEE: Early Coinbase investor Reid Hoffman on the rise of crypto


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