Coinbase will go public via a highly successful direct listing on Wednesday, with investors hailing it as a “watershed” moment for the cryptocurrency industry.
The digital currency exchange could be valued at up to $ 100 billion, making it more valuable than major trading venue operators such as the Intercontinental Exchange and Nasdaq, parent of the New York Stock Exchange.
It comes as the prices of bitcoin and other virtual currencies have skyrocketed over the past year, as investors sought to diversify their portfolios in the belief that a surge in inflation is coming. Bitcoin hit a new high of over $ 64,000 on Wednesday and its value has more than doubled so far this year.
Coinbase’s public market debut is “potentially a watershed event for the crypto industry and will be something that Street will laser focus on to gauge investor appetite,” said Dan Ives, technology analyst at Wedbush Securities. .
“It’s going to legitimize a lot of what these companies are doing,” Marcus Swanepoel, chief executive of London-based crypto platform Luno, said of Coinbase’s debut. “On the one hand, it is going to show how big the industry is and how much it is growing.”
Coinbase is the largest publicly traded cryptocurrency company so far. It is the second largest digital asset exchange in the world by trading volume, according to CoinMarketCap, and is credited with bringing cryptocurrencies to the mainstream with its user-friendly app.
But there are several risks ahead. Cryptocurrencies are known for their wildly volatile price movements, and skeptics think that you may be in a massive market bubble that is bound to burst at some point. Meanwhile, global regulators are increasingly trying to bring cryptocurrencies under their watch, with the Indian government even looking to ban digital currencies.
Volatility
Coinbase estimates that it made $ 1.8 billion in revenue in the first quarter of 2021, a whopping 844% increase compared to the $ 190.6 million it generated in the same period a year earlier. That was largely thanks to huge jumps in the price of digital currencies like bitcoin and ether.
Since Coinbase’s business is strongly tied to the performance of major cryptocurrencies, there is a risk that momentum will shift the other way if there is a significant pullback in the market.
“Cryptocurrency companies will need to figure out how to diversify their income streams eventually,” said Hunter Merghart, a former Coinbase executive who is now the US head for Luxembourg-based cryptocurrency exchange Bitstamp.
“I think at this point we are still in the investment phase and the overall crypto pie will continue to grow.”
Bitcoin rose noticeably to nearly $ 20,000 at the end of 2017, before dropping to nearly $ 3,000 the following year. This price volatility has been a key criticism from bitcoin naysayers, who say it fails key tests for the coins, such as acting as a medium of exchange or store of value.
However, crypto investors believe that such a precipitous price drop – known in the industry as “crypto winter” – is unlikely in the near future. They see Bitcoin as a kind of “digital gold” that is not correlated with other assets and can serve as a hedge against rising inflation.
“There have been a lot of sudden spikes in the price of bitcoin over the past 10 years,” Swanepoel said. “When it goes down, it sets a new baseline and growth continues at that new baseline.”
“In fact, I think the baseline will be significantly higher outside of this cycle,” he added. “If you look at the commodity markets, they have normal cycles and then they have ‘supercycles’. I suspect this is a super cycle for cryptocurrencies. Now it can be sped up a lot more.”
Regulation
Earlier this year, US Treasury Secretary Janet Yellen warned in her confirmation hearing that bitcoin and other cryptocurrencies are used primarily for illicit activities and that the government may need to “restrict” their use.
Coinbase says that it is regulated and has partnerships with various banks. But it warned in its prospectus that negative changes to regulations could “adversely affect” its financial condition.
Before former President Donald Trump’s term ended, the Treasury Department proposed a rule that would require financial services companies to record the identities of cryptocurrency holders. This proved controversial with many crypto companies.
“Regulatory risk is high because crypto platforms are currently not subject to the same rules as traditional exchanges or trading platforms,” said Stéphane Renevier, analyst at financial education platform Finimize.
“Some of Coinbase’s activities (such as some of its main brokerage services and the use of its own capital to trade) could be subject to stricter regulatory oversight in the future,” he added. “Since the regulatory landscape is evolving extremely fast, the company is always at risk of a change in status, which could affect some of its most profitable activities.”
Jesse Powell, chief executive of Coinbase rival Kraken, told CNBC that he believes “there could be some crackdown” on cryptocurrencies.
‘The tech giant of cryptocurrencies’
Garry Tan, founder of the venture capital firm Initialized and an early investor in Coinbase, said that the cryptocurrency market was still in its infancy.
“We haven’t arrived yet,” he told CNBC. “We’re still in the early innings of that, but it’s not that crazy anymore.”
But Tan and other Coinbase bulls say the company has created a competitive “moat” around its business that should allow it to thrive even with the arrival of new regulations.
“Coinbase is like the cryptocurrency tech giant,” Tan added. “The (debut) of Coinbase, and existing as one of the foundational tech companies in Silicon Valley, is very powerful because it means that, as well as the revolution of cryptocurrencies. Personal computers needed Apple and Microsoft, the crypto revolution needs Coinbase. “
Crypto industry insiders say that Coinbase is only part of the story. There are other emerging trends in the market, such as digital collectibles and so-called decentralized finance, which aim to recreate traditional financial products without intermediaries such as banks. Additionally, Coinbase may face more pronounced competition from rivals such as Binance and Kraken, the latter of which is evaluating its own stock price for next year.