Everything you need to know about Coinbase's IPO

This article was published on Odaily Planet Daily, author: Taylor Tepper, translated by: Moni.

Soon, you will be able to buy shares of the company that helps you purchase Bitcoin—although this sentence sounds a bit convoluted.

The largest cryptocurrency exchange in the U.S., Coinbase, has announced plans to go public on April 14, with the stock ticker COIN. They will bypass the traditional initial public offering (IPO) process and instead plan to enter the Nasdaq through a so-called "direct listing." In fact, this "direct listing" method was pioneered by large companies like Spotify (SPOT) and Palantir (PLTR) and has become popular among tech firms in recent years.

Given the significant role Coinbase has played in the cryptocurrency boom over the past decade, this "non-traditional" and somewhat trendy listing option makes sense for Coinbase. Of course, whether Bitcoin can truly replace the dollar or will further develop into a speculative asset remains to be seen.

What is Coinbase actually doing?

Assuming you want to buy Bitcoin, you currently have two options:

1. Deploy a powerful, complex computer to solve intricate mathematical problems for Bitcoin mining.
2. Purchase it on a cryptocurrency exchange.

The first option is costly and requires a lot of technical knowledge, while the latter only requires opening an account on an exchange.

This is why most people ultimately choose to buy Bitcoin on an exchange rather than purchasing mining machines, and it is one of the main reasons Coinbase was created:

• For the average crypto trading user, Coinbase acts as a straightforward trading platform that connects retail buyers and sellers to find suitable trading prices.

• For more experienced crypto trading users, Coinbase offers a powerful trading platform called Coinbase Pro, which features comprehensive functionality and analytical services to help you gain deeper insights into the cryptocurrency market. Additionally, Coinbase Pro provides a free wallet service that allows users to securely store their cryptocurrencies.

Coinbase not only excels at these tasks but, more importantly, compared to other cryptocurrency exchanges that are often hacked or frequently experience downtime, Coinbase has the capability to ensure the security of its users' personal data and stable operations. (Odaily Note: One of the most notable cases is Mt. Gox, a Japanese exchange that had to declare bankruptcy due to a hack, losing billions of dollars worth of Bitcoin.)

According to a report released in July 2020, Coinbase disclosed that it has over 35 million users, including retail and institutional clients, an increase of 5 million from the same period last year.

How does Coinbase make money?

Coinbase's wallet service does not charge users for cryptocurrency storage; however, when you actually buy and sell cryptocurrencies like Bitcoin and Ethereum, Coinbase earns fees and commissions. Specifically, Coinbase's main sources of revenue include:

1. Margin fees, also known as spreads, where Coinbase charges about 0.50% on the purchase and sale of cryptocurrencies, with the rate varying based on market conditions. The final margin fee paid depends on the price changes between the quote received by the user and the actual order completion.

2. Coinbase Fee, which is a commission charged on all crypto transactions, in addition to the spread, and the actual amount of the Coinbase Fee paid by users depends on their location and the total transaction amount.

In addition to trading services, Coinbase has several other main businesses, including:

1. Coinbase Business, which provides software for retailers to accept cryptocurrency payments, similar to PayPal, but for cryptocurrencies, with Coinbase's plugin usable on various e-commerce platforms.

2. Coinbase Card, Coinbase is currently in the early stages of offering users a physical Visa debit card and accompanying app, allowing consumers to use cryptocurrencies directly at physical merchants, with Coinbase converting the crypto transactions into dollars.

3. USD Coin (USDC), Coinbase has its own dollar-pegged stablecoin, USD Coin (USDC), which is based on the Ethereum blockchain and is pegged to the dollar at a 1:1 ratio.

According to a recent filing by the U.S. Securities and Exchange Commission (SEC), Coinbase's total revenue in 2020 was approximately $1.3 billion, more than double its revenue in 2019.

How much is Coinbase worth?

Accurately valuing a startup is not easy, but before going public, Coinbase was a private company, so its valuation can be understood through its financing deals. The last formal valuation of Coinbase occurred in 2018, when Crunchbase data showed that Coinbase was valued at $8 billion in a $300 million financing round.

Before Coinbase publicly releases financial information, we do not know the exchange's true profitability or how much revenue it generates annually. However, if Coinbase successfully goes public, it means that relevant data will be disclosed, and if their revenue is high, do not be surprised, as Bitcoin's price and attention have surged dramatically since 2018, bringing huge returns for investors and Coinbase.

However, as Bitcoin garners more attention, Coinbase's competitors are also increasing, such as:

• Commission-free crypto trading platform Robinhood allows investors to buy cryptocurrencies like PayPal and Square;

• Investment giant Fidelity has begun offering Bitcoin index fund trading services to accredited investors.

Recent reports indicate that Coinbase's current valuation is far higher than its 2018 valuation. According to industry media Axios, the exchange's valuation has reached $100 billion when selling shares in private markets, but we still cannot ascertain the exact market value of Coinbase before its official listing.

How does Coinbase go public?

On Wall Street, an IPO typically refers to the process by which a private company makes its debut on the public stock market. In this process, the company needs to hire large investment banks to help it sell shares to the public and set a viable IPO price, which these investment banks charge hefty fees for, but they do help private companies navigate the listing process smoothly.

Coinbase did not take this route but instead chose a direct listing, meaning they will not seek help from investment banks. The owners of Coinbase will convert their holdings into shares on the securities market, allowing investors to purchase these shares on the exchange.

It is worth noting that in an IPO, the listing company typically issues new shares to raise new funds, but in a direct listing, the company usually does not wish to raise more funds; instead, existing shares are sold directly to the public by company employees and investors.

What does Coinbase's listing mean for the future of Bitcoin?

Although there are many cryptocurrencies on the market, Bitcoin remains the most closely watched "king of cryptocurrencies," for a simple reason: Bitcoin's price is rapidly rising.

At the beginning of 2017, one Bitcoin was priced at about $1,000; by the end of 2020, when Coinbase first announced its public listing, Bitcoin's price was hovering around $20,000; and on February 26, 2021, one Bitcoin's price had exceeded $47,000.

In 2013, the slogan at the top of the Coinbase website read: "Welcome to the Future of Money." But in 2017, Coinbase changed the slogan to "Buy and Sell Digital Currency."

In the early cryptocurrency community, many believed that Bitcoin could potentially replace the dollar as the primary means of transaction and payment. However, in the future, this idea may change; people can use Bitcoin for payments, but Bitcoin can also be used for paying mortgages and other services, all made possible through blockchain technology.

Why would you choose Bitcoin? In reality, the true value of Bitcoin lies in its independence from central authorities; for instance, changes in interest rates by the Federal Reserve do not affect Bitcoin.

In 2013, Coinbase believed that Bitcoin could become a substitute for fiat currency, and that was the "future" they were talking about. However, by 2017, the situation changed; Bitcoin did not become a means of transaction in the mainstream economy but rather turned into an investment asset akin to gold. When people discuss Bitcoin, the term "market capitalization" is often mentioned, but "market capitalization" is a term used to describe the size and influence of a company, which has no meaning for currency, indicating that Bitcoin has become an investment commodity. When investors have a risk appetite, they flock to it, no longer viewing Bitcoin as a form of currency.

Gold has no intrinsic value, yet investors remain obsessed with this yellow metal; Bitcoin also has no intrinsic value. Now, people apply the concept of "digital gold" to Bitcoin, and this narrative has driven Bitcoin's recent surge, with more institutional investors beginning to purchase Bitcoin.

At least for now, if you choose to bet on Coinbase, you are essentially betting that Bitcoin will continue to be a speculative asset rather than a substitute for the dollar.

Indeed, it is best not to go against the Federal Reserve.