Virtual Currency

Is Coinbase’s IPO Already Overhyped?

Tomorrow will be one of the biggest days for crypto in quite some time…

Coinbase, the largest cryptocurrency exchange in the U.S., is going public via a direct listing to the Nasdaq.

Unless you’ve been hiding under a rock, you know cryptocurrencies have been on a tear.

Bitcoin – the largest cryptocurrency by market cap – has more than doubled in 2021. And it’s up more than 759% over the past 12 months.

Bitcoin's Surge Higher

Now, there are crypto miners that are publicly traded, like Hive Blockchain Technologies (OTC: HVBTF), Riot Blockchain (Nasdaq: RIOT) and Marathon Digital (Nasdaq: MARA).

But because Coinbase is the exchange for more than 50 cryptocurrencies, its listing will be a landmark victory for the industry.

Though the question remains: Should investors race to get in on this milestone action?

A Twentyfold Increase in Six Months

Right off the bat, I’m not always a fan of initial public offerings (IPOs) on their first day of trading.

But with Coinbase, I have a number of other reservations.

In its regulatory filings, Coinbase stated that the average weighted price of its shares in the private market through March 15 was $343.58.

That values the company at around $70 billion. And plenty of Wall Street analysts believe Coinbase’s IPO will balloon to $100 billion.

Now, the crypto exchange FTX unveiled a Coinbase pre-IPO contract to cash in on the excitement. These are trading at more than $583 as of this writing.

That values the IPO at $250 billion!

Maybe that sounds like a lot to you. Or maybe it sounds like Coinbase is still inexpensive, considering the total market cap of all cryptos recently topped $2 trillion.

To me, this smells like a situation rife with euphoria and mania.

Here’s the deal…

In the third quarter, Coinbase’s private shares were trading at around $28.83. That valued the company at $5.3 billion. I will admit that this price was ridiculously cheap. Coinbase was woefully undervalued at those levels.

But a 1,922% jump from the end of September to today?

I love cryptocurrencies. And I’m an ardent fan of Coinbase.

But a nearly twentyfold increase in value in a little more than six months feels a tad excessive in my book. And my gut tells me this is all just setting up some investors to be burned and left holding the bag.

The lofty valuations from FTX make Coinbase larger than CME Group (Nasdaq: CME), Intercontinental Exchange (NYSE: ICE) (the parent company of the New York Stock Exchange), London Stock Exchange Group (LSE: LSEG) and Nasdaq Inc. (Nasdaq: NDAQ).

In fact, if it were to be valued at $250 billion, Coinbase would have a higher valuation than all of those combined.

And even if shares were to IPO closer to $100 billion, Coinbase would still be valued above all of those traditional exchanges.

Can Coinbase Sustain?

Let’s look at this from a financial standpoint.

Coinbase’s trading volume was $335 billion according to its first quarter results released last week. This was a 73.5% increase from the $193 billion in trading volume it saw during all of 2020.

That amounted to $1.8 billion in revenue. This was a record – and more than the $1.3 billion it made during all of 2020.

And Coinbase stated that during the quarter it had $223 billion in assets on its platform ($122 billion from institutions), representing 11.3% of the total crypto asset market. This was also a 150% increase from the $90 billion it had last year.

All of that gets tossed aside though.

Coinbase is likely to be a volatile stock because it will more than likely be impacted by overall crypto price trends as well as monthly transacting user growth.

This is a double-edged sword.

The first side is easy: If crypto prices are bullish, shares of Coinbase will rally. But as I’ve covered here before, crypto prices have a cyclical nature.

The second is similar to monthly active users, or subscribers – which are the only numbers we really pay attention to with companies like Netflix (Nasdaq: NFLX), Snap (NYSE: SNAP), Twitter (NYSE: TWTR), Spotify Technology (NYSE: SPOT), and video game companies and platforms.

I often outline how social media, e-commerce or video game companies can beat earnings and revenue but miss on monthly active users – which can send shares into freefall.

That’s because this metric is the main reason investors are willing to pay such a high premium for shares in terms of sales. If monthly active users – or in this case, monthly transacting users – are increasing at a high clip, the growth is sustainable.

But any trip or stumble is a warning sign. And this is when investors won’t be able to find the exits fast enough.

In the first quarter, Coinbase stated it had 56 million verified users. Of those, 6.1 million were monthly transacting users.

The exchange’s revenue is directly tied to how many monthly transacting users it has. Approximately 96% of its revenue comes from transaction fees. And for 2021, it forecast a range of 4 million to 7 million monthly transacting users. The low end assumes a collapse in crypto prices, particularly Bitcoin’s. The high end assumes everything keeps chugging along higher.

But there’s one final piece of the pie… competition.

Expectations are for Binance, Bitstamp, Gemini, Kraken and other competitors of Coinbase to offer lower or zero trading fees. And this doesn’t include the possibility of traditional brokerages starting to allow investors to trade cryptos. That will eat away at Coinbase’s market share and revenue model.

From my perspective, if you’re a private market holder of Coinbase shares, this is the perfect moment to HODL – hold on for dear life.

For those looking to snag a piece of the crypto exchange, it may be prudent to wait for a pullback – or at least for the next leg lower in Bitcoin’s price.

Nonetheless, this is an important moment for the ongoing validation and mainstream adoption of digital currencies. And the long-term outlook for crypto remains bright.

Here’s to high returns,

Matthew

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