Felipe Pires is a researcher and head of economic analysis at the startup Alter. In a recent study, he talked about the public offering of the exchange Coinbase.
According to Pires, besides the direct listing of Coinbase’s shares, it can be a profitable investment, it can also be a watershed.
During the study, he did a value analysis of the exchange, as well as assessed the timing for the cryptocurrency industry.
Coinbase so far
Coinbase Global Inc. is the largest cryptocurrency exchange in the United States. In addition, it will be the first in its segment to go public on the stock exchange.
Its main business is an online platform, where people buy and sell cryptocurrency. It also takes custody of crypto assets, offers a trading platform and manages digital wallets for its clients.
According to Coinbase’s official website, its user base has more than 43 million verified customers in more than 100 countries. In all, Coinbase has more than R $ 450 billion in custody, in addition to a volume that reaches R $ 3 trillion.
In addition, she is a member of the Center Consortium, where she works with Circle to develop the stablecoin USD Coin (USDC).
Coinbase was founded in 2012 by Brian Armstrong and Emilie Choi. Armstrong is a former software engineer at Airbnb, and currently serves as the company’s CEO.
Choi, in turn, serves as president of the exchange and COO. In its almost 9 years of existence, Coinbase has raised US $ 547.3 million in 11 different investment rounds.
Investors include Tiger Global Management, Andreessen Horowitz, Y Combinator, Greylock Partners and Battery Ventures. True Capital Management and Fundamental Labs are among those who entered the last fundraising.
Pires also highlights Coinbase’s ambition to open up new fronts, such as its efforts in the DeFi ecosystem.
Through the USDC Bootstrab Fund, using a smart contract, the company has already acquired a stake in 15 organizations. His most recent acquisition was Bison Trails, in January 2021.
Bison Trails is the current blockchain platform behind Coinbase’s own custody structure.
Important to remember the numbers
Pires’ analysis indicates that Coinbase’s revenue comes from a combination of, apparently, good services. First, a major asset of Coinbase’s operation appears to be the security of custody of third party assets.
Through this service, it guarantees the maintenance of its customers in the face of competition, in addition to capturing their values when they are trying to escape hacker attacks.
However, although the wallet service is very popular, it is not charged. The values obtained by Coinbase are generated by the margins and fees charged.
These amounts are charged only when a customer buys or sells cryptocurrencies listed on the exchange.
Coinbase has other lines of business in addition to its exchange services. Pires lists them as:
- Coinbase Commerce: provides online retailers with software to accept cryptocurrency payments;
- Coinbase Card: still in the initial stage of development, the idea is to give its users a physical Visa debit card and a tracking application to spend cryptocurrencies (very similar to the one offered by Alter to its customers);
- USD (USDC) conversion: Coinbase offers allocation in its own stablecoin, USDC, which is built on the Ethereum platform. Its value is supposedly linked to the US dollar, in a 1: 1 ratio.
Since the company’s capital is still closed, valuation reports are usually associated with investment rounds.
Coinbase’s last formal appraisal was in October 2018, when the company was worth $ 8 billion and raised $ 300 million in an E series round.
The market’s interest in Coinbase has not gone unnoticed by other exchanges. FTX, focused on cryptocurrency derivatives, created the synthetic future contract Coinbase Pre IPO (CBSE).
The idea is that assets track the company’s (future) market value divided. This amount is divided by 250 million (number of shares).
At the end of the first day of public trading, the balances will be converted into the equivalent amount of fractional Coinbase share tokens.
If everything doesn’t happen by June 2022, CBSE tokens will expire at $ 32, in line with Coinbase’s latest formal valuation of $ 8 billion. Note that a 74.4% discount is also applied, which is on the launch value in December 2020.
Pires added a graph to the study showing the evolution of market expectations regarding Coinbase’s assessment:
The reading is also based on the evolution of the CBSE price from the launch to the writing of the study.
The CBSE, launched at $ 125 on December 22, 2020, went to $ 235 on the first day. On January 10, the price was already touching $ 300. On February 12, the price peaked at $ 356 – translating into a 185% advance.
But is the value fair?
Pires compares Bitcoin futures contracts at CME during the spike with CBSE. When BTC broke $ 40,000, the price soared 100% and its futures contracts varied 102%, all in the same period used for CBSE.
The researcher then highlights the fact that the expectation about Coinbase, through CBSE, exceeds even the valuation of Bitcoin. It is important to note that, during the indicated period, Tesla’s investment in BTC was already public.
Within the study, Pires also added a table to summarize the entire Coinbase price assessment, the relationship with CBSE and Bitcoin futures contracts:
In calculating the possible price of Coinbase’s shares at its launch, Pires points out that each share would be traded 8.38 times more than the company’s estimated value in 2018.
As a result, Coinbase’s market value would be close to R $ 400 billion.
Another important detail of this public stock launch event is the fact that the company’s managers choose an unconventional placement.
Instead of a classic IPO, in which new shares are issued and launched to the public with the support of intermediaries, Coinbase will directly negotiate the conversion into shares of the existing shares held by its shareholders.
It is the modality known as direct stock listing. Some companies, such as Spotify and Slack, have been successful in adopting this medium to carry out their primary offerings.
No middleman or period lockup, direct listing tends to be more accessible. However, it can generate greater volatility, due to the immediate liquidity of the share for the new shareholder.
The fact is that, even with the approval of the Securities and Exchange Commission of the United States (SEC, in its acronym in English) for the operation of the model, some regulatory uncertainties about the cryptocurrency market still remain.
At a time when big companies are testing Bitcoin cash diversification, the SEC’s own lawsuit against Ripple and the high cost of Ethereum’s lack of scalability solution end up forcing the concentration of institutional investors into a single asset – Bitcoin.
In addition, as a company based in the United States, Coinbase is not allowed to offer derivative margin trading. This is something that most of its competitors domiciled abroad offer on a large scale to its customers.
Such factors directly impact the diversification of the company’s service portfolio. In other words, it becomes more difficult to expand the business model.
In the same vein, this type of “barrier” impacts the price of Coinbase’s shares.
On the other hand, offers of recent shares of technology companies have given good results even with gaps. This is the case with Airbnb, which has risen 112% since its IPO.
In addition, its shares continue to rise, despite the regulatory weakness of its business model. Not to mention the high impact of the Covid-19 pandemic, which directly affects tourism.
In short, even though there is relevant information and data on price, the issue of Coinbase is difficult to specify. In other words, because there are no reference cases, it is a complicated process to pinpoint the “fair” price of Coinbase’s shares.
The difficulty arises from another problem, which is to say how profitable the business is.
Either way, Coinbase’s IPO could be a game changer. More than that, but a bridge to connect cryptocurrencies and the traditional market.
Pires leaves one last piece of information: FTX warns on its website that because it is a volatile product, CBSE investors must understand and meet the company’s risk mechanism, margin, settlement and insurance fund policies.
He concludes by advising investors to stay safe if they want to trade Coinbase shares.
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