In some ways, the Coinbase exchange is the poster child for the crypto industry. It has embraced — not fought — regulation, which sets it apart from most cryptocurrency exchanges while the firm’s trading app is praised for its ease of use. When JPMorgan Chase decided to extend traditional banking services to crypto firms in the United States earlier this year — a precedent-setting move — it began with Coinbase and Gemini, another registered U.S. exchange.
Therefore, last week’s report that Coinbase filed a draft registration for an initial public offering with the United States Securities and Exchange Commission wasn’t really a surprise, but it is big news nonetheless — and not just because research firm Messari declared the 35-million-customer company could be valued at $28 billion.
“It is a massive event,” Vladimir Vishnevskiy, director and co-founder of Swiss wealth management firm St. Gotthard Fund Management AG, told Cointelegraph, and not only in the U.S. but in Europe too, because “the IPO will provide a marker in terms of how markets are ready to value such companies.”
Stephen McKeon, a finance professor at the University of Oregon and a partner at Collab+Currency, told Cointelegraph: “Coinbase will represent the first crypto-native corporation to be listed on a major U.S. stock exchange,” and as such, its IPO “will be a significant event for the industry” — assuming, of course, that the offering proceeds as planned.
Meanwhile, Edward Moya, a senior market analyst at forex trading company Oanda, told Cointelegraph: “It looks perfectly timed following the strong breakthroughs with Bitcoin’s mainstream acceptance, high demand for cryptocurrencies and growing institutional interest.”
That said, Coinbase, like other so-called unicorns, will now face “a lot of scrutiny,” added Moya, simply because the IPO market has become so popular recently. Indeed, some are already calling the market “Tech Bubble 2.0” and making comparisons with the frenzied listings of internet firms during the dot.com bubble of the late 1990s.
“There is a lot of hot money out in the markets right now,” confirmed Vishnevskiy, and given the strong appetite for IPOs, he expected the offering to be oversubscribed. According to McKeon, “The premiums on the Grayscale and Bitwise funds suggests that there is enormous appetite for exposure to crypto within equity markets, which should foster a warm reception to Coinbase stock.” He added:
“IPO activity is cyclical, it oscillates between hot and cold markets. We are currently in the midst of one of the hottest IPO markets in recent years. Coupled with Bitcoin at all-time highs, makes this a highly opportune time for Coinbase to go public.”
Because of Covid-19-related stimulus efforts, the global economy is awash with liquidity, with not many places to invest. Bond yields are near zero. In this environment, public demand for equity stakes in innovative high-growth tech companies like Coinbase is strong.
Concerns about service outages
Is there anything that could derail the process? “If there is some unforeseen circumstance, like widespread media coverage of a new (or mutated) contagion, that could make market observers highly risk-averse, making them less likely to put their money into an IPO,” Charles Bovaird, vice president of content at Quantum Economics, told Cointelegraph.
Moreover, Coinbase has repeatedly gone down during periods of high demand, as Bovaird recalled. Back in 2017, when the SEC rejected the Winklevoss’ Bitcoin (BTC) exchange-traded fund and BTC prices subsequently crashed, many investors, Bovaird included, were unable to trade through Coinbase. That could factor into investors’ assessment during an IPO, since capacity problems were still dogging the exchange in 2020.
Additionally, “Coinbase has a public image problem that they will need to clean up and that might not be easy to do,” added Moya. The New York Times reported in November that some of Coinbase’s black employees had voiced concerns of discriminatory treatment, and during 2020, the employees were also “discouraged from debating causes or politics internally and from taking up activist causes at work” — all of which could raise some leadership concerns in the minds of potential investors. Moya told Cointelegraph:
“Next year, companies will need to embrace diversity and inclusion and until Coinbase can do that, they may miss out on completely capitalizing on this opportunity.”
Vishnevskiy disagreed that Coinbase had an image problem and said the firm would be viewed as one of the “safer crypto plays” if the IPO goes through. “Interest from Europe is likely to be more muted than in the U.S.,” which is the norm given the more conservative investment tendencies of European investors. “Nevertheless, I can confirm that I already know of a couple of family offices in Europe interested in getting an allocation,” he told Cointelgraph.
Bovaird added that as an investor, he wouldn’t care about the staffing policies or whether the employees are allowed to have political conversations, adding. “I do care if I can’t use their site to buy (or sell) Bitcoin when I want to.” Still, even if institutional investors actually prefer a “laser-focused” CEO like Coinbase’s Brian Armstrong, retail investors, who have been a major factor in the current IPO “frenzy,” might think differently.
Bringing in new entrants
Would a publicly held Coinbase drive more users to the cryptoverse? “This could spur crypto adoption,” John Griffin, who holds the James A. Elkins centennial chair in finance at the University of Texas, told Cointelegraph, because companies that survive the IPO process — with its months of scrutiny from regulators, analysts and institutional investors — often emerge battled-tested and a more secure investment, at least in some investors’ minds. By comparison, “Look at WeWork,” Griffin proposed, “it couldn’t survive the scrutiny of a public listing and crumbled.”
Digital assets, as well as IPOs, have been performing at near-record levels in 2020, and “this event could bring a number of new entrants to the space who were focusing just on IPOs previously,” said Vishnevskiy. According to McKeon, the risk appetite for both areas are very similar, adding: “A Coinbase IPO would further validate the cryptocurrency asset class for the general public, which is likely to lead to further adoption.” However, one shouldn’t expect a successful Coinbase IPO to solve all the industry’s problems. As Griffin told Cointelegraph:
“This is definitely a step towards legitimizing crypto and moving into the mainstream. A big issue is that while exchanges like Coinbase are under regulatory scrutiny, [other] exchanges that drive prices may be under little scrutiny. This means the market is still open to manipulation.”
Overall, though, most close observers viewed a Coinbase IPO as a signal achievement for the cryptocurrency and blockchain industry. One recalls the failure of other crypto-native listings such as Bitmain and BitConnect as well as Ripple’s long-anticipated but still unseen IPO. “Some have failed for disreputable reasons, others because of a difficult U.S. regulatory environment,” said Moya, who then added that anything driving the interest in crypto is a welcome development for the industry.
The IPO is a major event, and according to Griffin, “showing that the path of Coinbase to work within the regulatory process is an economically profitable one.” Meanwhile, John Sedunov, associate professor of finance at Villanova University, told Cointelegraph:
“A Coinbase IPO would be a signal of a further move to the mainstream for cryptocurrency. I don’t think this will push it across the finish line, but it will help continue the process of making cryptocurrency more accessible to investors and potential users.”