Coinbase is different from any debut on the Wall Street market

Coinbase is set to order an astronomical valuation when the digital currency exchange is released on Wednesday. But ask 10 market experts what the company should look like be appreciated and you will probably get 10 answers.

This is because Coinbase’s current business – which generated an estimated $ 1.8 billion in first-quarter revenue and up to $ 800 million in net revenue – is built almost entirely on the performance of bitcoin and ethereum. .

These cryptocurrencies have grown by over 800% and 1,300% respectively in the last year. As a result, Coinbase, the most popular place for American investors to buy these assets, has grown ninefold during this period.

If Coinbase were to enter the public market around the latest valuation of its $ 100 billion private market, taking into account a diluted total number of shares, it would instantly be one of the most valuable 85 companies. Americans.

Here’s the key question for investors before the Nasdaq debuts: What happens when a cryptocurrency company with abnormal historical growth, massive uncertainty and no official headquarters faces Wall Street rigors and familiar metrics such as selling price and price at – listening reports?

“Evaluating any start-up can be a challenge, but I think the evaluation problem is much more complex with a company like Coinbase,” said Natalie Hwang, a founding partner at investment firm Apeira Capital. He has no current shareholding in the company.

Predicting cryptocurrency prices turned out to be a stupid game. Swings can be so fast in both directions that Coinbase has 27 bullet points in its prospectus on volatility risks. These include changes in investor confidence, negative publicity and social media coverage, regulatory issues and technology outages.

Because the underlying assets that make up Coinbase’s financial story are so unpredictable, fundamental analysis of earnings quality, customer retention and efficiency doesn’t take you too far. Coinbase evangelists don’t spend much time on it.

Rather, it looks to the road to a future in which financial intermediaries are diminished and transactions take place predominantly on the blockchain. Online markets for e-commerce, travel and home buying, they say, will use a variety of cryptocurrencies to connect buyers and sellers, with the blockchain serving as a universal source of truth.

Coinbase calls it “cryptoeconomics”, a word that appears 163 times in its prospectus. It presents a world of payments, trading and all kinds of software-based peer-to-peer transactions, which take advantage of the blockchain ability to offer everything a unique identifier.

If Coinbase bulls are right, the company is at the center of a critical transformation of the Internet. Some compare it to Netscape, which introduced the consumer browser. Others look at how Amazon has brought physical retail to the web or how Facebook has become the way people connect.

Matthew Le Merle, managing partner of investment firm Fifth Era and Blockchain Coinvestors, said linking Coinbase’s value to bitcoin would be like an Amazon valuation in the early days based on book sales or placing a multiple on Airbnb five years ago, analyzing its number of booked nights booked.

“Don’t think about bitcoin volatility, trading fees and revenue,” said Le Merle, whose company specializes in crypto and has exposure to Coinbase by investing in some venture funds. “You have to start with – what is the profit fund of the world’s money and digital assets? In this context, it is trillions and trillions of dollars that will be hands-on.”

Regardless of the future, Coinbase’s revenue at least until this year will be largely determined by the volume of transactions, which is currently closely linked to bitcoin prices. Coinbase makes a transaction fee that varies depending on the size of the transaction.

In its first-quarter earnings report last week, Coinbase said it has 6.1 million monthly trading users (MTUs). If cryptocurrency prices rise, MTUs for this year could reach 7 million, Coinbase’s most aggressive estimate. In the mid-range, assuming a flat cryptocurrency market, MTUs would land at 5.5 million. The most conservative forecast, assuming that prices fall, is 4 million MTU.

Coinbase skeptics see a tax-based company in a market where a growing list of rivals can become price aggressive. For example, the popular Robinhood app doesn’t charge for encryption purchases.

New research firm New Constructs wrote in a report last week that competition from companies such as Kraken, Gemini and Binance will contribute to Coinbase’s future tax revenues, leading to a “race to the finish”, similar to what happened in the trading of the shares. The company said that according to its analysis, Coinbase should be valued at $ 18.9 billion, or 81% below its expected market capacity.

“As the cryptocurrency market matures and more companies inevitably pursue Coinbase’s high margins, the company’s competitive position will inevitably deteriorate,” New Constructs wrote. Competitors “are likely to offer lower or zero trading fees as a strategy to gain market share”.

Susquehanna, a research and trading firm, is much more optimistic about Coinbase, estimating a market cap with a fair value of between 96 and 108 billion dollars. That’s a price-to-sales multiple for Coinbase’s 1123 revenue between 11 and 12, a premium to its group of seven average, due to the company’s “high growth,” Susquehanna wrote last week.

Almost all of this growth for Coinbase comes from the large volume of bitcoin and ethereum transactions. The company goes public during a crypto super bull market, which saw bitcoin rise below $ 30,000 by the end of 2020, to $ 60,000 today.

But in 2018, Bitcoin lost 75% of its value and there are no rules to prevent this from happening again. In the section on risk factors in the Coinbase prospectus, the first two elements consider this very point.

The first says that financial results will fluctuate depending on the cryptographic market. The second says that revenues are “substantially dependent” on cryptographic prices and volumes and that “if such a price or volume falls, our business, operating results and financial condition would be adversely affected.”

But maybe these assessments are all safe.

Roger Lee, a partner at Battery Ventures, which invested in Coinbase in 2017 at a valuation of $ 1.6 billion, calls bitcoin the “least interesting” thing about crypto at the moment. Thus, there is no meaningful multiple of sales.

The right way to think about Coinbase, says Lee, is to imagine where the Internet was in 1994 before Netscape actually turned on the lights for the average consumer by providing a way to navigate. Similarly, Coinbase brings the complex concept of crypto into the mainstream, allowing the masses to learn and invest in it.

The more people start reading and hearing about various projects that are emerging in the cryptoeconomy, the less they will focus on the bitcoin chart, Lee said.

“For a lot of people who trade Coinbase, they will be fixed on the price of bitcoin,” Lee said in an interview. “For people who are long-term investors and who see that everything happens not only with bitcoin, but with 40, 50, 60, 100 chips in time, which allow all these other use cases, they will realize that Coinbase it is an index for other things being built “.

For example, Lee pointed to the Rally Network, a service that allows creators and artists to launch their own coins on the ethereum blockchain without knowing how to code. Creators can reward fans with chips, which can then be used to buy goods such as merchandise or concert tickets. Unlike most artist sites, there is no host fee.

“This is diametrically opposed to a traditional platform that has to ‘tax’ or ‘tax’ creators to generate revenue,” said Lee, whose firm is an investor in Rally, in a follow-up email.

Rally has its own network symbol that investors can buy and sell as bitcoin would, although Coinbase is only available in the custodian service for institutional buyers.

In addition to the many currencies on the market, there is also the recent explosion of non-fungible tokens (NFTs) or digital assets living on the blockchain. Athletes sold videos with important moments for up to hundreds of thousands of dollars each, while pieces of art sold for millions of dollars.

In February, Justin Blau, the DJ and musician who goes through 3LAU, auctioned off a series of songs, art and videos as NFTs and spent nearly $ 12 million in the process. For NFT technology, he has collaborated with Origin Protocol, which fuels cryptographic markets and e-commerce sites.

The Origin token can be purchased from Coinbase and is currently trading at $ 2.39. It has increased more than 20 times in 2021, even after falling by more than 20% in the last week.

Origin co-founder Josh Fraser is in the camp of true crypto believers, waiting for the rapid adoption of the market in finance and trade. He points out that PayPal has a market cap of over $ 300 billion, with a growth rate of around 20%.

“There is no reason to say that Coinbase should not be valued more than a nearly $ 300 billion PayPal, especially with the multiplier given to disruptive technology stocks,” Fraser wrote in an email in Taiwan . “The affordable money market itself is huge, and Coinbase would be one of the best pieces for ‘pawns and shovels.'”

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