Coinbase will go public on a blockbuster direct listing on Wednesday, and investors consider it a “turning point” for the cryptocurrency industry.
The digital currency exchange can be estimated at a whopping $ 100 billion, making it more valuable than major trading platform operators such as the parent company of the New York Stock Exchange Intercontinental Exchange and Nasdaq.
It’s because the prices of bitcoin and other virtual currencies have skyrocketed in the past year as investors wanted to diversify their portfolios in the belief that inflation will spike. Bitcoin hit a new all-time high of more than $ 64,000 on Wednesday and has more than doubled in value since the start of the year.
Coinbase’s debut in the public market is “potentially a watershed moment for the crypto industry and will be something the Street will turn to with laser focus to gauge investor appetites,” said Dan Ives, a tech analyst at Wedbush Securities.
“It will legitimize much of what these companies are doing,” Marcus Swanepoel, CEO of London-based crypto platform Luno, said of the Coinbase debut. “First, it will show how big the industry is and how much it is growing.”
Coinbase is the largest cryptocurrency company to go public to date. It is the world’s second largest digital asset exchange by trading volume, according to CoinMarketCap, and it has been credited with bringing crypto into the mainstream with its easy-to-use app.
But there are a number of risks ahead. Cryptocurrencies are notorious for their wildly volatile price movements, and skeptics think it is in a huge market bubble that is bound to burst at some point. Meanwhile, global regulators are increasingly seeking to bring crypto under their scrutiny, with the Indian government even attempting to ban digital currencies.
Mobility
Coinbase estimates it generated $ 1.8 billion in revenue in the first quarter of 2021, an increase of a whopping 844% compared to the $ 190.6 million it generated in the same period a year earlier. This was largely due to the enormous price increases of digital coins such as bitcoin and ether.
Since Coinbase’s business is strongly linked to the performance of major cryptocurrencies, there is a risk that momentum will turn the other way if there is a significant downturn in the market.
“Crypto companies will have to figure out how to eventually diversify their revenue streams,” said Hunter Merghart, a former Coinbase president who now heads the US for Luxembourg-based cryptocurrency exchange Bitstamp.
“I think we are still very much in the investment phase right now and the overall crypto pie will continue to grow.”
Bitcoin notoriously soared to nearly $ 20,000 in late 2017, before crashing to nearly $ 3,000 the following year. This price volatility has been a major criticism from bitcoin’s detractors, who say it fails important currency tests, such as acting as a medium of exchange or store of value.
However, crypto investors believe that such a sudden price drop – known in the industry as “crypto winter” – is unlikely in the near future. They see bitcoin as a kind of “digital gold” that is not correlated with other assets and can serve as a hedge against rising inflation.
“The price of bitcoin has risen a lot in the past 10 years,” says Swanepoel. “When it comes down, it establishes a new baseline and growth continues on that new baseline.”
“I actually think the baseline will be significantly higher from this cycle,” he added. “If you look at commodity markets, they have normal cycles and then they have super cycles.” I suspect this is a super cycle for crypto. It can now accelerate much longer. “
Regulation
Earlier this year, US Treasury Secretary Janet Yellen warned in her confirmatory hearing that bitcoin and other cryptocurrencies are primarily used for illegal activities and that the government may need to “restrict” their use.
Coinbase says it is regulated and has partnerships with a number of banks. But it warned in its prospectus that negative regulatory changes could “negatively” affect its financial condition.
Before former President Donald Trump’s tenure ended, the Treasury Department proposed a rule requiring financial services providers to record the identity of cryptocurrency holders. This has proved controversial with many crypto companies.
“Regulatory risk is high because crypto platforms are not currently subject to the same rules as traditional exchanges or trading platforms,” said Stéphane Renevier, an analyst with financial education platform Finimize.
“Some of Coinbase’s activities (such as some of its prime brokerage services and the use of its own capital to trade) may be subject to stricter regulations in the future,” he added. “As the regulatory landscape evolves extremely quickly, the company is always at risk of a status change, which could impact some of its most profitable businesses.”
Jesse Powell, CEO of Coinbase rival Kraken, told CNBC he thinks there could be a “crackdown” on cryptocurrencies.
‘The tech giant of Crypto’
Garry Tan, founder of venture capital firm Initialized and an early investor in Coinbase, said the cryptocurrency market was still in its infancy.
“We’re not there yet,” he told CNBC. “We’re still in the early innings of that, but it’s not that crazy anymore.”
But Tan and other Coinbase bulls say the company has created a competitive “moat” around its business that should allow it to thrive even with the advent of new regulations.
“Coinbase is like crypto’s technology giant,” added Tan. “Coinbase’s (debut), and it exists as one of the cornerstone technology companies in Silicon Valley, is very powerful because it means that just as the personal computing revolution needed Apple and Microsoft, the crypto revolution needs Coinbase.”
Crypto industry insiders say Coinbase is only part of the story. There are other emerging trends in the market, such as digital collectibles and so-called decentralized finance, which aims to recreate traditional financial products without intermediaries like the banks. Additionally, Coinbase could face tougher competition from rivals such as Binance and Kraken, the latter of which is weighing its own stock listing for next year.