Brian Armstrong, Co-Founder and CEO of Coinbase Inc.
David Paul Morris | Bloomberg | Getty Images
Coinbase is ready to make an astronomical valuation when the digital currency exchange goes public on Wednesday. However, ask 10 market experts how the company should go about itBerated and you will likely get 10 responses.
This is because Coinbase’s current business – which had estimated first-quarter sales of a whopping $ 1.8 billion and net profits of up to $ 800 million – is based almost entirely on the performance of Bitcoin and Ethereum .
These cryptocurrencies have soared more than 800% and 1,300% respectively over the past year. As a result, Coinbase, the most popular place for U.S. investors to buy these assets, has grown ten-fold over that period.
Should Coinbase hit the public market with its most recent private market valuation of $ 100 billion, taking into account a fully diluted stock count, it would immediately be one of the 85 most valuable US companies.
Here is the key question for investors ahead of the Nasdaq debut: What if a crypto company with historically abnormal growth, massive uncertainty and no official headquarters with Wall Street requirements and well-known metrics like value for money and value for money -Relation is in conflict? -Learning relationships?
“Valuing a start-up can be challenging, but I think valuation is far more complex at a company like Coinbase,” said Natalie Hwang, founding director of investment firm Apeira Capital. She is currently not involved in the company.
Predicting crypto prices has proven to be a foolhardy game. The fluctuations can be so rapid in both directions that Coinbase includes 27 bullet points on volatility risks in its prospectus. These include changes in investor confidence, negative publicity and social media coverage, regulatory issues, and service disruptions related to the technology.
Because the underlying assets that make up Coinbase’s financial history are so unpredictable, a thorough analysis of earnings quality, loyalty and efficiency won’t get you very far. Coinbase evangelists don’t spend a lot of time doing this.
Rather, they are looking to a future in which financial intermediaries will become fewer and transactions predominantly take place in the blockchain. Online e-commerce, travel, and home buying marketplaces will use a variety of cryptocurrencies to connect buyers and sellers, with blockchain serving as the universal source of truth.
Coinbase calls it the “crypto-economy”, a word that appears 163 times in its prospectus. It stands for a software-based world of payments, trading and all types of peer-to-peer transactions that use the ability of the blockchain to provide everything with a unique identifier.
If Coinbase cops are right, the company is at the center of a critical internet transformation. Some compare it to Netscape, which introduced the browser to consumers. Others look at how Amazon brought physical retail to the internet, or how Facebook became the way people connect.
Matthew Le Merle, managing partner of Fifth Era investment firm and Blockchain Coinvestors, said it would be tantamount to rating Amazon in its early days based on book sales or placing multiples on Airbnb by looking at its number of rental nights booked.
“You don’t think about bitcoin’s volatility, trading fees and revenue,” said Le Merle, whose company specializes in crypto and is involved in Coinbase through investments in some venture funds. “You have to start with – what is the profit pool of the world’s digital money and assets? In that context, that is trillions and trillions of dollars that will change hands.”
Today it’s all about Bitcoin transactions
Regardless of the future, Coinbase’s revenue for this year at least will largely be driven by the volume of transactions, which is currently closely linked to Bitcoin prices. Coinbase charges a fee for trades, which varies based on the size of the transaction.
In its earnings report for the first quarter last week, Coinbase said it had 6.1 million monthly transaction users (MTUs). Should crypto prices rise, MTUs could hit 7 million for the year, Coinbase’s most aggressive estimate. In the middle range, MTUs would land at 5.5 million in a flat crypto market. The most conservative forecast, assuming a price decline, is 4 million MTUs.
Coinbase skeptics see a fee-reliant company in a market where a growing number of competitors can get aggressive with pricing. For example, the popular Robinhood app doesn’t charge a fee for crypto purchases.
Stock research firm New Constructs wrote in a report last week that competition from companies like Kraken, Gemini and Binance will hurt Coinbase’s future fee income, leading to a “race to the bottom” similar to what happens in stock trading. The company said Coinbase should be valued at $ 18.9 billion, according to its analysis, which is 81% below its expected market cap.
“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 company, is far more optimistic about Coinbase and estimates a fair value market cap of $ 96 billion to $ 108 billion. That’s value for money for Coinbase’s sales in 2023 between 11 and 12, a premium over the comparative average of seven due to the company’s “high growth,” wrote Susquehanna last week.
Almost all of Coinbase’s growth is due to the high volume of Bitcoin and Ethereum trades. The company goes public during a crypto superbull market that saw Bitcoin jump from under $ 30,000 in late 2020 to $ 60,000 today.
But in 2018 Bitcoin lost 75% of its value, and there are no rules against it from happening again. In the Risk Factors section of the Coinbase prospectus, the first two points take exactly this point into account.
The first is that financial results will fluctuate depending on the crypto market. The second is that revenue “is heavily dependent on crypto prices and volumes” and that “if that price or volume decreases, our business, results of operations and financial condition would be adversely affected”.
Beyond day trading Coinbase
But maybe these reviews are all msiguided.
Roger Lee, a Battery Ventures partner who invested $ 1.6 billion in Coinbase in 2017, currently calls Bitcoin the “least interesting” thing about crypto. So there is no meaningful sales multiplier.
The right way to start thinking about Coinbase, according to Lee, is to imagine where the internet was in 1994, before Netscape effectively turned the lights on for the average consumer by offering a browsing experience. Similarly, Coinbase is bringing the complex concept of crypto into the mainstream so that the masses can learn about it and invest in it.
The more people start reading and hearing about various projects in the crypto economy, the less they will focus on the bitcoin chart, Lee said.
“For many people who trade Coinbase on a daily basis, they will be fixated on the price of Bitcoin,” Lee said in an interview. “For people who are long-term investors and see that not just Bitcoin but also the 40, 50, 60, 100 tokens over time that make all of these other use cases possible are all going on, they will realize that Coinbase is an index for which other things are being built. “
As an example, Lee pointed to Rally Network, a service that allows creators and artists to start their own coins on the Ethereum blockchain without knowing how to encode. Creators can reward fans with tokens that they can use to purchase goods such as merchandise or concert tickets. Unlike most artist websites, there is no hosting fee.
“This is in contrast to a traditional platform that has to” tax “or” charge “creators in order to generate revenue,” said Lee, whose firm is an investor in Rally, in a follow-up email.
Rally has its own network token that investors like Bitcoin can buy and sell. At Coinbase, however, it is only available for institutional buyers in the custody service.
In addition to the many altcoins on the market, there is the recent explosion of non-fungible tokens (NFTs) or digital assets that live on the blockchain. Athletes have sold video clips with highlights for up to hundreds of thousands of dollars each, while works of art have sold in the millions.
A virtual work of art called “Everydays: The First 5000 Days”. It was designed by digital artist Beeple and is the first NFT-based artwork to be auctioned at Christie’s.
In February, Justin Blau, the DJ and musician of 3LAU, auctioned a number of songs, works of art and videos as NFTs for almost $ 12 million. For NFT technology, he worked with the Origin protocol, which supports crypto marketplaces and e-commerce websites.
The Origin token can be purchased on Coinbase and is currently trading for $ 2.39. That’s more than 20x in 2021, even after falling more than 20% in the last week.
Origin co-founder Josh Fraser is in the crypto-believer camp and awaits rapid market adoption in finance and commerce. He points out that PayPal has a market capitalization of over $ 300 billion and a growth rate of around 20%.
“There’s no reason to believe that Coinbase shouldn’t be worth nearly $ 300 billion in PayPal, especially with the disruptive technology stocks multiplier,” Fraser wrote in an email from Taiwan. “The addressable market for money itself is gigantic and Coinbase would be one of the best picks and shovels games for that.”
CLOCK: Early Coinbase investor Reid Hoffman on the rise of crypto