Coinbase: supersize listing rests on bitcoin price

Coinbase shares, newly listed on Nasdaq, are a bet on two entwined factors: the price of bitcoin and regulators’ tolerance of cryptocurrencies. Neither is certain. But bitcoin’s price surge in the past year, aided by fans such as Elon Musk, has more than doubled the annual trading volume of the cryptocurrency exchange. Demand is still rising.

Coinbase’s listing is striking for a couple of reasons. It is the largest business of its kind to join public markets, on an anticipated opening market value of $100bn. And it is one of only a handful of companies that has chosen a direct listing over an initial public offering or purchase by a quoted “blank cheque” company.

Net income of as much as $800m in the first quarter meant Coinbase did not need it to raise money. Sales of $1.8bn exceeded annual revenue for the whole of last year.

Founded in 2012, Coinbase enables its 56m users to buy and sell cryptocurrencies. Of these, bitcoin is by far the most popular. Its price exceeds $64,000, up from less than $6,000 a year ago, cheered by fans such as Elon Musk.

The cryptocurrency has a market capitalisation of $1.2tn, according to market tracker CoinGecko. Ethereum, the second-largest, is worth just $254bn. For Coinbase sales to grow, bitcoin’s price must keep rising. Scale and volatility invite close regulatory scrutiny.

Coinbase investors must be crypto believers — or speculators cynically hitching a ride on their convictions. They apparently are valuing the company at a stratospheric 79 times trailing revenue. That requires sales growth that is supersized even by the standards of the tech industry. Data mining company Palantir, which also opted for a direct listing, ended its first day of trading with a valuation 19 times trailing revenue.

Coinbase’s listing tests mainstream acceptance of cryptocurrencies. Reservations were already abating. Companies such as Square and Tesla have purchased bitcoin. PayPal allows users to pay with cryptos. Bank of New York Mellon is giving customers access to cryptocurrencies alongside other assets. Coinbase counts 7,000 institutions as customers. 

That bodes well for bitcoin — for now. If prices drop, so will trading volumes. Coinbase’s newfound profitability would evaporate. But steep prices are dangerous too. They reduce the incentive for owners to spend bitcoin on daily payments. Without these transactions, the practical case for cryptocurrencies — and crypto exchanges — falls apart.

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