- Coinbase – one of the world’s largest digital currency exchanges – could potentially forgo the traditional IPO route in favor of a direct listing on the stock market.
- The exchange’s latest valuation is estimated to be USD8 billion, an increase of 400x since 2012, and around 49x P/E ratio and 14.7x P/S ratio.
- It is estimated to have generated USD543 million in revenue and USD163 million in profit in 2019.
- Its listing could prove to be a real game-changer for the industry.
Coinbase is planning a direct listing instead of a traditional IPO, later this year or next, according to Reuters.
The digital currency exchange boasts more than 35 million users with over USD7 billion in custody, and has facilitated approximately USD220 billion in trading since its launch in 2012. More recently, in Q4 2018, Coinbase upgraded its custody system and moved around 850,000 of its customers’ BTC to new addresses. Based on current values (1 BTC ≈ USD 9200), its client assets are estimated at around USD7.9 billion.
Despite its meteoric ascension and continued accelerated growth, Coinbase has to navigate multiple hurdles since inception. According to a document reviewed by Bloomberg, Coinbase generated USD923 million in revenue and USD380 million in profit in 2017, a giant leap from the USD17 million in revenue generated in 2016. Coinbase had initially forecast nearly USD1.3 billion in revenue and USD456 million profit in 2018. This aggressive projection was overblown – which could have been (at least in some small part) a ploy to inflate its equity valuation to over USD8 billion during its Series E fundraising – and expectations were dampened by a bearish slump.
Notwithstanding the optimistic overtone, BQ Intel – a blockchain data analytics firm – paints a more conservative picture in its quarterly analytical report, published in January 2020. The market intelligence agency suggests that Coinbase generated USD529 million in revenue and USD159 million in profit in 2018; the numbers rose to USD543 million and USD163 million respectively in 2019, totaling a 30% net margin, which is comparable with its mainstream regulated counterparts.
From the graph above, Coinbase’s significant revenue declination from 2017 to 2018 was due to BTC’s devaluation and a shrinkage of the customer base. This was corroborated by data collected by early-stage VC firm, Tribe Capital, which indicated a decline of approximately 80% of all of Coinbase’s monthly active users in the US between December 2017 and September 2018.
The exchange did eventually find some stability in 2019. The trading volumes in USD terms were flat and down by 3% in BTC terms, according to data retrieved from bitcoinity.
Coinbase has managed to raise USD547.3 million from nine strategic investment rounds. The company has a reputable list of equity investors including big names such as Andreessen Horowitz, Mitsubishi UFJ Capital, New York Stock Exchange (NYSE), Institutional Venture Partners (IVP), just to name a few.
Coinbase’s recent Series E fundraising was led by Tiger Global Management in October 2018. The American hedge fund invested USD300 million into the budding digital currency exchange platform, with a valuation of USD8 billion – 400 times of its initial valuation in 2012.
The distribution of equity throughout the series financing is outlined in the table above. The company’s Series E valuation was 49-times its estimated profit in 2019, and 14.7-times of its predicted forecast revenue in 2019. As staggering as they may seem, these figures highlight the US equity market condition, whereby 100-times price-to-sales ratios aren’t particularly uncommon for booming companies.
Though there has been a slight behavioral shift with investor scrutiny intensifying due to a number of high profile and well reported failed investments, should current market sentiment persist, it could prove the perfect time for Coinbase to get listed. Its decision not to raise funds in IPO implies that only existing equity holders will have the rights to sell shares, thereby alleviating any added selling pressure should the exchange not meet its listing valuation targets.
If Coinbase is successfully listed, it’s highly likely to have positive implications for the entire crypto industry. Not only could we experience incremental price hikes for BTC, ETH and other cryptocurrencies, the exchange’s potential direct stock market listing could further “credibilize” the industry by negating barriers to usage and propel mass adoption by the mainstream as a result.
Coinbase currently operates as a Money Service Business at the federal level in the US, and has obtained licenses in every operational state. In addition, it also made significant investments in adhering to the latest regulatory and compliance efforts, which could remove any potential barriers to direct listing, making the task considerably smoother and more appealing.
The only question that still remains is how the SEC will perceive altcoins trading on the Coinbase platform. The SEC used to contend that BTC is not a form of security, nor is it within its regulatory scope. However, some other altcoins can be categorized as securities, and the SEC had previously deemed altcoins as “fraudulent and manipulative”. It could further complicate matters in terms of categorization and classification.
This could be potentially problematic, and we plan to monitor the latest developments closely in order to better assess the situation and how it could be resolved.