IPO filings used to be less interesting. It’s been rather fun to record how some (not so fast growing, it turns out) tech unicorns have explained their businesses (it’s about people), the risks to growth (we have never made a profit and may never do so) and how they plan to structure voting rights (you don’t get any,). So imagine just how much fun various analysts and reporters have had poring over the S-1 filing from Coinbase, the crypto exchange which is about to list on the Nasdaq.
It’s fair to say the listing document is not short on eyebrow-raising information. We have for instance a Borrow & Lend scheme that lets US retail customers borrow against and lend their crypto asset portfolios.
“Our first product is a portfolio-backed loan: a flexible, non-purpose 12-month term loan that allows retail users to borrow US dollars using their crypto assets as collateral. Secured by their investment portfolio, customers can use the line of credit to access U.S. dollars while maintaining a “hodl” investing strategy. Over time, we plan to offer our retail users the ability to opt into lending their crypto assets to earn a passive return on their long term investments,” the statement explains.
Now this is where it gets really interesting from an institutional point of view as you can harvest yield on crypto assets as a basis trade. The filing also shows that Coinbase earns interest on customer deposits.
The company has no address – nowhere to forward strongly-worded letters when the coins are lost or hacked – for Coinbase is a “remote-first company”. Nice touch for the new normal, post-pandemic work from home world. Less good if you are say, an underwriter for the listing. Maybe one reason why it’s gone the direct route.
CFTC investigation
There are several legal proceedings on the go, including a CFTC investigation commenced in July 2017 that has covered topics including a 2017 Ethereum market event, trades made in 2017 by one of Coinbase’s then-current employees, the listing of Bitcoin Cash on its platform, and the design and operation of certain algorithmic functions related to liquidity management on the platform.
“During the course of its investigation, the CFTC has issued subpoenas to us and certain of our directors, executive officers, and former employees, including testimony subpoenas, and other requests for information. We are cooperating fully with the investigation,” Coinbase explains.
Then you have the various risks, one of which is the CEO taking his eye off the ball with other ‘cryptoeconomy’ projects. George Osborne would approve. In a nice little dig at the established financial system (Coinbase let’s not forget sees itself as being at the vanguard of creating an ‘open financial system’), it even called out the Federal Reserve as a potential risk to its business, citing the 2-hour outage to the central bank’s payment network this week. Trolling the Fed will appeal to its customers – who will of course want to be shareholders.
Hacks – customers losing all their Bitcoins – are in there, naturellement. But they are not so high up as the volatility of crypto prices. In fact earnings are inextricably tied to crypto prices, the filing makes plain. This is not the case with listed exchanges trading equities. The price of Unilever shares doesn’t really matter to the LSE. This link to pricing, rather than just volume, may be obvious in this case since prices and volumes are correlated in cryptos, but it is interesting to see in black and white: “Our total revenue is substantially dependent on the prices of crypto assets and volume of transactions conducted on our platform. If such price or volume declines, our business, operating results, and financial condition would be adversely affected.”
Majority of revenue is from Bitcoin and Ethereum transactions
More than anything it’s highly dependent on Bitcoin. A majority of Coinbase’s net revenue is from transactions in just two crypto assets: Bitcoin and Ethereum. For year ended December 31, 2020, Bitcoin, Ethereum, and other crypto assets represented 70%, 13%, and 13% of assets on platform respectively. “If demand for these crypto assets declines and is not replaced by new demand for crypto assets, our business, operating results, and financial condition could be adversely affected” says the filing.
Institutional interest is rising. Whilst we know this is the direction of travel – we have seen Square, Tesla and MicroStrategy invest in Bitcoin and the likes of PayPal and Mastercard announce plans to support crypto payments, the filing further underscores growing institutional interest. “More recently, we have experienced significant growth in the number of institutions on our platform, increasing from over 1,000 as of December 31, 2017 to 7,000 as of December 31, 2020,” the filing says.
Finally – what’s the scoop on its outlook? Let’s not stress about valuations for now. I’d say the margins look handsome with revenues of more than $1.1bn from $193bn in transaction volumes, which puts it in a nice place to take advantage of soaring interest in cryptocurrencies. A listing gives it Wall Street status in a world that is only starting to see the first railroads and barbed wire fences erected. And despite any investigation (or rather, let’s park those for now as we don’t know enough about their material impact and I can’t believe they are anything scarier than other exchanges), a Nasdaq listing will make Coinbase appear like its sheets are the cleanest. It also has 46m users, many of whom will want to own stock.
Editor: Note that Coinbase has not yet provided an official date for its IPO. Paperwork was filed with the SEC on 25 February. The IPO is anticipated early this year. No share price for Coinbase has yet been set. Transactions on Nasdaq Private Markets indicate a valuation of $373/share, making the company worth $100 billion, give or take.
