Coinbase impresses ahead of direct listing — but investors question valuation and risks

If financial reports were films, we might have an early Oscar contender in Coinbase.

This past Friday, in the process to go public, the largest cryptocurrency exchange in the U.S. released its S-1 filing – and they did not disappoint.

Shine the spotlight over here

Founded by Brian Armstrong in 2012, Coinbase is an online platform to buy/sell Bitcoin, Ethereum, and other popular cryptocurrencies. Popularized by its easy-to-use interface, Coinbase expects to go public via direct listing in 2021.

With Bitcoin up over 600% since the beginning of 2020, the decision for crypto exchanges was easy – it’s time to go public. In addition to Coinbase:

• Bakkt, a crypto exchange backed by Microsoft, is going public via SPAC, VPC Impact Acquisitions Holdings ($VIH).
• Apifiny and Gemini, two other crypto trading platforms, have also announced plans to go public.

Ready for its close-up

Here’s a look at Coinbase’s numbers:

• $1.27b in sales, up 139% from 2019
• $322m in net profit, compared to a loss of $30m in 2019
• 43m retail users, up 34% from the end of 2019

The company generates the majority of its revenue by taking a 0.5% cut of each transaction. The more cryptocurrencies people buy and the higher their price, the more Coinbase makes  – making its sales correlated with the volatile price of cryptocurrencies.

As Bitcoin’s price skyrocketed in 2020, Coinbase’s sales exploded to $600m in the last quarter of 2020 – triple what it made at the beginning of 2020.

At the end of 2017, crypto prices crashed more than 70%. According to CoinTelegraph, Coinbase saw its sales fall by nearly half in the following year. If crypto prices fall, Coinbase could see a similar decline.

For investors… There’s always a critic…

And here’s what investors should be criticizing:

• Crypto correlation – Coinbase’s sales are heavily tied to the price of crypto. If the market were to crash, Coinbase’s sales could follow.
• Regulations – Unlike financial institutions, crypto isn’t regulated. But in recent months, US policymakers expressed concerns of crypto’s role in facilitating illegal transactions and their intentions to regulate cryptocurrencies.
• Valuation – Coinbase is reportedly going public at a high valuation of $100b – a 12x increase from the $8b it was worth when it raised money in 2018.

If Coinbase wants to avoid becoming an oscar flop, it’ll have to meet the high growth expectations on its business. And that ultimately depends on the enthusiasm surrounding cryptocurrencies.

Learn more: Bitcoin is going mainstream but investors are worried about these things…