In 2020 we saw the start of another bull run in the cryptocurrency asset class, with the price of Bitcoin reaching $30,000 by January 2021 and currently at around $57,500. This rapid rise has led to many businesses in the industry benefiting significantly. One of these businesses, Coinbase, is aiming to capitalise on the rise of crypto by listing onto the Nasdaq. With a total valuation of $100 billion, the planned direct listing has caught the attention of many investors.

Company Overview

Coinbase was founded in 2012 by Brian Armstrong (the current CEO) and Fred Ehrsam. The company acts as a cryptocurrency exchange and broker for Bitcoin, Bitcoin Cash, Ether, Litecoin and others and is currently the biggest US cryptocurrency exchange.

The business model is based on two core products. The first is an exchange for trading cryptocurrencies, known as Coinbase Pro. The second is the cryptocurrency wallet, a user-facing platform for trading different cryptocurrencies. Coinbase offers accounts to potential clients for cryptocurrency trading, boasting over 25 cryptocurrencies to its users, some of which are niche opportunities known as altcoins. [1]

Coinbase charges a commission fee for its users when they make transactions and its users can trade with leverage. It also has two different accounts: regular, which is for users new to cryptocurrency or users who want to keep it simple, and pro, which is for users who want to trade with more complex instruments and use leverage. The regular account charges higher commission fees for users than the pro account.

Coinbase generated $1.3 billion in revenue last year, up from $534 million the year prior, enabling the company to turn a profit of $322 million in 2020 despite losing $30 million in 2019. Coinbase now has 43 million verified users, and 2.8 million monthly active users. A reason for Coinbase’s success is their ability to provide a user-friendly service and how they have avoided security problems and regulatory headaches that have plagued their rivals. [2]

Bitcoin’s Boom and Its Positive Effect on Coinbase

If Bitcoin or other cryptocurrencies achieve widespread adoption, the user base would likely multiply. Coinbase has also emerged as a major player in institutions purchasing Bitcoin. For example, Coinbase’s institutional trading wing handled electric car-maker Tesla’s $1.5 billion investment into Bitcoin last month. Coinbase also handled MicroStrategy’s multiple investments into Bitcoin. It has also been reported that the exchange has more than five Fortune 500 firms as clients. This will likely lead to institutions choosing to work with Coinbase over other exchanges, bringing significantly more revenue for the firm. [3]

With Coinbase’s market size of 3.5 billion people, there is huge potential for further growth. While Bitcoin rose at the start of the bull run hitting $41,000 in January, searches for Bitcoin doubled in just a month. This led to a huge increase in inflows from retail investors, with institutions following shortly. This has helped cryptocurrencies establish themselves as an asset class.

Furthermore, with enormous fiscal stimuli being provided by governments across the world, for example, the USA’s $1.9 trillion stimulus package this month, there will likely be more inflation. Cryptocurrencies are a good hedge against inflation, meaning that they can protect wealth from being eroded by rising price levels. Also, with very low and in some countries even negative interest rates, there has been more investment into stores of values such as Bitcoin which can provide a higher yield than gold. This has led to greater adoption from many and with more adoption of crypto, Coinbase’s user base and revenues will grow.

Coinbase Risk Factors

There were some risk factors detailed in the S-1 document filed and sent to the SEC (Securities and Exchange Commission). One risk that is described is the volatility of cryptocurrencies and the prospect of another crypto winter, a term used for a bear market that lasts several years. If another bear market arises, Coinbase’s revenues would suffer and there may be potential losses being made for several years. However, if Coinbase manages to adapt and get through the bear market then once the bull run starts again they would be back to making record profits.

Regulation and no backing from governments is also a big risk factor attached to crypto. For example, Janet Yellen, United States Secretary of the Treasury, sounded a warning about how Bitcoin is an ‘extremely inefficient’ way to conduct monetary transactions. She also said that she fears it is often used for illicit finance, which is damaging to the reputation of cryptocurrencies. Some governments have also banned or looking to ban cryptocurrencies which could damage Coinbase’s growth prospects. For example, it has been rumoured that India is preparing to ban cryptocurrencies. [4]

Looking Ahead

Coinbase is aiming to list in April. The company’s public debut, the first for a large US cryptocurrency exchange, is likely to rank as one of this year’s largest new tech listings and would mark a milestone for backers of the emerging sector.

Coinbase aims to make the complex and defiantly anti-establishment world of cryptocurrencies accessible to the mainstream. Going public is a big step to making this possible as more and more people will be made aware of this new asset class.

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