Coinbase, a cryptocurrency exchange went public in a direct listing last week at a valuation of $100 billion. A reference price of $250 was assigned to Coinbase by Nasdaq on Tuesday even and the stock opened around $381 on Wednesday morning. Coinbase closed at $328.28 but not before peaking at $429.54 during trading on Wednesday.
IPO vs Direct Listing
Coinbase didn’t technically go public the traditional initial public offering (IPO) instead executives opted to go public via a direct listing. “But what is the difference?”. In the traditional IPO process Coinbase would have worked with an underwriter (think of investment banks) to sort out the terms and structure of the offering including share price. The underwriter then turns around and offers the shares to clients that include hedge funds. The direct listing involves the same process; however, the underwriters are not involved in the event. Coinbase is just the latest tech firm to go public via a listing instead of a traditional IPO. Coinbase executive probably chose this method of going public because the opening price reflects the long-term value of the stock and they would’ve raised more money this way.
This is certainly an exciting period for anybody interested in cryptocurrencies. Coinbase is the first cryptocurrency company to list publicly and will probably lead other companies to do the same. Until recently, financial institutions have not been cautious or directly opposed to the societal adoption of cryptocurrency. This listing will go some way to prove that cryptocurrencies are not fringe investments; with Coinbase being more profitable and larger than a number of U.S. exchanges. However, this fact has placed a number of people, including myself at a crossroads. A report by New Constructs, a market research firm based in Tennessee, suggests that Coinbase is grossly overvalued. According to New Constructs research Coinbase would need to reach 1.5x the combined revenues of Nasdaq and Intercontinental Exchange, two of the biggest Exchanges in the U.S. New Construct also places Coinbase’s valuation closer to $20 billion.
Recently we have seen brokerages like TD Ameritrade cut their commission rates to 0% or close to zero. Despite Coinbase’s popularity, users have complained about the high transaction fees. Analysts suggest that cryptocurrency exchanges may head in the same direction, if that is the case Coinbase will need to cut their trading fees to match the competition. Considering that Coinbase makes 96% of their revenue through these fees they’ll need to either come up with a new monetisation strategy or growth strategy so that they can acquire new users to validate their market value.
I do believe that Coinbase is overvalued right now, however, with the cryptocurrency space being relatively new there will be plenty of opportunity in the not-too-distant future for Coinbase to validate their market value.