Coinbase is different from any market debut Wall Street has ever seen

Coinbase is poised to get an astronomical valuation when the digital currency exchange goes public on Wednesday. But ask ten market experts how the company should do it to be rated and you will probably get 10 answers.

This is because Coinbase’s current business (which generated an estimated $ 1.8 billion in revenue in the first quarter and up to $ 800 million in net revenue) is based almost entirely on Bitcoin’s performance and Ethereum.

These cryptocurrencies have skyrocketed by more than 800% and 1,300%, respectively, in the last year. As a result, Coinbase, the most popular place for US investors to buy these assets, has multiplied again in this stretch.

If Coinbase hit the public market around its latest private market valuation of $ 100 billion, given a fully diluted stock count, it would instantly be one of the 85 most valuable U.S. companies.

This is the key question for investors before the Nasdaq debut: what happens when a cryptocurrency company with historically abnormal growth, massive uncertainty and no official headquarters collides with the rigors of Wall Street and metrics known as selling price and the price at home ratios?

“Valuing any start-up can be a challenge, but I think the valuation issue is much more complex with a company like Coinbase,” said Natalie Hwang, a founding partner of investment firm Apeira Capital. He has no current stake in the company.

Predicting cryptocurrency prices has proven to be a foolish game. Changes can be so rapid in any direction that Coinbase has 27 basis points in its prospectus on volatility risks. They include changes in investor confidence, negative publicity and social media coverage, regulatory issues, and technology-related service outages.

Because the underlying assets that make up Coinbase’s financial history are so unpredictable, fundamental analysis of customer quality, retention, and customer efficiency doesn’t take you very far. Coinbase evangelists don’t spend much time there.

Rather, they are looking on the path to a future in which financial intermediaries are declining and transactions take place primarily in the blockchain. Online markets for e-commerce, travel and home buying, they say, will use a lot of cryptocurrencies to connect buyers and sellers, with blockchain as the universal universal source.

Coinbase calls it “cryptoeconomics,” a word that appears 163 times in its brochure. It portends a world based on payment software, commerce, and all sorts of peer-to-peer transactions that leverage the ability of blockchain to give an entire unique identifier.

If Coinbase bulls are right, the company is at the center of a critical Internet transformation. Some compare it to Netscape, which introduced the browser to consumers. Others see how Amazon brought physical commerce to the web or how Facebook became the way to connect.

Matthew Le Merle, managing partner of investment firm Fifth Era and Blockchain Coinvestors, said linking Coinbase’s value to bitcoin would be like valuing Amazon in its early days based on book sales or placing a multiple on Airbnb five years ago looking at their number of booked rental nights.

“Don’t think about the volatility of bitcoins, trading commissions and revenue,” said Le Merle, the cryptocurrency company that has exposure to Coinbase through investments in some venture funds. “You have to start: what is the set of benefits of the world’s digital money and assets? In this context, it’s trillions and trillions of dollars that will change hands.”

Regardless of the future, Coinbase’s revenue during at least this year will be largely determined by the volume of transactions, which is currently closely tied to bitcoin prices. Coinbase charges a transaction fee that varies depending on the size of the transaction.

In its first-quarter earnings report last week, Coinbase said it had 6.1 million monthly transaction users (MTUs). If cryptocurrency prices rose, MTUs for the year could reach 7 million, Coinbase’s most aggressive estimate. In the middle range, assuming a flat cryptography market, MTUs would reach 5.5 million. The most conservative forecast, assuming prices fall, is 4 million UTM.

Coinbase skeptics see a tariff-dependent company in a market where a growing list of rivals can become aggressive with prices. For example, the popular Robinhood app charges no fee for cryptographic purchases.

Stock research firm New Constructs wrote in a report last week that competition from companies such as Kraken, Gemini and Binance will be earmarked for future Coinbase fee revenues that will lead to a “race to the bottom” , similar to what happened in stock trading. The firm said that according to its analysis, Coinbase should be valued at $ 18.9 billion, 81% below the projected market capitalization.

“As the cryptocurrency market matures and more companies inevitably chase Coinbase’s high margins, the company’s competitive position will inevitably deteriorate,” New Constructs wrote. Competitors “will likely offer lower or zero trade commissions as a strategy to gain market share.”

Susquehanna, a research and trading company, is much more optimistic about Coinbase and estimates a market cap of $ 96 billion to $ 108 billion. This is a multiple of the sale price for Coinbase’s revenue in 2023 between 11 and 12, a premium for its group’s seven-year average, due to the company’s “great growth,” he wrote. Susquehanna last week.

Almost all of this Coinbase growth comes from the high volume of bitcoin and ethereum transactions. The company will go public during a super bull crypto market that saw Bitcoin rise by less than $ 30,000 by the end of 2020, past the current $ 60,000.

But in 2018 Bitcoin lost 75% of its value and there are no rules for this not to happen again. In the risk factors section of the Coinbase brochure, the first two items consider this point.

The first says that financial results will fluctuate depending on the cryptographic market. The second says that revenue “depends substantially” on cryptographic prices and volumes and that “if that price or volume decreases, our business, operating results and financial situation will be adversely affected.”

But perhaps these assessments are all balanced.

Roger Lee, a partner at Battery Ventures, which invested in Coinbase in 2017 with a valuation of $ 1.6 billion, considers Bitcoin to be the “least interesting” cryptocurrency right now. Therefore, there is no sales multiple that makes sense.

Lee says the right way to think about Coinbase is to imagine where the Internet was in 1994 before Netscape effectively turned on the lights of the average consumer by providing a way to browse. Similarly, Coinbase brings the complex concept of cryptography to the mainstream, allowing the masses to know it and invest in it.

The more people start reading and hearing about various projects that are emerging within the cryptoeconomy, the less they will focus on the bitcoin chart, Lee said.

“For many people who trade daily on Coinbase, they will look at the price of bitcoin,” Lee said in an interview. “For people who are long-term investors and see everything that happens not only with Bitcoin, but with the 40, 50, 60, 100 tokens over time that allow the rest of these use cases, they will realize that Coinbase is an index of other things that are being built “.

As an example, Lee pointed to Rally Network, a service that allows creators and artists to toss their own coins into the ethereum blockchain without knowing how to code. Creators can reward fans with tokens, which can then be used to buy products such as merchandise tickets or concerts. Unlike most artist sites, the host has no fee.

“This is diametrically opposed to a traditional platform that needs to‘ tax ’or‘ charge ’creators to generate revenue,” Lee, whose company is an investor in Rally, said in a follow-up email.

Rally has its own network testimony that investors can buy and sell as Bitcoin would, although at Coinbase it is only available on the custody service for institutional buyers.

In addition to the numerous alternative currencies on the market, there is the recent explosion of non-expendable tokens (NFTs) or digital assets living in the blockchain. Athletes have sold video clips of highlights for hundreds of thousands of dollars each, while pieces of art have been sold for millions of dollars.

In February, Justin Blau, the DJ and musician who goes through 3LAU, auctioned off a series of songs, art and videos as NFT and it stretched for about $ 12 million. For NFT technology, it partnered with Origin Protocol, which boosts crypto markets and e-commerce sites.

The Origin token can be purchased on Coinbase and is currently trading at $ 2.39. This exceeds more than 20 times in 2021, even after falling more than 20% last week.

Origin co-founder Josh Fraser is in the realm of true cryptographic believers, waiting for a rapid adoption of the market through finance and trade. He points out that PayPal has a market cap of more than $ 300 billion, with a growth rate of around 20%.

“There’s no reason to say that Coinbase should be valued at more than a $ 300 million PayPal, especially with the multiplier awarded to harmful technology stocks,” Fraser wrote in an email from Taiwan. “The airship money market itself is gigantic and Coinbase would be one of the best plays for that.”

I WILL SEE: Reid Hoffman, Coinbase’s first investor, increased cryptography