One of the biggest cryptocurrency exchanges in the world, Coinbase, has recently released the much-awaited initial public offer (IPO) on 14 April. Listed on Nasdaq, the shares are represented under the market symbol 'COIN', and Nasdaq on the night of April 13 had set a reference price for the company at $250 per share. Experts predict that the company might go public at a valuation of $100 billion.
The company has decided to opt for a direct listing, where existing shareholders can sell their shares directly on the exchange. Thus, it is refraining from traditional IPO procedures. This method does not allow to raise new funds but does offer current shareholders, i.e. founders, employees, and historical investors the chance to sell their stocks on the market.
Thus, as soon as the listing takes place new investors from across the world including India can start their investments.
Origins of Coinbase
The company was founded in 2012 in San Francisco by Brian Armstrong and Fred Ehrsam, and it facilitates end-to-end financial infrastructure and technology for the crypto-economy. It allows users to buy and sell about 50 cryptocurrencies, including the popular bitcoin and ether. It has also benefited from bitcoin's meteoric rise over the year, with the crypto asset's price rising from $6,500 in April 2020 to a record-high of $62,575 on April 13, 2021. Other digital currencies like ether, Litecoin or Stellar Lumens have also shot up.
According to Forbes, the chief executive officer of the company, Armstrong, is the second-richest crypto billionaire in the world with a net worth of $6.5 billion. On the other hand, Ehrsam who left the company in 2017 but remains a board member, is worth $1.9 billion, as of 5 March 2021.
Prominent figures of the company
In the first quarter of the year, Coinbase reported revenue of $1.8 billion in revenue as compared with the $1.3 billion for all of 2020. With a quarterly trading volume of $335 billion, the company inhabited more than 56 million verified users as of March-end.
With a share of 11.2% in the market of crypto assets, Coinbase in its first quarter of 2021 has touched assets worth $223 billion.
Live Mint reported, “Since inception through December 31, 2020, the company has generated over $3.4 billion in total revenue, largely from transaction fees that we earn from volume-based trades on the platform by retail users and institutions.”
Further, Coinbase in the years ended 31 December 2020 and 31 December 2019 accumulated a total revenue of $1.3 billion and $533.7 million respectively, and a net income (loss) of $322.3 million and $(30.4) million respectively. The Adjusted EBITDA for December 2020 and December 2019 was $527.4 million and $24.3 million, respectively.
What are the risk factors?
With the crypto assets and the broader crypto-economy influencing the revenue of the company, the highly volatile nature of the crypto-economy, and the prices of crypto assets, can cause results to fluctuate. Thus, it is highly determined by market sentiments and movements in the broader crypto-economy.
In an SEC filing, Coinbase talked about how the company and its financial condition will be adversely affected if the demand for Bitcoin and Ethereum declines and it is not replaced by new demand for crypto assets.
“We are subject to an extensive and highly-evolving regulatory landscape and any adverse changes to, or our failure to comply with, any laws and regulations could adversely affect our brand, reputation, business, operating results, and financial condition," the company said in a filing.
With the company’s operating expenses expected to gain a significant increase in the foreseeable future, it is speculated that Coinbase may be unable to achieve a positive cash flow and profitability on a consistent basis.
Further, it was recently charged by the US Commodity Futures Trading Commission (CFTC) of "reporting false, misleading, or inaccurate" information about cryptocurrencies and manipulating the market between 2015 and 2018. Thus, Coinbase paid a $6.5 million fine and was forced to push back its listing date on Wall Street.
Should You Invest In Coinbase?
By opening a US brokerage account on platforms that enable global investments, Indians can contribute to this investment. Currently, a US brokerage account can be opened with just a PAN Card and an Aadhaar card using just an app. This will give them access to buy shares of Coinbase once it’s listed on Nasdaq on 14th April.
An investor further has to register for the liberalized remittance scheme (LRS) of the Reserve Bank of India (RBI) with her or his bank. This scheme permits an individual to send up to $250,000 per year overseas for travel, education, and medical care as well as for the purchase of shares. Thus, once the LRS registration is completed, one can transfer the money to the US brokerage account and start investing.
However, any investment is always associated with a certain amount of risks. Thus experts suggest observing extra caution while opting to invest in such newly listed stocks.
Vikas Gupta, the founder of Omniscience Capital, a Sebi-registered investment adviser, that also advises on foreign stocks says, “For Coinbase, there is always a regulatory risk. The risk may not be for the exchange per se, but its volumes are coming from certain activities, and some of those activities might face hurdles in the future. Moreover, there’s no reason for investors to get excited about a company in an IPO. You always invest in a good company later."
Further, with Coinbase opting for a direct listing route to go public, there are some unique features that create some potential risks.
“Unlike a traditional IPO, which is backed by underwriters, a direct listing doesn’t offer the safety of long-term external investors. This means no lock-in period for existing shareholders, which allows them to sell immediately and cash in on their returns, which could lead to downward pressure on prices. Additionally, a lack of large institutional shareholders could also create initial volatility in the share price," said Viraj Nanda, CEO, Globalise, a platform that helps Indian investors invest in US stocks.