Recent private sales value Coinbase at approximately $100 billion, but investors should proceed with caution.
Over the past 11-plus years, cryptocurrency has grown from a single coin to a global asset class worth more than $1.5 trillion. That growth has been spurred, in part, by the inflow of institutional capital from the likes of MicroStrategy, Square and Tesla. The market is as bullish as it’s ever been and Coinbase, the largest crypto exchange in the United States, has opted to strike while the iron is hot.
Thomas Meyer is the head of marketing for Cove Markets. He previously worked for Peak6 and Spire Trading as an equity options trader. He holds investments in bitcoin and ETH.
The Coinbase direct listing is being hailed as a watershed moment where the innovative spirit of crypto will finally collide with the decades-old tradition of Wall Street. While the moment itself should certainly be celebrated, investors should take a step back and analyze whether Coinbase is really worth $100 billion. Although many articles have been written praising the valuation, in the immortal words of Lee Corso, “Not so fast, my friends.”
Investors should proceed with caution
While Coinbase may very well have a successful listing and an even more successful year, investors should be aware of the risks. A few of those potential pitfalls include an overreliance on trading fees, significant competition from other exchanges and investment platforms, and the threat of decentralized finance (DeFi).
In late February, the U.S. Securities and Exchange Commission published the company’s S-1 form. Coinbase disclosed a few facts that are somewhat alarming, including:
“We generate substantially all of our total revenue from transaction fees on our platform.” (p. 17, Risk Factors)
“For the year ended December 31, 2020, transaction revenue represented over 96% of our net revenue.” (p. 92, Our Business Model)
Even though bitcoin set an all-time high last month, remember that cryptocurrency is still a highly volatile market and cyclical in nature. Although not everyone subscribes to this theory, one common school of thought is that crypto tends to operate in a four-year cycle of exponential highs, a bear market, an accumulation phase and then a recovery and continuation period. Although some may disagree on the specifics, one cannot argue that the crypto market is cyclical in nature and will likely remain so until the entire asset class reaches maturity.
In 2019, Coinbase reported a net loss of $30.4 million on revenue of $533.7 million. Last year, as would be expected, those numbers improved significantly with the company reporting a net profit of $322.3 million on revenue just under $1.3 billion. If we take the most recent valuation of $100 billion and divide it by 2020…
Read more:Sorry Coinbase, You’re Not Worth $100B