The Coinbase IPO Foreshadows the Crypto Industry’s Future Role in Finance
Coinbase is publicly listed as of April 14, 2021. The market capitalization of Coinbase is estimated at US $100 billion. The crypto exchange’s growth is astonishing and has taken old-established financial institutions by surprise. Particularly traditional exchanges’ reactions will be located somewhere in a continuum between jealousy and awe. Coinbase’s success, culminating in its stock market launch, is a wake-up call for financial intermediaries and investors to take decisive action or to brace themselves for the turbulences ahead. — Authors: Philipp Sandner, Jong-Chan Chung
Coinbase leaves the established competition behind
Founded in 2012, Coinbase is the largest US-based centralized crypto currency exchange platform with 6.1 million monthly transacting users in the first quarter of 2021. In the same quarter, US $335 billion worth of crypto assets were traded and revenues totaled US $1.8 billion. Against this backdrop, Coinbase Global, Inc., the corporate parent of Coinbase, filed a registration statement on Form S-1 with the SEC on February 2, 2021. Coinbase’s Class A common stock will be listed on the Nasdaq Global Select Market under the ticker symbol “COIN” starting from April 14, 2021.
Coinbase’s market capitalization is estimated at US $100 billion. To properly appreciate Coinbase’s growth path and current valuation, its market capitalization should be contrasted, for instance, with that of the Deutsche Börse AG (founded in 1990 as Frankfurter Wertpapierbörse AG and renamed in 1992) which stands at €28 billion (US $33.3 billion). While a direct comparison between Coinbase and Deutsche Börse is debatable due to a mixture of path dependency and missed opportunities on the part of the latter, they both operate nonetheless as exchanges, essentially connecting buyers and sellers of different assets.
The fact that Coinbase as a new player in the exchange business (albeit relatively old for a crypto company) outstrips incumbents in terms of market value, is telling for the overall direction of the crypto space: bitcoin (BTC) and other crypto assets are maturing. Coinbase’s IPO represents for many bitcoiners the coming of age of the crypto market — an observation that will elicit a reaction, one way or the other, from Nasdaq, LSE, and co.
Coinbase’s growth parameters
Coinbase’s growing number of users is largely due to appealing customers with a primary focus on investing in BTC. Betting on a high correlation between the prices of COIN and BTC is not a bad guess at all. BTC behaves like a commodity in digital form and a key feature is its predictable scarcity which has driven its valuation for the most part. It is an inflation-hedge and therefore a store of value. Bitcoin’s utility is derived from empowering people to send value across borders to anyone with a Bitcoin wallet with no one to potentially prevent the transaction. It is censorship-resistant. All that is needed is electricity, Internet access, and a basic device to access the Internet. As long as the private key is kept private, not even governments, public authorities, or companies can enforce a personal action on the blockchain — such as executing an outgoing transaction. While a malicious state or institutional actor scenario might seem a stretch for some readers residing in stable countries, for many humans in developing countries and warring territories, the danger of theft of funds is a genuine concern. This is where Bitcoin shines.
But Coinbase shares do not only profit from a co-movement with BTC. Unlike many other crypto exchanges, of which there exists around 200, Coinbase has so far not failed to provide a working, user-friendly, and most notably a secure trading platform that has so far resisted any hacking attempts. Importantly, Coinbase behaves like a model student engaging with regulators, not trying to circumvent regulations, and taking KYC and AML measures seriously. This of course boosts customer confidence, demand, and future share price prospects.
One qualifying remark pertains to decentralized trading protocols such as Uniswap from the decentralized finance (DeFI) space. Decentralized exchanges (DEX) could contest the advance of centralized exchanges, as through the use of smart contracts, intermediaries could be made superfluous. Traders then could do without custodial wallets, adding an extra layer of security. However, a showdown will take place no earlier than five to ten years. For now, DEXs are inferior to centralized crypto exchanges due to high network costs and a lack of liquidity.
Conclusion: a call to action
In any case, financial institutions will need to adapt to a rapidly changing environment and make an effort to apprehend the implications of crypto currencies and blockchain technology in general for their businesses to stay on top of the game. Passivity is certainly not the go-to. Rather, established financial institutions need to take stock of their resources and possibilities to get active, for instance, investing in R&D for enterprise DLT solutions, partnering with a blockchain startup, entering a consortium, or even acquiring a promising blockchain company.
Bitcoin and its peers have attained adulthood and the blockchain space has produced with Coinbase an IPO company that is multiple times larger in terms of company valuation than much older incumbents. Coinbase’s stock market launch is a call to action even for the sleepiest of the incumbent financial institutions: Crypto has come and will not go away, because the developments of the last decade cannot be reversed and too many are already invested in blockchain technology. Moreover, regulators are likely to endorse blockchain technology and crypto even further to bring in much-needed taxes for the treasury in light of the pandemic-related jump in public debts. Financial intermediaries and investors need to understand that April 14, 2021, does not mark the culmination of the evolution of crypto but rather a milestone in the history of crypto and blockchain technology — and certainly not the last: Of course, Coinbase is a growing company. So, an estimated market capitalization of US $100 billion will not be the peak of the company valuation. Rather, we can expect significant company growth and we can be curious when the company will have reached US $200 billion.
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Prof. Dr. Philipp Sandner has founded the Frankfurt School Blockchain Center (FSBC). In 2018 and in 2019, he was ranked as one of the “top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belonged to the “Top 40 under 40” — a ranking by the German business magazine Capital. Since 2017, he is a member of the FinTech Council of the Federal Ministry of Finance in Germany. The expertise of Prof. Sandner includes blockchain technology in general, crypto assets such as Bitcoin and Ethereum, the digital programmable Euro, tokenization of assets and rights, and digital identity. You can contact him via mail (email@example.com), via LinkedIn, or follow him on Twitter (@philippsandner).
Jong-Chan Chung is a research assistant at the Frankfurt School Blockchain Center (FSBC). His fields of interest are cryptocurrencies and applications of blockchain and DLT systems. Prior to joining the FSBC, he worked in economic research and business development, specializing in data analysis. He holds a dual Master’s degree in public policy from the Hertie School and the University of Tokyo. You can contact him via email (firstname.lastname@example.org) or via LinkedIn.