Coinbase Makes Everyone a Cryptocurrency Investor
(Bloomberg Opinion) -- From this day forward, everyone is a crypto investor.
Cryptocurrency exchange Coinbase Global Inc. is making its Nasdaq debut on Wednesday through a direct listing, the latest in a long line of prominent tech-related public stock offerings in recent years. But Coinbase isn’t your typical debutante. Unlike so many that have come to market with big plans but little to no profits, Coinbase is already hugely profitable. The company expects to report earnings of $730 million to $800 million in the first quarter on $1.8 billion of revenue.
That means Coinbase will soon be nestled in a lot of portfolios. The crypto exchange is valued at about $100 billion, which instantly places it among the 100 largest companies in the U.S. and the world by market value and guarantees it a spot in most broad market index funds. The fact that Coinbase is already profitable also makes it eligible for the S&P 500 Index, the most popular index of them all and a core investment in countless portfolios and retirement accounts.
Given its size and visibility, Coinbase is also likely to be popular with actively managed funds, particularly growth managers. Interest in cryptocurrencies has skyrocketed recently, with companies, institutional investors and big banks all announcing plans to buy cryptos. The surge in interest has fueled Coinbase’s eye-popping growth. If it maintains the pace of first-quarter revenue and earnings, it will have increased revenue five times and earnings 10 times this year compared with 2020. And that may be just the beginning because interest in cryptocurrencies is widely expected to grow.
The sweetener is that Coinbase isn’t necessarily more expensive than growth stocks generally. Assuming a market value of $100 billion and roughly $3 billion in profits this year, Coinbase is valued at 33 times expected 2020 earnings. That’s in line with the forward price-to-earnings ratio of 30 for the Nasdaq 100 Index, 32 for the Russell 1000 Growth Index and 37 for the NYSE FANG+ Index. It’s also about half as cheap as Amazon.com Inc. and a fifth as cheap as Tesla Inc. by that measure, two of the most popular growth stocks.
Of course, everything can change quickly in cryptoland. Bitcoin has already experienced two crashes of more than 80% in its short history. Another wipeout could dampen the enthusiasm for cryptos, which would be a problem for a company that generates most of its revenue from trading fees. And even if cryptos manage to avoid another crash, their huge price swings could mean equally large swings for Coinbase’s financial results and stock price.
Coinbase acknowledged as much in its registration statement, showing that the number of users, assets on the platform and trading volume have all been highly correlated with crypto prices and volatility. So while Coinbase has a market value comparable to large established companies, owning its stock is likely to feel more like owning cryptos directly.
There are plenty of other risks. Coinbase achieved a profit margin of close to 50% in the first quarter. That kind of profitability tends to invite competition. And with sky-high trading fees on crypto exchanges, there’s a lot of room for competitors to grab market share by cutting fees. That ultimately drove brokerage commissions for stocks and exchange-traded funds to zero. The same could happen to crypto trading, particularly if discount brokers get in on the act.
Competition may also come from governments. China unveiled a digital currency recently. On Sunday, Fed Chair Jerome Powell told 60 Minutes that most large countries are looking into launching their own central bank digital currencies, including the U.S. These currencies could forestall the case for using Bitcoin and other cryptocurrencies, if not the case for investing. Hayman Capital’s Kyle Bass was more emphatic in an interview on Tuesday with CNBC about the potential for central bank digital currencies to disrupt cryptos. “This is going to make private cryptocurrency an afterthought,” Bass said. “It’s going to be a sideshow. Whether we talk about Bitcoin or Ether or this or that, it just won’t matter. CBDCs are the game, and that’s where we all have to focus.”
And let’s not forget the ever-present regulatory risk. The Securities and Exchange Commission still hasn’t gotten behind cryptocurrencies and has yet to bless a Bitcoin ETF. With Coinbase soon to be dropped into millions of portfolios, cryptos have essentially found a way around regulators. That may compel the SEC to ramp up regulation and scrutiny of crypto exchanges. Coinbase has already received a subpoena from the SEC about XRP, a digital token that the regulator contends was sold as an unregistered security. That could be a preview of things to come.
But whatever happens, investors no longer have the luxury of watching from the sidelines. We all have a stake in cryptos now.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.
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