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‘It’s more than just Coinbase’: Crypto giant snares $85.8 billion valuation in Nasdaq debut

The exchange’s public listing — it closed at $328.28 a share — is seen as a litmus test for the mainstream viability of digital currency

Coinbase chief executive Brian Armstrong sits with Tina Bhatnagar, former head of customer support and operations, at the cryptocurrency exchange's headquarters in San Francisco. (Christie Hemm Klok for The Washington Post)
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Coinbase made history Wednesday as the first major cryptocurrency player to go public, with an eye-popping $85.8 billion valuation and moving the digital currency market closer to the mainstream.

The San Francisco-based exchange’s direct listing on the Nasdaq is both a milestone and test run of the public’s appetite for digital currency. In the past year, cryptocurrency has been embraced by such brands as Tesla and Square, while Wall Street giants as Goldman Sachs and Morgan Stanley have taken steps toward offering bitcoin and other digital assets to investors, CNBC has reported.

Nasdaq gave Coinbase — which trades under the ticker “COIN” — a reference price of $250 a share Tuesday. It opened at $381 on Wednesday afternoon, soaring as high as $429 before retreating. It ended the session at $328.28.

“Coinbase is not just any crypto play, they’re one of the linchpins to the global crypto ecosystem,” said Dan Ives, managing director of equity research at Wedbush Securities. “Ultimately, how the Coinbase IPO and reception plays out is important for many other companies that are potentially following on the crypto front. It’s more than just Coinbase.”

The company made its public debut amid a sell-off in tech shares, with the Nasdaq dropping 138.26 points, or nearly 1 percent, to end at 13,857.84. The S&P 500, which set a record high Monday, shed 16.93 points, or 0.4 percent, to settle at 4,124.66. The Dow Jones industrial average edged up 53.62 points, or nearly 0.2 percent, to close at 33,730.89.

Though interest in virtual currencies has skyrocketed — the market has doubled since January and smashed past $2 trillion this week — the landscape is peppered with risk. Cryptocurrency is notoriously volatile, and lawmakers have expressed an urgent need for regulation to combat criminal activity. In 2020, global “dark net” markets brought in a record $1.7 billion in crypto revenue, according to Chainalysis.

Coinbase provides a range of crypto-related financial services and aims to “create an open financial system for the world,” according to the prospectus it filed with the U.S. Securities and Exchange Commission. At the end of last year, Coinbase had 43 million users from more than 100 countries, as well as 7,000 retail and financial institutions on its platform. It has roughly 1,700 employees and $1 billion in cash on hand.

Coinbase’s fortunes are closely aligned with bitcoin, which has more than doubled in value since the start of the year and briefly breached the $64,000 mark Wednesday before losing steam. The exchange, which gets more than 95 percent of its revenue from transaction fees, has raked in $1.3 billion in the past year as bitcoin made its meteoric rise.

“[Crypto] is still seen by many as a risky proposition and for good reason,” Danni Hewson, financial analyst with AJ Bell, wrote in a commentary Tuesday. “But it’s also become a part of the global cash conversation. ”

About a third of adults worldwide — 1.7 billion — are unbanked, according to the World Bank. But global access to financial services is deepening in low- and middle-income economies, according to the International Monetary Fund’s 2020 financial access survey. Progress made in bringing more people into the financial system is partly due to “innovations such as digital financial services, including mobile money,” the survey said, which has taken “deep root” in sub-Saharan Africa and Asia.

Ukraine, Russia, Venezuela and China led the world in cryptocurrency adoption in 2020, according to research from Chainalysis. About a third of small and medium-sized U.S. businesses accept cryptocurrency as payment, according to a 2020 HSB survey.

In a letter included in the prospectus, chief executive Brian Armstrong said Coinbase could help foster greater economic freedom by creating a more accessible financial system that complements rather than replaces the traditional economy, “much like email was to paper mail.”

Armstrong co-founded Coinbase with Fred Ehrsam in 2012 (the two first met on Reddit). Now, Coinbase’s public debut could land Armstrong among the world’s 100 richest people, given his 20 percent stake in the company. He was No. 404 on the Forbes list, with a net worth of about $6.5 billion, before the company’s public listing.

“People are using cryptocurrency to earn, spend, save, stake, borrow, lend, vote … companies are being funded, getting early customers, and will eventually go public, all on blockchain,” Armstrong wrote in the letter. “The cryptoeconomy is just getting started.”

Coinbase acknowledged the risks ahead in the prospectus, “many of which are unpredictable and in certain instances are outside of our control.” They include the unknowns of the regulatory environment as well as the company’s dependence on cryptocurrency, its ability to “attract, maintain and grow” its customer base and potential competition.

Crypto emerged stronger after the devastating blows to trading in the early days of the pandemic pushed many investors to seek assets outside the traditional financial system. It’s also been lifted by the hysteria or euphoria (depending on whom you ask) that has characterized trading in 2021, starting with GameStop’s dizzying run after novice investors vowed to take the ailing retailer “to the moon.”

Bitcoin has claimed the headlines, but other digital currencies have soared, too: Ethereum, the second-largest cryptocurrency by market capitalization, is up more than 221 percent year-to-date, according to Coindesk. Dogecoin, a meme-based currency that was created as a joke, is up more than 2,700 percent to 13 cents a share.

Tesla CEO Elon Musk has used his Twitter account to become Dogecoin’s biggest cheerleader — potentially putting himself back in the SEC’s crosshairs in the process. In February, the electric-car company disclosed in a regulatory filing that it had invested $1.5 billion in bitcoin and would start accepting it as payment “in the near future.”

“Leading up today, everything exposed to crypto was rallying,” Ed Moya, a financial analyst with Oanda, wrote in a commentary Wednesday. “Bitcoin has survived years of skepticism and today’s Coinbase debut is an exclamation point that cryptocurrencies are here to stay.”

Since its creation in 2009, bitcoin has been riding major boom-and-bust cycles, and many analysts believe another bubble burst is inevitable. In a research note last week, UBS Global Wealth Management warned clients that “empirical evidence” suggests greater participation among institutional investors could increase volatility “due to their more opportunistic investment approach,” Markets Insider reported.

Coinbase registered more than 261 million shares for the listing. But its massive valuation is more a reflection of “flare and hyperbole” than substance, said David Trainer, chief executive of New Constructs, who notes that it was an $8 billion company just three years ago. He thinks Coinbase should be valued around $19 billion.

“I’d avoid falling prey to the memestock frenzy around what is probably a good company,” Trainer said, “but at the proposed valuation is not even close to being a good stock.”

Coinbase’s first-quarter earnings report inspired awe among some investors: The exchange earned $1.8 billion in revenue. That’s more than it took in all of 2020. It hosted $223 billion assets on the platform, representing 11.3 percent of the crypto market.

Coinbase is a pillar of the modern crypto ecosystem, but there’s no guarantee it can maintain dominance if the appetite for cryptocurrency continues to balloon. It already faces competition from such exchanges as Gemini and Kraken, and digital financial services companies such as PayPal and Robinhood.

“The valuations in the beginning stages of a nascent industry are extraordinary,” Trainer said. “But at the end of the day, if someone’s making really high margins, that means someone else can come in and take market share with a lower margin and still be very profitable.”

The choice to make a direct listing on the Nasdaq, rather than raising money on a roadshow through a traditional initial public offering, squares with Coinbase’s dark-horse image. Last month, Armstrong and other executives took to Reddit for a three-day AMA (“Ask me anything”), fielding questions on everything from stock plans to Coinbase’s stance on NFTs (non-fungible tokens).