Soon you’ll be able to buy the company that helps you buy Bitcoin.
Coinbase, the largest cryptocurrency exchange in the U.S., has announced plans to go public—but it will eschew the traditional initial public offering (IPO) process of hiring investment banks to drum up interest and finance the deal.
Instead, Coinbase plans to post its shares straight on an exchange via a so-called direct listing, a technique pioneered by big names like Spotify (SPOT) and Palantir (PLTR) in recent years.
This nontraditional yet trendy choice makes a certain amount of sense for the Coinbase narrative, given that the company has aided and abetted the similarly non-establishment cryptocurrency craze over the past decade. Whether Bitcoin itself actually replaces dollars or develops further as a speculative asset remains to be seen.
What Does Coinbase Actually Do?
Let’s say you want to buy Bitcoin. You’ve got two options: Deploy sophisticated, powerful computers to mine Bitcoin by solving complicated math problems or buy it on an exchange. The former is insanely costly and demands a ton of technical know-how while the latter requires nothing more than opening an account with said exchange.
That’s why most people end up buying Bitcoin, instead of mining it, and that’s where Coinbase comes in.
For many crypto enthusiasts, Coinbase operates as a straightforward online exchange, allowing retail buyers and sellers to meet in the middle and find a price. For more experienced users, Coinbase offers a robust trading platform—called Coinbase Pro—with a full set of features and charts to help you plumb the depths of the crypto market. It also offers a free wallet service that allows users to safely store their cryptocurrencies.
Coinbase has succeeded not only by performing these tasks efficiently but also by keeping its users’ personal data secure. Numerous similar crypto exchanges have come and gone, and many have failed the test of securing their users’ accounts.
One of the most spectacular failures was the 2014 hacking of Japanese exchange Mt. Gox, which resulted in the company’s bankruptcy and the loss of billions of dollars worth of Bitcoin. There have been others.
In a July 2020 report, Coinbase disclosed that it had more than 35 million users, including both retail clients and institutional firms, up 5 million users from a year earlier.
How Does Coinbase Make Money?
Coinbase doesn’t charge you to store your cryptocurrency in its popular wallet service. Instead, it earns fees and commissions when you actually buy and sell cryptocurrency, like Bitcoin and Etherium. These include:
- Margin fee. Also known as the spread, Coinbase charges about 0.50% for crypto purchases and sales, although this rate varies depending on market conditions. The margin fee you end up paying depends on the change in price between when you get a price quote and when the order is actually completed.
- Coinbase Fee. This is a commission on all crypto transactions, charged in addition to the spread. How much you actually pay depends on your location and the total amount of your transaction.
Coinbase has several other lines of business in addition to its exchange services.
- Coinbase Commerce. This service provides online retailers with software that lets them accept cryptocurrency payments. Think of PayPal, but for crypto—Coinbase’s plugins are used on a variety of e-commerce platforms.
- Coinbase Card. Coinbase is in the early stages of giving its users a physical Visa debit card and an accompanying app to spend cryptocurrencies in the physical world by converting crypto to U.S. dollars when used.
- USD Coin (USDC). Coinbase offers its very own cryptocurrency, USD Coin (USDC), which is built on the Ethereum platform. Its value is tied to the U.S. dollar, so 1 USDC is always worth $1.00.
How Much Is Coinbase Worth?
Valuing start-ups can be challenging. As private companies, we only get a view into the valuation of a start-up when they accept new outside investments. Coinbase’s last formal valuation was in 2018, when it accepted $300 million in new financing. According to Cruchbase, at that time the company was worth $8 billion.
Until Coinbase releases fresh financial information after going public, we won’t know how profitable the business really is or what kind of revenue it’s pulling in each year. Don’t be surprised if Coinbase ends its first day as a public company well north of that number. The popularity of Bitcoin has risen dramatically since 2018, delivering outstanding returns to investors—and to Coinbase.
But Bitcoin’s popularity has meant more competitors for Coinbase. The commision-free trading platform Robinhood, for instance, allows investors in most states to purchase cryptocurrency as have PayPal and Square. Investment giant Fidelity is even offering wealthier customers a Bitcoin index fund.
How Is Coinbase Going Public?
An initial public offering is how Wall Street describes the process by which a private company makes its debut on the public stock market.
With an IPO, a company hires big investment banks to help it sell shares of stock to the public. The bankers don’t come cheap, but they do help a private company navigate unfamiliar waters and set a viable IPO price per share.
With a direct listing, companies can skip the expensive investment bankers and their fees and simply list the stock on an exchange. The current owners of the company convert their shares to stock, and then investors can buy shares on the exchange.
Notably, in an IPO, a company going public typically issues new shares of stock to raise new capital. In a direct listing, a company isn’t looking to raise additional capital—its employees and investors are selling their existing shares of stock to the public.
What Does All This Mean For Bitcoin’s Future?
There are a bunch of cryptocurrencies, but Bitcoin has captured the greatest share of public attention. The reason is simple: Its value has risen dramatically.
One Bitcoin was valued around $1,000 at the beginning of 2017, and as of Feb. 3, 2021, that same Bitcoin is now worth $37,000. When Coinbase first announced its intentions to go public in late 2020, Bitcoin was worth almost half that amount
But it’s worth noting that the interest and discussion around Bitcoin has strayed over the past decade. Back in 2013, the slogan at the top of Coinbase’s website read “Welcome to the Future of Money.” As of 2017, this had changed to “Buy and Sell Digital Currency.” There’s more to this change than marketing.
Bitcoin gained notoriety as a possible replacement for the U.S. dollar as the main means of exchange and payment. In some future world, the idea went, you’d get paid in Bitcoin and pay your mortgage in Bitcoin. This would be enabled by blockchain technology, which would account for all transactions and keep everything secure.
Why would you choose Bitcoin? Its value wouldn’t be secured or managed by a central authority, like when the Federal Reserve, which sets interest rates. Bitcoin as a replacement for governmental currency was the future Coinbase was talking about back in 2013.
But by 2017, those dreams had dimmed. Bitcoin had not become the primary means of exchange in the economy but rather an investment asset, like gold. People referred to its “market cap,” which makes no sense for a currency but is the term people use to describe a company’s size and clout. This suggests Bitcoin has become more an investment than anything else. Investors would flock to it when they had an appetite for risk, rather than use it as a direct form of money.
Bitcoin has no intrinsic value, but then again neither does gold, and investors remain perpetually obsessed with that yellow metal. This prospect of a digital gold has helped drive Bitcoin’s recent rise, especially with more institutional investors buying up Bitcoin.
A bet on Coinbase is, at least right now, a bet that Bitcoin will continue its rise as a speculative asset rather than a replacement for the almighty dollar. Don’t fight the Fed, indeed.