D.R. Maurice*, Robert Lalani
*Disclosure: Personal views of the author are represented rather than any government or other entity, past or future.
Coinbase’s Nasdaq April 14, 2021 listing engendered vociferous positive and negative responses. Cited as the ‘real deal’ by Barron’s others heralded its role in validating the use of cryptocurrencies to generate new forms of capital. The ‘renegade behavior of crypto-friendly Coinbase CEO Brian Armstrong’ for example, resulted in Mr. Armstrong’s leap into the ranks of the world’s 100 richest people. ‘Tens of billions’ of new wealth for a company were unlocked. Upon launch, unlike some unicorns, despite what some consider ‘lofty’ valuations, Coinbase is cash flow positive with an estimated $1.8 billion in Q1 2021 revenue.
Blockchain Based Trading
Many agree that Coinbase’s will continue to succeed as a prototype trading platform and cryptocurrency exchange despite challenges related to its visible transformation into a public company. As a unicorn innovator in blockchain technology established in 2012, it will now face increased public and regulatory scrutiny and quarterly performance expectations. Coinbase’s public listing, at its best, brought the ‘oft-mocked asset class closer to mainstream acceptance’. Coinbase may have also introduced a diversification play for successful innovation strategist investors like Cathie Wood’s ARK. ARK sold $99.5 million in Tesla’s shares reportedly at the same time increasing its Coinbase position by $64 million.
Options Based Business Model
Detractors largely focus on the challenges of Coinbase’s fee dependent business model. Profitability reflects ‘volume’ discounts for larger ‘takers’ of the crypto-asset, favoring ‘whales’ versus smaller retail investors. Taker/Maker fees, which some suggest as onerous, range from 0.04% for positions over USD 1 billion to 0.50% for trades USD 10,000 and under based on trailing thirty-day period. Other than a possibly regressive fee structure accounting for 90% of its revenues, the remaining 10% of its close to $900 million first quarter revenue is derived from trading its own crypto assets. Revenue is largely undiversified with some doubting the sustainability of the business model.
Prior to the NASDAQ launch, critics also focused on the projected ‘unsupported’ USD 10 billion valuation which could climb to $100 billion. Transparency and alignment with the underlying crypto-assets traded on the exchange is limited and largely de-linked from its volatile share price. Critics claim that ‘whale’ investors in both the IPO and the underlying assets profited during and immediately after the initial launch, likely at the expense of smaller retail investors. Policy makers, according to Forbes, remain conflicted on the underlying value propositions of the assets being traded. The jury is still out on the intrinsic worth of cryptocurrency. ‘Bitcoin- and crypto-fearmongers’ discourage the validation of crypto-assets. Meanwhile, former acting CIA director Morell, took a more supportive view and continues to endorse a wider acceptance of cryptocurrencies because of protections provided by the blockchain trading platforms.
Coinbase – An Evolving Blockchain Success
As the drama around the Coinbase launch fades potentially as fast as Bitcoin, Ethereum, and other assets traded on its platform, an indisputable fact pattern emerges. Coinbase is both a story of volatility and the rise of a growing asset class that defies succinct and repeatable valuation of the underlying assets it trades. It reflects the growth of the ‘special purpose’ non-bank financial that for some represents the remerging scepter of the 2007-2008 Great Financial Crisis. Critics maintain that like Enron, options-based compensation has even been blamed for encouraging fraud.
Foundationally Coinbase’s legacy reflects the success of blockchain technology with or without its advocates and detractors that underscore the many countervailing arguments. Blockchain solutions, ranging from trading platforms to promoting more efficient trade, represent the future. Growth opportunities fostered by blockchain platforms range from emerging forms of cryptocurrency including the advent of Central Bank Digital Currency “CBDC”. Would Coinbase exist without the use of blockchain technology? What are the consequences of ignoring blockchain solutions? Former acting CIA director Morell, who now represents a consortium of new institution crypto-investors including Fidelity, supports the blockchain trading platform which leverages Coinbase’s potential. Other links to Blockchain have significant geopolitical influence.
Forbes recently wrote: “Morell made it clear that there will also be severe geopolitical repercussions for the U.S. vis-a-vis China if it wastes energy and resources chasing a ghost as opposed to leveraging blockchain, and fintech more generally, to build the country’s technological and economic base. Specifically, he said that ‘we need to make sure that the conventional wisdom that is wrong about the illicit use of Bitcoin doesn't hold us back from pushing forward the technological changes that are going to allow us to keep pace with China.’”
Image Credit: ft.com