The surging popularity of bitcoin (and other cryptocurrencies) has led to what might be thought of as the “enablers” for the crypto realm itself. Exchanges make it possible to trade the digital offerings themselves — and regardless of one’s view on whether bitcoin is worth $59,000, $100,000 or $0, buyers and sellers need a place to meet and transact.
Coinbase is aiming to go public on the tech-heavy NASDAQ exchange next week, selling roughly 115 million shares in a direct listing. This week’s announcement of first-quarter results, preliminary though it is, shows the tailwinds of the crypto boom.
And there are some lines here that differ mightily from some tech-driven IPOs. Notably, those lines are written in black ink – as in, the company is turning a profit. Hundreds of millions of dollars in profit, in fact, as Coinbase gave a range of net income for the quarter spanning $730 million to $800 million. Adjusted EBITDA, a (rough) measure of cash flow, could be $1.1 billion; trading volume was $335 billion, and the firm states that it has monthly transacting users (MTUs) of 6.1 million.
The transacting user base and the assets on the platform are stated at $223 billion, which the company states is more than 11 percent of the crypto asset market share. Those numbers point to scale; the asset base tally includes $122 billion of assets on the platform from institutions. It follows, then, that the remainder would come from individuals.
Looking out Through 2021
The company offered up a 2021 forecast that looks to have average MTUs of seven million at the high end of its projected range, a mid range of 5.5 million (which assumes a flat market cap for cryptos) and a low end of four million, assuming a big drop in the crypto markets.
Now, one quarter’s performance does not a full trend make — but growth certainly has been a hallmark of Coinbase. The company’s SEC filing shows that revenues surged more than 136 percent year on year to $1.1 billion; along the way, the company swung from an operating loss to operating income of nearly $409 million. For the year, the monthly average transacting users numbered 2.8 million, while the number of verified users was 43 million. To see those numbers jump to the recent readings of more than six million and 56 million, respectively, gives a sense of how quickly cryptos have gained new enthusiasts.
Risk factors are nothing new in SEC filings — and are in fact required. In this case, the risk of depending on volume flows (and being at least somewhat at the mercy of volatility) become apparent. As Coinbase states in the filing: “All of our sources of revenue are dependent on crypto assets and the broader crypto economy. Due to the highly volatile nature of the crypto economy and the prices of crypto assets, our operating results have, and will continue to, fluctuated significantly from quarter to quarter in accordance with market sentiments and movements in the broader crypto economy. For example, the average three-month Crypto Asset Volatility supported on our platform increased by 73 percent from the fourth quarter of 2019 to the first quarter of 2020, before decreasing by 36 percent from the first quarter of 2020 to the second quarter of 2020. Our operating results will continue to fluctuate significantly as a result of a variety of factors, many of which are unpredictable and, in certain instances, are outside of our control.”
Part of the risks are tied to crypto trading activity itself, as stated above, but the company also cited in the same filing that there are risks tied to the regulatory environment. This latter factor may be significant. As reported earlier this week, Former SEC chair Jay Clayton has warned of new bitcoin regulations possibly coming soon. Clayton, who was speaking as a citizen at the time, said that the future of digital assets “will be driven in part by regulation both domestic and international, and I expect that regulation will come in this area both directly and indirectly.”
The stock markets are heady at this point, so the rewards tied to the IPO may be heady, too, with a rocketing share price — and it seems the risks are also significant.
