Original title: “The stock price plummeted, did Coinbase really choose the right way to go public?

Written by: Trefis Team

Translation: Moni

Since landing on Nasdaq on April 14, Coinbase’s share price has been falling all the way. On the day of listing, the share price was 350 US dollars per share, but on May 6, it had fallen to about 256 US dollars, and it once touched 250.51 US dollars at the lowest point. People cannot help asking, why did Coinbase perform so poorly after listing? What exactly caused Coinbase’s stock price to plummet?

上市后股价持续下跌,Coinbase 未来会变好吗?

First of all, Coinbase chose direct listing instead of an IPO, which means that people inside the company can sell their shares immediately. You should know that in the case of traditional initial public offerings, a lock-up period for the supply of original shares is usually set, so as to ensure that the company’s insiders will not sell shares immediately after listing. However, Coinbase did not choose this method. According to official Coinbase news, as of April 28, most of the company’s executives had sold the shares they held, as follows:

  1. CEO Brian Armstrong (Brian Armstrong) only sold less than 2% of the issued share capital instead of the 71% previously rumored;
  2. Chief Financial Officer Alesia Haas (Alesia Haas) sold 15% of the issued share capital, instead of 100% as stated in some reports;
  3. President and Chief Operating Officer Emilie Choi (Emilie Choi) sold 24% of its issued share capital;
  4. Chief Product Officer Surojit Chatterjee sold 8% of its issued share capital;
  5. Chief Accounting Officer Jennifer Jones sold 38% of its issued share capital.

Although the number of shares sold by Coinbase executives is not large, it is likely that this has triggered market selling sentiment and also put pressure on the company’s stock. The same situation has occurred in 2020. For example, workplace management software manufacturer Asana and big data player Palantir Technologies both landed on the stock market through direct listing, and they all showed a sideways adjustment or downward trend in the months after listing. .

Secondly, since the listing of Coinbase, the cryptocurrency market has suffered a wave of “downtrends.” The price of Bitcoin, the number one cryptocurrency by market value, has fallen by nearly 15%. Coinbase’s business revenue is highly correlated with cryptocurrency pricing, so its performance is very sensitive to currency price fluctuations, because the price will have a direct impact on the number of trading users on the platform and the total value of transactions. If the price of the cryptocurrency market continues to fall, it is likely to affect Coinbase’s annual revenue and profitability.

Finally, Coinbase is facing increasing pressure from market competition. At this stage, Coinbase’s main source of income is platform transaction fees (accounting for more than 80% of total revenue). Compared to other cryptocurrency trading service providers, Coinbase charges relatively high. In addition to charging retail users with a 0.50% transaction price difference, they will also charge an additional 1.5%-4%—depending on the user. The way to fund the transaction. In contrast, Robinhood provides users with cryptocurrency commission-free investment services. In addition, in some cases, PayPal and Square charge lower fees than Coinbase. Not only that, because the cryptocurrency market is still in the early stages of development, this means that more participants will definitely enter the market in the future, leading to intensified competition and further reducing Coinbase’s transaction fee income and profit margins.

Can Coinbase respond to the crypto bear market?

As mentioned above, the vast majority of Coinbase’s revenue comes from transaction revenue, so it is very sensitive to the price fluctuations of cryptocurrencies (especially Bitcoin). In the first quarter of 2021, the price of Bitcoin continued to rise and set new historical records many times, which in turn pushed Coinbase’s transaction volume during the quarter to 335 billion U.S. dollars, surpassing the sum of the two-year transaction volume in 2019 and 2020. But the problem is that if the price of Bitcoin drops, Coinbase’s transaction volume and transaction volume may also drop sharply. As a listed company, this situation is obviously very unfavorable.

The current Bitcoin market may be affected by the following two factors, which will lead to subsequent declines:

First, as the number of people vaccinated against the new crown in the United States continues to increase, the real economy will further open up, and investors may transfer funds from highly speculative cryptocurrencies to real economic assets;

Second, there are reports that the Biden administration is seeking to increase the capital gains tax for the wealthy from the current 20% to 39.6%, which may also be detrimental to the rise of cryptocurrencies, because most cryptocurrencies have been in the past year. There has been a big increase, and some people have profited from it. Now if heavy taxes are imposed, they are likely to choose to accelerate the selling.

Although Coinbase’s revenue growth rate reached 139% last year, if the intrinsic periodicity of cryptocurrency prices and trading revenue is included in the Coinbase stock price at the current level, it will be found that its stock forward earnings trading volume is only 11 times its revenue. about.

Can Coinbase make money like it used to?

Coinbase’s business model is actually relatively simple, which is to provide retail customers and institutional customers with cryptocurrency purchase, sale and storage services including Bitcoin and Ethereum . The company mainly attracts customers through Coinbase, Coinbase Pro and Coinbase Wallet applications and their websites. As of the first quarter of 2021, the total number of Coinbase retail users is approximately 56 million. As of 2020, approximately 90% of the company’s revenue comes from transactions and transaction fees received through services such as cryptocurrency storage and analysis, including:

  • The margin fee, also known as the spread, Coinbase charges about 0.50% for the purchase and sale of cryptocurrencies. The rate will vary according to market conditions. The final margin fee to be paid depends on the price change between the user’s quotation and the actual completion of the order.
  • Coinbase Fee, this is a commission levied on all encrypted transactions. It is also a fee that you will be charged in addition to the spread. The actual amount of Coinbase Fee paid by the user depends on the location and the total amount of the transaction.

Coinbase’s charging model can basically be summarized as follows: customers with a smaller transaction volume charge a higher rate (estimated to be about 0.5%), and customers with a larger transaction volume charge a lower rate. In view of the high transaction costs of Bitcoin and other cryptocurrencies, Coinbase commissions are higher than traditional exchanges, and 10% of the company’s revenue comes from selling its own crypto assets to customers. According to a document recently disclosed by the US Securities and Exchange Commission (SEC), Coinbase’s total revenue in 2020 is approximately $1.3 billion, which is more than double the revenue in 2019.

Although the stock price is frustrated, will Coinbase get better in the future?

Coinbase’s trading revenue depends to a large extent on the pricing trend of cryptocurrencies (especially the price trend of the market leader Bitcoin). Not only that, the currency price trend will also affect the monthly trading users on the platform. The quantity and the total value of the transaction.

If the price of cryptocurrency is higher, it will help Coinbase get more revenue. Taking 2020 as an example, the company’s total revenue has increased from approximately US$534 million in 2019 to US$1.28 billion, and the average monthly number of trading users on the platform during the same period has also increased from About 1 million increased to about 2.8 million, and the total transaction volume increased from about 80 billion U.S. dollars to 193 billion U.S. dollars.

In the first quarter of 2021, Coinbase performed equally well, with revenue expected to grow to US$1.8 billion, and platform transaction volume in the quarter rose to US$335 billion. The reason is that the price of Bitcoin has almost doubled, resulting in an average monthly number of active traders. Triple jump: from 1 million to 2.8 million at the end of last year, and from 2.8 million to 6.1 million in the first quarter of this year.

However, given the cyclical nature of the crypto market, it may not be realistic to expect Coinbase to maintain growth similar to the first quarter in the second half of 2021. In addition, with the increase in traditional bond yields and the potential adjustment of Bitcoin prices, it seems that the cryptocurrency market is vulnerable to correction in the short term.

What if you are looking for a more balanced investment portfolio? It is undeniable that since 2016, Bitcoin’s return on investment has indeed beaten the traditional market, with a return rate of more than 100%, compared with 55% for the S&P 500. However, the S&P 500 index is made up of companies with strong revenue growth, high profits, ample cash, and low risk. If you don’t want to worry about fear, it might be a good idea to look at the S&P 500 index.