Old Wall Street, meet new Wall Street.
Coinbase, one of the world’s largest cryptocurrency exchanges, went public on Wednesday via a direct offering of shares. At the end of the day, the company was valued at $65 billion, launching it into the top 150 largest U.S. public companies.
Everybody seems to have an opinion on crypto, especially with Bitcoin’s rise over the past year. Coinbase’s debut has been the talk of the markets for weeks, and its shares’ dramatic swings have fueled the skeptics. Some have ridiculed Coinbase’s high valuation, calling it another classic sign of a bubble or market top.
They may be proven correct. But that may not be the ultimate point in the long run. Two things may be true: Skepticism is warranted, but Coinbase’s big debut could be an indication of the coming-of-age moment for crypto and blockchain technology. The story of crypto is not done — it may be just beginning.
As crypto matures, its drawbacks and unknowns will have to be revealed and potentially more regulated. The distinction of crypto as an “investment vehicle” vs. its use as “currency” for exchange of goods and services could be another test as the space matures.
This piece is not designed to advocate for Coinbase, but rather to use its story as a means of learning for us long-term investors.
An Intro to Crypto
If you’re a stranger to the world of crypto, here’s a quick 101.
Cryptocurrencies are digital coins that can be used to buy and sell goods and services. Many of them have to be bought with a base currency (like the U.S. dollar), and they fluctuate in value each day. Think of them as digital cash. Bitcoin is the most well-known cryptocurrency, but there are thousands of other cryptocurrencies out there.
Many (but not all) cryptocurrency transactions are executed on the blockchain: a decentralized, encrypted database that stores verified trade data on a transparent, permanent ledger. Blockchain technology is different because there’s no single owner of transaction records. Everybody on the ledger can see and verify the data.
Cryptocurrency has existed for years, and it’s had its moments in the headlines. There was even a bubble of sorts that burst when Bitcoin fell more than 80% from December 2017 to December 2018. But 2020 was the year cryptocurrency went mainstream. Bitcoin prices soared more than 300%, and financial institutions took a closer look at investing in cryptocurrency and blockchain technology. Its growth was fueled by higher retail and growing institutional participation, low rates and pandemic-fueled societal behavioral changes.
This year, crypto’s adoption has crossed the chasm into the U.S.’ biggest companies and institutions. In February, Tesla added $1.5 billion in Bitcoin to its balance sheet. A few weeks ago, PayPal announced it’ll start allowing customers to pay merchants with cryptocurrency. Even the Federal Reserve and other top governments around the world have commented on crypto’s rise.
Back to Coinbase.
For context, Coinbase has been one of the biggest beneficiaries of this transformational year. Coinbase’s crypto has exploded recently, and its revenue jumped to $1.3 billion last year, nearly triple its sales in 2019.
Wall Street’s main complaint about cryptocurrency has been the lack of fundamentals and cash flow, which makes Bitcoin and other coins tougher to value (and more prone to big pops and drops). This is a legitimate concern. That is why companies like Coinbase going public provides us with some of that transparency into a crypto-related company’s revenue and earnings and, ultimately, its worth.
Regardless of whether investors become active participants or wait-and-see observers of this space, Coinbase going public will help shed much needed transparency and help us gain future learnings about the world of crypto.
There can be risks to investing in a younger company, no matter what industry it’s in. Investors should consider their personal investment situation and outlook when undertaking investment decisions. Some Wall Street analysts are skeptical of Coinbase’s operating prospects and lofty valuation. It’s a legitimate concern — over 96% of Coinbase’s revenue comes from trading fees, which could disappear if other crypto exchanges start cutting fees. Coinbase’s shares have had their ups and downs, too.
But no matter what happens next in the market, we think this is an inflection point for the crypto space. Cryptocurrency has evolved from a way to get illicit deals done, to an inflation and currency hedge, to an increasingly popular investment vehicle. And now, it’s the basis for one of the biggest companies on the market. Crypto’s next test is its ability to behave like a currency. It’s not there yet, but established companies like Microsoft and Starbucks accepting payment in Bitcoin is a watershed moment. Blockchain is also a fascinating innovation that could have game-changing ramifications for several industries, including finance.
The Bottom Line
Crypto has its legitimate skeptics, and there have been growing pains. No doubt it will likely have even more growing pains as it matures. But regardless of future valuation or obstacles, crypto’s impact and the transformative nature of its underlying technology is undeniable and worth learning from. However, this lesson doesn’t diminish the importance of long-term thinking, the virtues of diversification and factoring in your personal financial situation when approaching investing.
Crypto evolution reminds us of the rise of social media about a decade ago. Facebook and Twitter were heavily scrutinized by investors too, but one could argue that they’ve fundamentally disrupted traditional media. Crypto may follow the same path of disruption, even though it’s still tough to see that path clearly at the moment.
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During her tenure as president of Ally Invest, Lule led Ally Invest Securities, Ally Invest Advisors and API business lines. She also authored several articles about the investing industry and investor behaviors. Lule has a passion for agile product development and an appreciation of design thinking in shaping user-centric experiences. An advocate for financial and retirement solutions that rely on a mix of digital and human guidance, Lule believes in empowering individuals, especially women and minorities, to independently drive their own financial futures.