Coinbase Direct Listing Explained (Bitcoin Hits All-Time-High)

Okay folks, welcome to Tuesday the 13th of April, 2021. So we are in the age of DeFi, crypto, and all sorts of financial assets that don't make sense to a lot of people. And, um, tomorrow I think it is, we have the IPO of the crypto exchange Coinbase. And we thought, who better to get on to have a look at this for us than Mr. Eddie Dalmas?

Well, thanks for the introduction.

And his haircut.

Yeah, I mean, first of all, just off camera telling Tim, apologies to all the viewers for my hair or my mane, my helmet of hair. The lockdowns have eased in the UK, so I have got a haircut booked in for later. So Again, apologies in advance, but yeah, we've got the, uh, Coinbase direct listing, uh, tomorrow. And wow, it's gonna be very, very interesting, and it's quite hard not to get excited about this one, I have to say. So a bit of background, um, it is going public via a direct listing rather than IPO, so the market makers are going to set the price and the and then it's going to start trading. And there's a few little kind of changes from the traditional IPO process, like no underwriting and things like that. The price just is set and it just starts trading. So the rumored valuation tomorrow is going to be any— there's been a huge range, to be honest, anywhere from $19 billion all the way to $180 billion, which huge numbers, obviously.

Wow, I just heard— I just read 100.

Exactly, yeah. So there was a range of all those different figures, but the rumor is about 100 billion tomorrow. So why is it looking so tasty? Obviously we've seen a huge rally in Bitcoin and lots of other cryptos, so over 800% over the last year. And this is on fears of inflation, monetary debasement increased institutional adoption, treasury utility by companies, and of course Michael Saylor, Elon Musk, they've all been getting involved in the space. And it seems like even just the Earth rotating on the axis, axis is making crypto go up as well. In terms of Coinbase and the valuation, they actually just reported their Q1 kind of earnings um, 1.8 billion in revenue. 1.8 billion. And that's actually on a net income of 700 to 800 billion. That's 60% higher, circa 60%, than the whole of their fiscal year 2020 combined. And let's not forget, 2020 was a great year for crypto as well, after that March sell-off where we had that big liquidation event. With stocks, gold, everything, um, because of Corona, you know, it had a massive, uh, massive year. Um, so it was a great year for crypto, um, and yet Coinbase have absolutely blown their 2020 figures out of the water in one quarter.

Yeah, I had— I just— I did a little bit of research last night, right? 139% on revenue year-on-year growth, Q1 2021. 9x. You're at 9 times quarter on quarter for 2021 Q1.

Yeah, it's massive. If you actually annualize that figure, which, you know, can be irrational in some cases, you know, that's, uh, just holding the, the environment of Q1 constant, obviously, throughout the year, that gets you to $7 billion, right? That's a huge number. But if if this crypto environment and the bull market continues. It's not that crazy. Um, they, they also reported their assets. I think they hold about 11 to 12% of the whole crypto market cap. Um, it sits above $200 billion. And the real interesting thing about this for me is a clear paradigm shift. So 50%, more than 50% of those assets from institutions. So $122 billion. But what's even more surprising about this, or something to keep a note of, this is up from $45 billion at the end of 2020. So in 3 months, they've attracted another $70, $80 billion in institutions alone. So that's, you know, that's huge. And I think there has been a huge paradigm shift. Um, and the way I view this, you know, it is hard to not get excited about this. And, you know, the, the environment's perfect, Bitcoin's rallying into it. You know, if we see a sell-off obviously on the day of the, of the direct listing tomorrow, I think that's actually unlikely. But the, the real key thing for me about this is it's a pure crypto play, and this is going to allow institutions that couldn't invest in Bitcoin, okay, and think about that whole amount of available assets to invest. You know, you look at stocks, fixed income, gold— they— a lot of portfolio managers simply cannot invest in crypto. It's just not an option for them. Okay, hedge funds, and of course, um, you know, they have a bit more freedom. It all depends on investor policy statements and things like that. You know, they've not been able to invest in Bitcoin. You know, it's a huge career risk. Imagine if you're a you know, 20, 30-year-old, uh, sorry, career portfolio manager. And, you know, you don't want to ruin your career, a good career, investing in a speculative crypto asset that has a, you know, a relatively small history of, you know, anywhere from 10 to 20 years. Okay, but if you invest in Coinbase, that's not necessarily a massive, you know, career-risking trade in my, in my opinion. You know, that's just an equity that's listed on a, a nice US exchange, you know, and it provides a great crypto play similar to how Tesla was the one-stop shop for ESG play. What, what's the best way of playing ESG? Tesla. So that's the way I, I view this. And in terms of the valuation as well, you know, is it crazy? $100 billion, it's a massive number. If you look at Google, what they IPO'd at was $20 billion. I think that's been rumored, but paying 20 times revenue for brokers is actually quite common. Look at Snowflake in terms of the fintechs that have been going public at 36 times revenue. You know, they've been trading at huge valuations. If you look at Snowflake and the other fintechs that have been going public, and then also we've had SPACs, special acquisition companies. Blank check companies performing reverse mergers. They've been valued multi-billion on 2025 expected revenue. Coinbase is generating $1.8 billion in revenue in a quarter, $700 billion in net income in one quarter.

So I want to, I want to put the cameras on this because I was reading some financial projections on these guys last night They said that one of the scenarios was a 0.01% change in their fee structure on the revenues that they make on trading essentially would result in that net revenue of $1.1 billion for trading coming down to like $35 million. It was looking at the story about, what, 2017, There was a— or 20— yeah, 2017, a lot of these brokerage houses really had to go down to free structures, like to place trades for free, like Schwab, so on and so forth. And then there were comparisons to like ICE and CME, these guys as well. But 100— those valuations were at $100 billion, and really these accountants were looking at it from the sense of, well, actually The book value looks to be like $19 billion. And that, you know, there are competitors in this space for crypto like Gemini, the Winklevoss twins, Kraken, Binance, Bitstamp, BitMEX. There are tons of people in there, but I don't think they have the same mass marketing engine that Coinbase have. I saw that they have $12 to $14% plan for marketing activities for the year going forward. And I just don't think Binance or Kraken or any of these guys will be even at the races with that sort of money.

Yeah. It's interesting. I saw that same thing in the S-1 that they filed, obviously, for this direct listing, that they're going to be directing a huge amount more into their sales and marketing. So I did see that as well. Um, but yeah, you know, who knows, you know, with the— with this company, why it's so profitable is the margins that they, they generate. Such a, you know, high margin business, and it is actually quite expensive, um, uh, the spreads. But, you know, we're like— we've seen with Robinhood, uh, and the commission-free trading, you know, they'll find a way. If it is, you know, payment for order flow, if it is, you further gamification of this Coinbase, and then the regulators will be interested as well. Um, you know, yeah, we're yet to see, but I think they will be spending a huge amount more on that sales and marketing. So that's definitely a line item to watch for sure.

So is there an indicative price being floated around for the IPO price?

Not, not that I've seen. Um, but you know, that's one thing to, to take a note of this relative to an IPO, just like with Deliveroo why that had such a— obviously it fell 31%, um, with the underwriting, with the, with the investment banks that you get with an IPO. Goldman actually stepped in, uh, and injected— I believe they bought $75 million worth of shares, uh, of Deliveroo when it was under a lot of pressure. With a direct listing, you don't get that. So it's going to be set, the price is going to be set, and then it's going to be, you know, pure, uh, secondary market activity from there. There'll be no stabilization So that's definitely one something to watch, but I can't see a negative outcome for this, for this IPO. It's going to be wild, but, you know, given the run-up in Bitcoin and the, the environment at the moment, I'm pretty confident that this is going to be a, you know, great PR event for them to really hit the mainstream.

The big question is, how much crypto does Eddy have in his portfolio?

Well, we'll have to, uh, show that in another video, Tim.

Okay, we'll do it then. So listen, thanks for your time. Thanks for coming on.

Thanks, Tim.

Cheers.

Bye-bye.