Founded in 2012, Coinbase is a San Francisco-based online central cryptocurrency exchange. The company’s shares began trading on Wednesday, March 14 with a direct listing on NASDAQ. For many investors, this was an important event in cryptocurrency’s long-standing battle toward mainstream acceptance.
At the same time, this big move for Coinbase is turning heads for another reason - the decision to forgo the more traditional IPO process for a direct listing.
Why Is Coinbase Going Public Important?
This is the first time a cryptocurrency-based company has gone public on the stock exchange. It listed on the NASDAQ with a reference price of $250 per share, valuing the company at around $65 billion based on its number of shares. It closed the first day at $328.28 per share valuing the company as one of the 100 most valuable US companies at $85.8 billion a 30% increase.
However, this was a historic day for cryptocurrency, marking its “official” entrance into mainstream trading platforms. Cryptocurrency has been around for over a decade, but investors may have been wary to put money towards this unregulated asset. With Coinbase now a publicly traded company, investors may be more comfortable with the idea of owning stock in an SEC-reviewed company. Cryptocurrency like Bitcoin and Ethereum have been viewed with skepticism and speculation, but this move for Coinbase may be considered another step towards legitimizing and demystifying this asset type.
A Reminder About Cryptocurrency
It’s important to remember that cryptocurrency is not a currency at all. It’s a speculative asset class that is not appropriate for everyone. Like other alternative assets, cryptocurrency can be illiquid at times, and its current values may fluctuate from the purchase price. Only people with a high-risk tolerance should consider cryptocurrency assets. Cryptocurrency assets can be significantly affected by a variety of forces, including economic conditions and simple supply and demand as well as future regulations. As of this writing, Turkey and China have banned cryptocurrency payments and South Korea and India are reviewing banning as well. Additionally, India is exploring an official State cryptocurrency issued by the Reserve Bank of India.
IPO vs. Direct Listing
Coinbase isn’t the first well-known company to do a direct listing, as larger companies including Slack, Spotify and Asana all chose this method as well. But among companies who choose to do an IPO, those who choose the direct listing method are comparatively rare.
If a company chooses to do an IPO, there is a well-traveled path to follow. It must file documentation with the SEC and work with an investment bank (or banks), which guides the company through the entire process. The work that goes into an IPO before a company officially goes public can often draw attention to the company, drumming up interest amidst investors before its debut on the NYSE or NASDAQ.
If a company chooses to do a direct listing, the process tends to be more streamlined than a traditional IPO and the company gets to choose its timing. The company’s shareholders sell stock directly to the public through the exchange. With a direct listing, financial institutions aren’t as involved as they are with an IPO - they aren’t acting as the underwriter. This method of going public is typically reserved for larger companies with good brand recognition.
Direct Listing Considerations
Because of its more streamlined process, doing a direct listing may cost a company fewer fees while allowing them to maintain control over the initial stock price. But doing a direct listing can be tricky and leave companies open to potential complications.
The financial institutions that underwrite an IPO help support the stock price of the company’s shares, at least in the short term. During the initial process, they set the IPO price and drum up interest amongst investors beforehand. With a direct listing, there is no underlying support by an investment bank. The stock may fluctuate significantly during its first few days, creating levels of extreme volatility that can make investors wary.
Misjudging the Market
The hype that banks can create surrounding a traditional IPO can help attract interest and give a company an idea of how many investors are expected to buy shares. With a direct listing, the initial supply and demand is unknown, as it’s at the mercy of those on the inside who are willing to sell and those investors on the outside looking to buy in. There is no indication ahead of time, and no bank advocating to institutional investors on your behalf. This can make it harder for a company to predict demand during the first few weeks of trading and therefore expect enhanced volatility.
What does this all mean for investors? Coinbase has made significant headway for cryptocurrency, making this an exciting time for a relatively new unregulated technology. However, similar to the frenzy surrounding GameStop a few months ago, the speculation and high valuation may not translate into a suitable investment for everyone.