Epic Coinbase listing rests on cryptocurrencies’ price

Coinbase shares, newly listed on Nasdaq, are a bet on two entwined factors: the price of bitcoin and regulators’ tolerance of cryptocurrencies. Neither is certain. But bitcoin’s price surge in the past year, aided by fans such as Elon Musk, has more than doubled the annual trading volume of the cryptocurrency exchange. Demand is still rising.

Coinbase’s listing is striking for a couple of reasons. It is the largest business of its kind to join public markets — the stock opened at US$381 valuing the group at almost US$100 billion ($140b). And it is one of only a handful of companies that has chosen a direct listing over an initial public offering or purchase by a quoted “blank cheque” company.

Net income of as much as US$800m in the first quarter meant Coinbase did not need it to raise money. Sales of US$1.8b exceeded annual revenue for all of last year.

Founded in 2012, Coinbase enables its 56 million users to buy and sell cryptocurrencies. Of these, bitcoin is by far the most popular. Its price exceeds US$64,000, up from less than US$6000 a year ago.

The cryptocurrency has a market capitalisation of US$1.2 trillion, according to market tracker CoinGecko. Ethereum, the secondlargest, is worth just US$254b. For Coinbase sales to grow, bitcoin’s price must keep rising. Scale and volatility invite close regulatory scrutiny.

Coinbase investors must be crypto believers — or speculators cynically hitching a ride on their convictions. They apparently are valuing the company at a stratospheric 79 times trailing revenue. That requires sales growth that is supersized even by tech industry standards. Data mining company Palantir, which also opted for a direct listing, ended its first day of trading with a valuation 19 times trailing revenue. Coinbase’s listing tests mainstream acceptance of cryptocurrencies. Reservations were already abating. Companies such as Square and Tesla have purchased bitcoin. PayPal allows users to pay with cryptos. Coinbase counts 7000 institutions as customers.

That bodes well for bitcoin — for now. If prices drop, so will trading volumes. Coinbase’s newfound profitability would evaporate. But steep prices are dangerous too. They reduce the incentive for owners to spend bitcoin on daily payments. Without these transactions, the practical case for cryptocurrencies — and crypto exchanges — falls apart.