The S&P 500 in the cryptocurrency world can rise by 140% when Coinbase goes public

As the “Coinbase effect,” a measure of how important the company is to the cryptocurrency market, declines, investors should watch for any impact on Coinbase’s valuation.

Coinbase Global, the largest cryptocurrency exchange in the United States, will be listed on Nasdaq on April 14 (Wednesday), Eastern Time, under the trading symbol COIN. Nasdaq said on the evening of the 13th that the reference price of Coinbase was $250 per share. The prospectus, published on March 23, shows that Coinbase’s existing shareholders have registered 114.85 million shares.

The fully diluted share count was 261.3 million, according to Coinbase. Based on a reference price of $250, the company has a market capitalization of $65.3 billion.

The reference price of $250 is not the price at which Coinbase began trading on Wednesday, but is meant to give the public market an idea of how the company has been trading in private markets recently. Coinbase stock traded between $200 and $375.01 during the first quarter, according to the prospectus. Following the listing, Coinbase is expected to be valued at more than $100 billion.

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Instead of going public with a traditional initial public offering (IPO), Coinbase went public via a direct listing, in which the company did not raise new capital this time around and instead had existing shareholders sell their shares.

MoffettNathanson analyst Lisa Ellis (Lisa Ellis) gave Coinbase a "buy" rating and a one-year target price of $600 (Editor's note: 140% higher than the reference price). Its market cap will reach $123 billion. Based on the expected sales in 2023, the price-to-sales ratio is 18 times.

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While Ellis is bullish on Coinbase, she also noted that the company's revenue is closely tied to the overall cryptocurrency market and retail investor enthusiasm for cryptocurrencies, which she expects to continue to fluctuate wildly.

Quotes | The total market value of global cryptocurrencies is about 175 billion US dollars: According to AICoin data, the total global market value of cryptocurrencies is 175.238 billion US dollars. Bitcoin ranks first in the cryptocurrency market, with a market value of approximately US$93.4 billion, accounting for 53.30% of the current market value; Ethereum ranks second, with a market value of US$16.7 billion, accounting for 9.50% of the market value; Ripple Ranked third, with a total market value of 12.6 billion US dollars, accounting for 7.19% of the market value. [2019/4/27]

Ellis wrote in the research report, "Coinbase sales reached US$1.8 billion in the first quarter, 40% higher than the US$1.3 billion in sales for the whole of 2020, and may be approaching the peak. Changes in value will remain cyclical, so it is possible that Coinbase sales in 2022 will be more than 35% lower than in 2021."

Such a sharp drop in sales is unusual for a fast-growing company, but underscores how heavily Coinbase relies on growth in the overall cryptocurrency market. On the 13th, the price of Bitcoin broke through $63,000, setting a new high.

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Investors in Coinbase may exit once the cryptocurrency market is in trouble. Ellis wrote, "We don't yet know the extent to which the stock market can absorb the wild fluctuations in Coinbase's performance." She predicts that by 2022, the total value of the cryptocurrency market will drop to $1.38 trillion, which means a drop of 30% from current levels.

However, Ellis believes that the decline in the cryptocurrency market will not last long, and the market value will more than double in the next year to $3.65 trillion. By 2026, the market value is expected to expand to $11 trillion.

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'Coinbase Effect' Diminishing, Valuations May Change

The appeal of cryptocurrencies is that they are decentralized and do not require a regulator to act as a gatekeeper. However, as the main digital asset trading platform in the United States, Coinbase plays an important role in the issue of which cryptocurrencies can be recognized and which cryptocurrencies may be abandoned. It can be said that it is a "gatekeeper" itself.

There are thousands of different cryptocurrencies out there, most of which are likely to fail in the end. One of the paths to success is Coinbase, where the decision to include a cryptocurrency can cause extreme price volatility. Coinbase currently offers fewer than 60 cryptocurrencies to some customers, some of which are only available in certain jurisdictions or on certain services. The lack of clear legitimacy for many cryptocurrencies means that Coinbase makes or breaks most of them.

This "Coinbase effect" is similar to the role that S&P Dow Jones Indices plays when it includes certain securities in major stock indexes such as the S&P 500.

Coinbase’s influence on cryptocurrencies is arguably more important than that of companies that compile stock indexes because, unlike stocks, most cryptocurrencies are not recognized by regulators. Accreditation by Coinbase is especially important for many entrepreneurs looking to enter the crypto space, and it is also a very important factor for investors who want to invest their funds in assets other than mainstream cryptocurrencies such as Bitcoin and Ethereum.

This “gatekeeper” role for Coinbase is a measure of how important the company is to the market, and one reason why its valuation could exceed $100 billion.

However, some industry experts believe that the impact of the "Coinbase effect" is no longer as great as in the past, and investors should pay attention to whether this will affect the valuation of Coinbase.

In the five days after Coinbase announced its listing, assets traded on the exchange rose an average of 91%, according to a March report from cryptocurrency research firm Messari. However, this figure does not include some outliers, some assets fell by 32%, and some skyrocketed by 645%. After removing outliers, Messari came up with an average gain of 29%.

In addition to this price effect, if a cryptocurrency is included in Coinbase, it will be available to tens of millions of new users. As of the end of the first quarter, 56 million people had accounts with Coinbase.

From a design perspective, cryptocurrencies are not just an asset, and many cryptocurrencies can be used in the network for specific purposes such as purchasing file storage. By contrast, Coinbase shareholders are passive participants who just hope the stock goes up. In the crypto space, increasing the number of cryptocurrency holders is doubly important.

Coinbase's methods for deciding whether to include a cryptocurrency are complex, and some of them remain unknown to outsiders.

Coinbase allows creators and users of cryptocurrencies to submit applications through a public website, which are then reviewed for security, legal and compliance issues. Coinbase also has the discretion to include cryptocurrencies with or without applications.

The incorporation process can take weeks and involves complex issues such as reviewing legalities in jurisdictions around the world. Additionally, the company has to examine the technology behind each protocol and figure out how to make it seamlessly integrated with its own platform.

And the process has not always been smooth. Coinbase reversed its decision to include Ripple in December after the U.S. Securities and Exchange Commission sued cryptocurrency firm Ripple for illegally selling XRP. Ripple is one of the most valuable cryptocurrencies. While Coinbase's role as "gatekeeper" is critical, that role varies depending on the circumstances.

Matt Hougan, chief investment officer at cryptocurrency fund provider Bitwise Asset Management, noted that the "Coinbase effect" has "significantly diminished" compared to a few years ago, when Coinbase included fewer than 10 assets. ". In addition, there are some external factors at play in the "Coinbase Effect".

Research firm Messari found that Coinbase's impact on the market often depends on the performance of the entire cryptocurrency market. Once Bitcoin and other tokens fall, Coinbase's performance after listing will be negatively affected.

Additionally, as governments tighten regulations on cryptocurrencies, coupled with the rise of other exchanges, these factors could also dampen the “Coinbase effect.”

"Regulatory transparency continues to increase across the U.S. for cryptoassets, with more exchanges in regulation and compliance," Garrick Hileman, director of research at Blockchain.com, wrote in an email to Barron's. It has also reached the same level as Coinbase, and some exchanges have even surpassed Coinbase in some areas, and these developments may erode Coinbase’s influence.”

Text | "Barron's Weekly" contributor Avi Salzman (Avi Salzman) et al

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