COINBASE IPO ANALYSIS (2021) – Thoughts From A Former Customer (Part 1 of 2)

As a user of coinbase myself, I knew I had to make a video about the upcoming IPO What is up everyone, my name is Ben. I'm a former JP Morgan investment banking analyst and welcome to the best channel for tech investing Today I'm actually in a different setting I'm in Los Angeles, not Korea so that's why my background is a little bit different and I'll be filming in the states for the next few weeks This is another addition to the playlist on my channel Rare Deep Dives of tech companies and this is actually going to be part one of two of Coinbase because there's just so much to cover so this first video is going to be about Coinbase more qualitatively and then the second video is going to be more about financials and valuation With that said, as a reminder I am not a financial advisor so please treat all content in this video as for entertainment purposes only Alright with that said, let's just jump straight to it.

Let's first start off with what Coinbase does Founded in 2012, Coinbase is one of the first cryptocurrency exchanges and allows everyday investors like you and me or hedge funds to invest and sell cryptocurrencies The company serves 43 million retail users, 7,000 institutions like hedge funds, and 115,000 ecosystem partners in over 100 countries. On the retail side coinbase's main products are its mobile app, which has a super easy to use interface and then there's Coinbase Pro which is a little bit more for advanced traders and let me show you actually what both of these look like Here's coinbase's mobile app for everyday users On the home screen you have your watch list and some news if you scroll down In the next tab, you can see your portfolio and as you can see here i was trading back in 2017 and then cashed out but really regret that and wish i just held.

Next, you can buy and sell crypto, convert crypto from one asset to another, and send and receive, and lastly, you can see how the market and individual assets are doing. In fact now you can trade in over 45 assets and store more than 90 of these And these numbers are likely going to increase pretty dramatically as the years go on Next, I wanted to show you guys Coinbase Pro, which used to be called GDAX, and the interface can look a little bit intimidating at first, but really all you do is just choose your asset and then enter trades in this area over here You can set market limit and stop orders, which you can't do on the normal Coinbase app On the business side, Coinbase also offers a lot of really interesting services including trading for institutions, listing assets on coinbase, which probably comes at a high cost, enabling businesses to accept cryptocurrency payments, cryptocurrency custody, which just means helping institutions store crypto assets securely, and a venture capital arm that invests in crypto startups So as you can see, Coinbase is more than just a place where you can trade crypto There's a lot of parts of the business that are kind of feeding off each other and creating a much more vibrant and strong ecosystem That leads us next to coinbase's business model.

To understand where coinbase's business is going to be going, you kind of have to understand some context first about the crypto market itself Since 2010 there were four major price cycles with peaks and troughs and each cycle lasted anywhere from two to four years Crypto was also uncorrelated to the equities markets until february 2020 when Covid hit, and now there seems to be some correlation. I bring up this data just to really show you that the crypto market is still in its early stages, it's highly volatile, there are a lot of changes constantly going on, and so the future is a bit uncertain but there is still a lot of promise as well As you may imagine as an exchange, Coinbase currently profits the most when bitcoin prices are high and there's high volatility and doesn't make as much profit when the bitcoin prices are lower and volatility is lower This is precisely why since 2018, Coinbase has making a concerted effort to diversify its revenue streams in order to decrease its reliance on market volatility.

Seven of the eight new products have been subscription and services, which really just shows you Coinbase's focus on building a more stable business, which as a potential coinbase investor will be really important to pay attention to over time. This strategy seems to already be producing results, with monthly transacting users appearing to be less correlated to crypto volatility, but still related to bitcoin prices. For example, you can see that volatility was at a 9 in both Q1 2020 and Q4 2020, but the number of users is much greater in Q4 which was also when bitcoin began rising dramatically Next up, let's talk about some key stats about Coinbase's market over the past three years, Coinbase has been able to almost double its users from 23 million to 43 million, which is just really amazing growth.

As a result, the company has been able to grow its market share from 4.5% to 11.1% over the past few years, which is also quite impressive. In terms of the total market since, the end of 2012 to the end of 2020 the cryptocurrency market grew from 500 million dollars to 782 billion dollars, which represents a 150 percent CAGR That base of 500 million is really small so that explains the CAGR, but also in just the past few months the market cap has grown by about 130 percent to 1.8 trillion dollars.

If you've seen my previous video of the 10 things I look for before investing in a company, then you know that I pay a lot of attention to the industry and its growth rate because if a industry is growing really really quickly then all the company really needs to do is maintain its market share to grow at the rate of the market I bring this up because I think it's important to note that out of all the tech companies and industries I've covered so far, I haven't seen a single one really grow at the rate of the cryptocurrency market. Next let's talk about why you would be bullish as an investor in Coinbase First off is Coinbase's history and branding Especially for anyone in the US, Coinbase is really the go-to crypto exchange for the average retail investor and many institutions This in large part is due to the company's intense focus on following regulations and the company also dedicates 15% of its full-time staff to legal compliance, finance, and security functions.

Now that crypto is a little bit more mainstream, it's a lot easier to trust companies like Coinbase or other exchanges but back even in 2017 when I was trading, there was a lot of mistrust in the market From the start, Coinbase created a really easy user interface for users to trade what's honestly a very complex product and that really has been its edge ever since in addition to all of the regulation and security rules that it follows. Second is what is called the company's flywheel Because customers trust Coinbase the company is able to attract more and more customers. This allows the company to keep scaling while also adding more assets onto the platform that customers can trade With this Coinbase, can then understand more and more their customers needs and create innovative products that help keep customers on the platform This entire process makes the overall platform stronger, which extends Coinbase's leadership in the marketplace and allows the company to grow its market share Coinbase stated that 21% of users used a non-investing product in 2020 that led to an average net revenue increase per user of 90% A third reason to be bullish on Coinbase is the rapid growth of the crypto market which is helped by an extremely applicable use case and institutional trading.

This graphic may be a bit outdated since it's from 2018, but the point still stands Even if the crypto market is 1.8 trillion dollars that amount is pretty small if you believe that crypto is going to be a significant form of currency in the future Personally myself I've had to transfer money from the US to Korea and China for my last business, and it's an extremely painful and expensive process Now I've also sent money through crypto and it's really easy and inexpensive the only kind of tricky part is that you have to figure out what addresses to send to but after that it's actually a really painless experience As a result personally I can really just see the crypto market growing based on just this use case alone, but there are so many other arguments that could be made for cryptocurrencies such as bitcoin being a store of value In addition to this, I think a big reason the crypto market is going so fast is because institutions like hedge funds are joining and really validating the market At just Coinbase alone, institutions grew from 1,000 in 2017 to 7,000 in 2020, and even Tesla recently made a 1.5 billion dollar investment into bitcoin These institutions increasingly validate crypto and it's going to be a huge boost to Coinbase in the future.

The fourth reason to be bullish on coinbase is that it has so many more markets it can enter and new assets that it can add Coinbase is currently ranked second for spot exchanges on and as you can see, that's pretty impressive given that Coinbase is in much fewer markets and offers less coins. Coinbase is extremely deliberate on what kind of assets it adds onto the platform and that's why for such a long time when even competitors like finance were offering almost hundreds of different assets, Coinbase back in 2017 was only offering three: bitcoin, ethereum, and litecoin. In order to be listed on Coinbase, you have to really go through a ton of scrutiny by the company and this is why customers also really trust Coinbase because they don't just let any asset onto the platform But the main point is that as Coinbase adds more assets and enters into more markets that just means more revenue and increased scale for the company Next up, let's talk about what you might be worried about as an investor First up is Coinbase's dependence on a highly volatile crypto market Now everyone knows that the crypto market is volatile and Coinbase is not at fault for that but as a new public company, the company is going to have to report each quarter and manage investor expectations and that's going to be pretty hard for the company to do when the market is just going up and down so much As you can see here, the trading activity on Coinbase has been super lumpy over the past few years What this means as a potential investor in Coinbase is that you're gonna have to have a pretty strong stomach that is able to go through the ups and downs of the crypto market which is going to cause a fluctuation in Coinbase's price The second risk is intense competition Because the crypto market is so lucrative, there are constant competitive threats coming from multiple fronts First, there are other crypto exchanges which are the most direct competition and a lot of them are not based in the US and not as highly regulated As a result, non-us crypto exchanges have a competitive advantage because they're able to offer popular products and services with less regulation while still serving the US population Second are financial incumbents like TD Ameritrade or Schwab If these companies start to offer crypto trading, then they could potentially meaningfully take share away from Coinbase.

Third, our fintech companies like Robinhood, Square's Cash App, and Paypal even entered into the mix recently These companies are already seeing pretty significant trading volume And fourth are decentralized trading platforms which allow for the trading of crypto assets without a centralized exchange like Coinbase These platforms are currently not as easy to use and aren't as fast or liquid, but over time the models are going to improve rapidly with Coinbase even admitting in its S-1 that the company has seen transaction volumes rivaling its own So Coinbase is very well positioned, especially in the US market and has a significant market share but there is a ton of competition potentially in the future The third risk is pretty mixed public sentiment Overall Coinbase is generally regarded as one of the safest ways to invest in crypto, but there still are a lot of honesty haters, for of the company in my due diligence I actually often like to use Reddit as a indicator of sentiment because a lot of the posts on there are from daily users and customers like you and me On Coinbase's subreddit, there are constant complaints about funds being locked out and accounts not working and users seem to complain most about the lack of customer service and also the company's high fees.

Now I wouldn't let this scare you too much because every single exchange has a ton of problems if you look into their subreddits and Coinbase probably has to charge a little bit of higher fees because it operates in the us but with that said I do think that coinbase can improve its overall platform by offering better customer service, which is something that people have been complaining about for a really long time The fourth risk are the lack of shareholder voting rights As is with the case with a lot of tech companies these days, the vast majority of voting rights are with the Class B stockholders. Class B shareholders own 99.2 percent of voting rights while directors officers and 5 shareholders own 60.5 percent of voting rights which puts a lot of power into the hands of the few. View an example of why this could be a problem Coinbase's CEO Brian Armstrong actually took a lot of heat recently for not allowing political and social discussions at work Things like this and potential scandals could lead to a lot of unrest within the company and shareholders can't really do much about it because they don't have any voting rights.

The fifth and last risk on the list is Coinbase's valuation As I mentioned earlier on in the video, part two is where I'm going to be going more over Coinbase's valuation and financials, but really quick one thing you should know is that Coinbase shares traded in the private markets at a valuation of 5.3 billion dollars just a few months ago in September 2020. There is a lot of talk that Coinbase will IPO at a 100 billion dollar valuation which indicates a 20-fold jump in the last six months. You could argue that crypto's insane jump over the past six months justifies Coinbase's higher valuation as well, but it's also important to note that there is no lock-up period for investors because Coinbase is doing a direct listing and so existing shareholders could potentially flood the market if the valuation gets ahead of itself That's why as a potential Coinbase investor, you want to make sure that you get in at a good price and that'll be the next topic for my next video Also of course, if you want to follow my trades make sure to check out my Patreon in the description below.

I always send buy sell alerts whenever I purchase anything or sell anything, and with that said thank you so much for watching as always I appreciate it a lot, please send this video to your friends if it was helpful and hopefully I catch you in the next video. Thank you, peace out [Music].

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