Coinbase Went Public Recently With a Direct Listing. Here’s Why that Approach Can Be Tricky and What That Means For You

Cunningham Wealth Management - 30 Second Summary:

• Coinbase, the US cryptocurrency exchange, made history for the cryptocurrency asset class earlier this month by becoming the first crypto asset to publicly list on the US stock market. 
• Cryptocurrency is a digital currency and is not backed by any government. The asset class has high volatility marked by large price swings. Crypto is appropriate for investors with medium to high risk tolerance levels. 
• Coinbase went public via a direct listing rather than an IPO. This is a less popular method of going public and can mean greater volatility, thus, greater risk for investors. 
• Coinbase entered the market at a price of $381. At the time of writing the stock's price has risen to $429 and fallen to $282 in only 10 days of trading. This represents a fall of 26% from it's initial price and a high of 12% above it's initial price, for a total price swing of 38%.
• Coinbase is a dedicated crypto exchange facilitating the buying and selling of crypto coins such as Bitcoin and Etherum. Coinbase may present a less risky opportunity to gain exposure to crypto, rather than owning a single coin. 
• Schedule a free 30 minute consultation with one of our advisors today, or, take our risk tolerance questionnaire, to learn more about your risk capacity. 

Founded in 2012, Coinbase is a San Francisco-based central cryptocurrency exchange space. The company’s shares began trading on April 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. However, the stock opened at $381, valuing the company at over $100 billion. 

This was a historic day for cryptocurrency, marking its “official” entrance into mainstream trading platforms. Crypto 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. Crypto, like Bitcoin and Ethereum, may have been viewed with skepticism and speculation. However, this move for Coinbase may be considered another step towards legitimizing and demystifying this asset type. It is important to note Coinbase is a dedicated crypto exchange to trade coins like Bitcoin and Ethereum. Coinbase is not an actual crypto coin. 

A Reminder About Cryptocurrency

It’s important to remember that cryptocurrency is a digital currency, it is not backed by a government, unlike standard currencies, like the US dollar or the Euro. It’s a speculative asset class that is not appropriate for all investors. Investors with moderate to high risk tolerance should consider crypto assets, as this asset class has proven to be highly volatile.

Like other alternative assets, crypto can be illiquid and it's value can change rapidly. At Cunningham Wealth Management, we work with you and assess investments based on your objectives, timeframe and risk tolerance. Unsure what your goals are? Use our free Goal Planner tool. All investments will be considered in the context of your overall portfolio. 

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 have all chosen this method. However, IPO's are much more popular. So, why did Coinbase choose this route?

IPO

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 syndication of 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. IPO's are more costly to a company. 

Direct Listing

If a company chooses to do a direct listing, the process tends to be more straightforward and considerably cheaper than an IPO. The company’s shareholders sell stock directly to the public through the exchange, which works with accredited investors (annual income > $200k (S), or $300k (MFJ)) to set a reference price for the initial offering. With a direct listing, financial institutions are bypassed, and the company sells directly to the accredited investors. 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. This method is less regulated, and that can mean more risk for investors. 

Volatility

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 volatility that make investors wary, as evidenced earlier with near 40% price swing from it's initial price. 

What's Next For Coinbase?

Avi Salzman, a senior writer at Barron's, labelled Coinbase as having the potential to become the Google of crypto. He argued that, "Coinbase is a novel company with competitive advantages that have enabled it to increase market share despite fierce rivals" (Barron's, April 21).  We think it's probably too early to compare Coinbase to Google, but it is clear Coinbase does present a good investment opportunity to gain exposure to cyrpto. Coinbase, unlike Bitcoin and Etherum, is a dedicated crypto exchange, facilitating the buying and selling of crypto coins. Therefore, owning Coinabse offers the benefit of a more diversified asset, as opposed to owning a single coin, which helps reduce price and nonsystematic risks. 

In parallel, crypto is becoming more accepted by society and business as a whole. This has been validated by corporations buying large amounts of Bitcoin including Tesla purchasing $1.5 billion of the digital currency in January, and MicroStrategy investing $2.19 billion in the coin. The companies are sighting various reasons for their purchases. Could this indicate an impending shift? 

If you are interested in crypto, investing or financial planning services, we would be delighted to speak with you. At Cunningham Wealth Management, we act as fiduciaries and take a holistic approach in helping you achieve your financial goals and objectives. We recommend you set up a free consultation with one our advisors, so we can learn more about you, your goals, and your overall financial situation. 

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• Goal Planner - Take our quick 3 step tool, to help you start thinking of your overall financial and life goals and objectives. 
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Cunningham Wealth Management, is a registered investment advisor, specializing in financial planning, portfolio management, and tax advisory services. Our partner firm, Cunningham & Associates, CPA, has 29 years of tax experience and has 5 office locations across the country.