Behind Coinbase's IPO: Chinese capital enters the market, valuation may reach $28 billion

Original title: "Behind Coinbase's listing: Chinese capital enters the game, valuation may reach 28 billion US dollars"

Original source: TechFlow

After 8 years of hard work, Coinbase finally applied for IPO!

On December 7, Coinbase Global announced that it had submitted a listing application to the U.S. Securities and Exchange Commission (SEC), becoming the first cryptocurrency exchange to test the capital market.

Coinbase has been dreaming of going public for two years. Now that the price of Bitcoin has broken through its all-time high and has become the focus of attention, this cryptocurrency exchange, which was founded in 2012, has also decided to take center stage.

Behind Coinbase's grand IPO, there are still many doubts. Will Coinbase go public through an IPO or a direct listing? What is Coinbase's latest valuation? What mysterious capital is behind Coinbase?

TechFlow dissects the mystery behind Coinbase's listing by removing the fog of capital.

The dream of going public is not a matter of two or three days.

There have been rumors about Coinbase going public.

As early as October 26, 2018, CNBC host and crypto analyst Ran NeuNer tweeted that he had talked with Adam Draper, one of Coinbase's original investors, and Coinbase confirmed that it would soon launch a $500 million IPO.

The IPO will be conducted in two rounds, including preferred shares and common shares, with different voting rights.

Ran NeuNer revealed that Coinbase had about 25 million users at the time, of which about 600,000 were active users, and expected revenue of about $1.3 billion in 2018, with a profit of $456 million, up from $380 million in 2017. 80% of the revenue came from ordinary users and 15% from institutional accounts.

In response to the news of Coinbase's upcoming IPO, DGroup founder Zhao Dong wrote on Weibo at the time: "Coinbase's listing is a very ridiculous thing."

In the eyes of many cryptocurrency practitioners, this is equivalent to Song Jiang going to Liangshan, shouting "Down with IPO, reform finance", but he did not expect that he would be recruited first.

When everyone was discussing it, Asiff Hirji, then COO of Coinbase, clarified to Bloomberg that Coinbase would not IPO in the near future.

At the end of 2018, the cryptocurrency market experienced an even more severe winter, and Bitcoin fell sharply, which was also considered to be an important reason why Coinbase shelved its listing at the time.

Two years later, on December 17, as Bitcoin broke through a new high, Coinbase announced its intention to go public. The meaning behind this is self-evident.

Valuation may reach US$28 billion

According to some media reports, Coinbase is now valued at US$8 billion, but this is actually an outdated figure.

In November 2018, Coinbase announced the completion of a $300 million Series E financing round led by Tiger Global Management, with participation from Andreessen Horowitz, Y Combinator, Wellington Management Company and Polychain. The company's valuation reached $8 billion.

In other words, $8 billion is only the valuation two years ago. Two years ago, the price of Bitcoin was still hovering around $5,000, but now it has exceeded $23,000.

Is an $8 billion valuation too much of an underestimation of Bitcoin and Coinbase?

At present, the latest valuation of Coinbase remains a mystery, but many professionals have begun to give their own analysis.

TechFlow obtained a valuation analysis of Coinbase in July 2020 from Lex, a foreign analyst who focuses on the field of financial technology. By analyzing the revenue of trading business, custody business, and other businesses, and calculating the REV valuation at 20 times, it was believed that Coinbase's valuation at the time was approximately US$15 billion.

However, this valuation is merely a model deduction made by analysts based on data in July, and it is a conservative valuation of 20x. Now the price of Bitcoin has reached a new level.

On December 18, Messari researcher Mira Christanto conducted an in-depth study of some business and transaction data of the cryptocurrency exchange Coinbase and believed that Coinbase's potential valuation was US$28 billion.

In Messari’s model, Coinbase’s business segments are also divided into transaction fees, custody fees, debit cards, etc.

In the trading sector, the trading volume mainly comes from institutional clients, but the average amount of currency held by each client is US$703. The total amount of custody business reached US$7 billion in 2019 and increased to US$20 billion in 2020.

Mira came to this conclusion after referring to previous financing records and the pricing of cryptocurrency companies by the current capital market.

However, Coinbase's valuation will ultimately be determined by the market.

Analyst Lex expressed optimism about Coinbase, believing that Coinbase is "a better investment target than Bitmain" because it is betting on human nature rather than the use of the Bitcoin network.

Coinbase doesn’t need to rely on the Bitcoin network to keep the company going, nor does it need to fight a hardware war for mining machines. It just needs to keep attracting people to trade an emerging asset that the younger generation finds attractive: Bitcoin.

Do you want an IPO?

Although blockchain media such as Coindesk, traditional media such as the New York Times, and Grayscale CEO Barry Silbert have all used "Coinbase IPO" as their headlines, Coinbase has not yet made it clear that it will go public through an IPO.

Coinbase has only confirmed that it has secretly submitted a draft registration statement in Form S-1 to the SEC, which does not mean that it will adopt an initial public offering (IPO). Whether it is an IPO or a direct listing, an S-1 filing is required. It seems that people are more using the broad meaning of IPO, that is, a company going public.

In July 2020, Reuters first reported that Coinbase was preparing to go public, and said that Coinbase might choose to skip the IPO and go public directly.

Compared to an IPO, a direct listing will save Coinbase tens of millions of dollars in investment banking fees. For example, Slack, a collaborative chat software that went public directly in June last year, only spent $22 million in investment banking consulting fees; while Lyft, a taxi-hailing software of similar size, spent $70 million on IPO-related investment banking fees.

From Spotify to Slack, technology unicorns are beginning to abandon IPOs and instead enter the public market through direct listings, which is gradually becoming a trend.

Another feature of direct listing is that there is no need to sell new shares like an IPO, and early investors are not subject to the restrictions of the lock-up period. However, it is precisely because of this that the risk of direct listing is that cash flow and stock price will fluctuate greatly in the early stage of listing.

The choice of direct listing instead of IPO reflects Coinbase's personality against Wall Street. Jeff Roberts, the author of the Coinbase biography "The King of Cryptocurrency" and Forbes reporter, once answered the question "Why did Coinbase choose direct listing?" in the crypto podcast Unchained. He said "This is a way to fight back against Wall Street. All lawyers and bankers rely on IPOs for their livelihoods." He also believes that selling stocks directly will make all insiders rich.

Additionally, Coinbase co-founder Fred Ehrsam has suggested that Coinbase’s IPO could be achieved by offering digital tokens on a blockchain.

In his latest article for Forbes, Roberts argues that “it is unclear whether the SEC will approve the IPO. If the SEC refuses to do so, Coinbase’s other option would be to pursue a direct listing and sell shares directly to the public.”

On Twitter, Roberts responded to the rumors of Coinbase's listing, saying, "No news yet, it will be traditional, direct or in token form."

Therefore, the way Coinbase will go public remains unknown.

Chinese Capital Behind Coinbase

When a company goes public, the biggest beneficiaries, apart from the company team, are the investors behind it.

Currently, according to crunchbase data, Coinbase has completed its E round of financing, raising a total of US$547 million from 59 investors.

The five main investors are A16Z, Tiger Fund, IVP, DFJ, and Mitsubishi UFJ Bank. Other well-known investors include the New York Stock Exchange (NYSE) and Union Square Ventures.

Among them, several investors deserve special attention.

In 2012, Coinbase completed its Series A financing, led by Union Square. Among Coinbase's investors in this round, there was also Chinese capital, namely IDG Capital.

Li Feng, then partner of IDG Capital, confirmed the investment. According to Li Feng, Bitcoin is a new and exciting field. IDG Capital made early arrangements and invested in Coinbase in Silicon Valley in September 2012. It is the main investor in the project. At the same time, IDG Capital is also the first investment fund in China to invest in a Bitcoin company.

Later, in 2013, Li Feng also participated in Ripple's early investment, and after continuing to invest in the A round in 2015, he joined the board of directors of Ripple Labs.

In April 2015, USDC issuer Circle also received investment from IDG Capital. In the same year, Li Feng left IDG and founded Frees Capital.

In 2017, IDG Capital participated in the investment in Bitmain.

Bitmain, Ripple, Coinbase, Circle, imToken, KuCoin... IDG Capital has now become one of the biggest value capturers in the blockchain industry.

Next is the famous female tennis player Serena Williams.

In 2019, world-renowned tennis player Serena Jameka Williams said in an Instagram post that Serena Ventures was launched in 2014 and currently has investments in more than 30 companies, including the well-known cryptocurrency exchange Coinbase.

But in October of this year, Coindesk discovered that the investment portfolio listed on the Serena Ventures website no longer included Coinbase, so it believed that Williams Jr. may have abandoned his investment in Coinbase.

In addition, in 2019, Bloomberg reported that Singapore Government Investment Corporation, one of the world's largest sovereign wealth funds, had participated in investing in Coinbase in 2018, although Coinbase did not disclose relevant information.

But it is worth noting that in 2018, Vertex Ventures, a subsidiary of Singapore's government investment institution Temasek, announced a strategic investment in Binance.

Coinbase Controversy History

In 2016, after the Satoshi Nakamoto roundtable meeting, the ancient Bitcoin milk king "Si Hai" commented on the Coinbase CEO: "He is a political player who wants to control Bitcoin. He is very manipulative and highly dangerous."

Judging from past history, Coinbase does have considerable ambitions.

With the second Bitcoin halving in July 2016, Coinbas began to intervene in the debate over Bitcoin block size to expand its influence.

As The Guardian wrote in August 2015, Bitcoin was experiencing a “civil war” as supporters of a higher block size used a hard fork called “Bitcoin XT.”

Coinbase’s decision to support Bitcoin XT angered a group of Bitcoin evangelists at the time.

However, soon afterwards, Bitcoin XT was destroyed by rogue software before it really had a chance to take off.

In February 2016, after attending the Satoshi Nakamoto roundtable, Coinbase CEO Brian Armstrong began to attack Bitcoin Core, the core development team of Bitcoin, saying that Bitcoin Core becoming the only development team may be the "biggest systemic risk" of Bitcoin. He claimed that Core's "poor communication skills" and "lack of maturity" discouraged other developers. More importantly, developers prefer "perfect solutions" rather than "good enough solutions", which is usually an excuse for doing nothing.

Finally, he concluded: “We need to create a new Bitcoin protocol development team to help Bitcoin become a multi-party system and avoid the systemic risk of core becoming the only development team working on the protocol.”

Since then, another fork of Bitcoin, BCH, has also caused Coinbase to be embroiled in controversy and even went to court.

On December 20, 2017, Coinbase launched Bitcoin Cash (BCH) on its GDAX trading terminal (now Coinbase Pro), nearly a month ahead of schedule. The price of BCH rose instantly, and the price difference compared with other exchanges was as high as $6,000.

After that, investors filed a class action lawsuit, alleging that there was insider trading and that employees had set up a mouse position in advance to make profits. Later, the allegation was dismissed by U.S. District Judge Vince Chhabria.

In November 2018, this group of people appealed again and gave the key method by which Coinbase profited from BCH insider trading: driving up prices and earning the difference.

The lawsuit documents show that when BCH was launched, only buy orders could be placed on the trading platform, but no sell orders could be placed, causing the price to soar. Taking advantage of the soaring price, Coinbase closed the transaction a few minutes after the announcement, and those insiders who got the news in advance could make huge profits by selling BCH at a high price during this period.

“Coinbase’s goal is to lower the price of BTC, raise the price of BCH, encourage users to conduct more transactions, and increase its own profitability,” the plaintiff said.

In addition, the lawsuit also stated that the price of BCH on Coinbase once soared to US$9,000, and Coinbase later erased this price history.

Recently, Coinbase's overly close relationship with the government has also caused it to be caught up in a vortex of controversy.

In June 2020, according to TheBlock, the U.S. Drug Enforcement Administration (DEA) and the U.S. Internal Revenue Service (IRS) are willing to purchase Coinbase Analytics' blockchain analysis tools from Coinbase, one of the leading exchanges, to combat crypto crimes.

Investor reaction to the news was unprecedented, with a large exodus of investors leaving Coinbase.

As BeInCrypto reported on June 11, users withdrew more than $200 million from Coinbase after the U.S. government announced the deal. Coinbase insisted that it would not share sensitive user data with authorities, but few seemed to believe it.

For Coinbase, compliance with government permission is a kind of liberation and freedom, but it also brings shackles.

Coinbase, founded in June 2012, has witnessed the birth, development, lows and highs of the cryptocurrency market. Today, Bitcoin is being accepted and invested in by more and more institutional investors, while Coinbase has chosen to enter the capital market. Cryptocurrency is no longer a "self-entertainment" of a small circle of geeks, but has become a financial ecosystem that cannot be ignored.