Coinbase’s April 14 IPO was the stock market event that launched a thousand superlatives. A “watershed moment,” a “rocket” that analysts said would see its stock price double, and a “landmark moment for crypto” are but a few of the headlines marking its debut as a listed company that day.
Today (April 19, before the market’s open), Coinbase’s market cap stands at $64 billion, give or take. Coinbase offers many services, but it mainly operates as an exchange for cryptocurrencies. The market cap of ICE, an exchange that owns and operates 12 exchanges and clearinghouses, including the NYSE, is worth only a smidge more, at $69 billion. NASDAQ, in case you are curious, has a market cap of $26 billion.
Now, exchanges haven’t been notorious for having large market caps — at least, not until the Coinbase debut last week. Although the function of an exchange is vital to the overall economy, the real economic value is created by the companies that these regulated exchanges enable to raise capital and allow investors to buy and sell shares — the companies that produce products and deliver services with business fundamentals that investors use to evaluate whether to buy, hold or sell stock.
And it’s that comparison — or maybe others that could be made — that makes handicapping the future value of Coinbase both interesting and challenging.
At the moment, Coinbase and the cryptocurrencies it trades seem to be speculative cryptocurrency assets. The underlying value of these cryptocurrencies is based purely on what someone else is willing to pay for it, just like gold. But the trading activity seems to be driven mostly by speculation that the value will continue to climb, or not, generating the high-margin flows that Coinbase enjoys every time someone makes a trade.
For some retail investors, the “fundamentals” used as the basis for investing are often tweets by famous billionaire crypto enthusiasts, for whom crypto investments are but a tiny piece of their overall holdings and who can comfortably weather its volatility. But it’s been the institutional investor that has driven so much of Coinbase’s recent volume, eclipsing retail trading volume every quarter since Q2 of 2019. In addition, many high-profile companies — most notably Tesla, MicroStrategy and Square — bought bitcoin to hold on their balance sheets as an investment. Big banks are now also offering to trade and custody crypto.
A Financial Times story published on April 16 likened the Coinbase debut to the launch of Netscape in 1994, an equivalent “landmark technology” that ignited the World Wide Web 27 years ago. The comparison, BTW, is being made to a landmark technology, not a valuable company. You might recall that Netscape itself wasn’t long for this world.
If Coinbase is Netscape 2.0, as the analysts in that FT article infer, there are five things you must believe. And handicapping them is the secret to figuring out whether Coinbase is crazily overvalued, or has room to zoom and zoom.
Must-believe #1: Coinbase is a path-breaking innovation that will unlock huge value.
When Netscape launched in 1994, it was a dramatic innovation that enabled regular people to easily navigate the internet, as commercial applications were just starting to take off. Early online pioneers like Amazon and eBay leveraged its technology to build web businesses where consumers could, albeit primitively by today’s standards, purchase things. Netscape ushered in the age of the dot.com — initially creating value for itself by creating value for businesses that could use its technology to build their own sites.
Clearly, Coinbase is an innovative platform that has spent the last nine years building a globally regulated exchange, digital wallet and custody operation for assets that are the digital equivalent of cash. Coinbase enables investors to buy and sell and store those cryptocurrencies safely, securely and in compliance with global regulations. And unlike Netscape (more on that later), that is a huge moat not easily replicated – at least not without lots of time and at great cost.
Coinbase is an innovative enabling platform, and clearly the foundation for the cryptocurrency trading boom. Its innovation has made it more efficient, and more secure, for retail and institutional investors to trade and store a speculative asset – much like other exchanges have made it easier, more efficient and safer to trade other exotic speculative assets like gold, copper, corn and soybeans. It is also creating liquidity for cryptocurrencies whose use cases are enabling transactions on special-purpose blockchains for which there is some traction.
Must-believe #2: Coinbase will ignite the crypto economy.
That said, igniting the crypto economy means that the cryptocurrencies on the Coinbase exchange transition from being a currency that people trade for speculation, to a cryptocurrency that becomes the basis for how consumers and businesses transact. And not just a way to buy and sell goods and services, but the way — or at least a major way — that people do business because that is how merchants and other businesses want to be paid for what they sell.
For consumers, it means a rather big change. The consumer who today moves fluidly between cash, debit cards, credit cards and alt credit to pay for things at merchants would single-thread on cryptocurrency. For Coinbase to participate in the crypto economy and not just ignite it, consumers would also use the Coinbase wallet primarily, but not exclusively, to buy, sell, hold and transact.
That’s different than how the internet economy took off with Netscape.
Netscape made it easier for developers to render websites and for consumers to navigate to them. When those consumers wanted to buy something from those sites, though, they had a variety of familiar cards in their leather wallets – and then, over time, digital wallets. The early internet innovators who tried to mint their own currency (Beenz, anyone?) found that the platform’s dynamic – a new channel, new method of payment and the inherent difficulty of getting consumers and merchants on board – too complex to get off the ground, and gave up.
That said, the ability for developers to create new places on the web for consumers to shop did give rise to a new set of payment enablers that eliminated friction from online checkout. PayPal launched in 1998, and later ignited the eBay marketplace by being a trusted intermediary for buyers and sellers to transact — first using the consumer’s bank account credentials, and then over time their existing card credentials (and even more recently, bitcoin) as the underlying funding method for purchases. Consumer choice further scaled its consumer and merchant network growth, using the PayPal wallet as a payment method and a store of value.
Shopify launched in 2006, and later ignited by giving SMBs a suite of commerce tools that leveled the digital playing field — including the ability to accept the method of payment that consumers wanted to use to buy things from a merchant they’d never seen or heard of before.
Leveraging existing payment methods also ignited Square, which launched in 2009, giving micro-merchants the ability to accept the cards consumers carried in their wallets by plugging a square dongle into their smartphone, enabling them to accept any network-branded credit card with a mag.
And Stripe, which launched in 2011 and later ignited the world of mobile commerce, made it easy for developers to paste a few lines of code into their mobile app and start accepting digital versions of the cards they carried in their wallets, as well as the digital wallets consumers also used to register those card credentials.
Coinbase currently has 43 million verified users with a Coinbase wallet. For the Coinbase platform to move beyond trading to conduct commerce on its platform, more consumers would have to open a Coinbase wallet — and most importantly, merchants would have to accept it.
For that to happen, consumers would have to get comfortable using cryptocurrencies to transact — and lots of merchants would have to agree to put Coinbase alongside other marks like Visa and PayPal.
And consumers who would want to use crypto would want to use a crypto-only wallet, rather than having crypto as part of a digital wallet that has other payment credentials. Or Coinbase would have to open its wallet to non-crypto methods of payment.
Or consumers and businesses, en masse, would have to think of crypto as they do any other currency, and migrate to new wallets and rails that would become a parallel global financial ecosystem built on crypto.
Must-believe #3: Cryptocurrencies are a currency and not a speculative asset.
For the crypto economy to ignite, consumers must stop thinking of crypto as a way to speculate (some would say gamble), or as the digital equivalent to gold where they store wealth, and start thinking about it as a method of payment they can use every day to buy things.
That’s arguably more difficult right now, as analysts posit that bitcoin’s supply constraints will drive its value to $1 million over the next five to six years — and as one day bitcoin is worth $57,000, the next day it’s worth $65,000 and the next day it’s worth $61,000. And at a time when Dogecoin, which started as a joke meme coin in 2013, saw its value rise 400 percent over the last week for no apparent reason other than it was April.
All of that further fuels the speculative nature of cryptocurrencies — so when consumers cash out their crypto gains and buy a boat or an exotic car, pay off their mortgage or put a down payment on a beach house, they view the sale as taking and spending their gains, like they do when they sell stocks at a gain. Making those gains spendable using digital fiat currency at the businesses where consumers want to shop is different than using cryptocurrencies in place of their fiat-denominated currency.
Must-believe #4: Regulators embrace, and don’t strangle, the cryptocurrency economy.
Bitcoin has long been the scourge of regulators, who have fears over AML, KYC and bad actors that use it for their own nefarious purposes. Most of them consider crypto as a “speculative” digital asset that they tolerate, but want to kibosh its use as a global currency in any way. It’s why regulators have very strong words for bitcoin, and it’s why they initially rejected Facebook’s Libra — which not only has a new name, Diem, but now looks a lot like Centre and USDC.
It’s also why the regulators look differently, and more carefully, at stablecoins denominated to the U.S. dollar and their own digital fiat in a nod to the power of digital currencies, regulated and stable, to potentially enable new, compliant and path-breaking payments use cases.
It’s also why the first cryptocurrency that Visa is using to pilot its crypto clearing and settling wasn’t an exotic cryptocurrency, but a fiat-denominated currency whose value is pegged to the world’s currency, the stable U.S. dollar.
And it’s why innovators are making blockchain rails faster, to unlock the potential for cryptocurrencies to become payments at scale.
But for Coinbase to ignite a crypto economy — and for any of the players in the cryptocurrency ecosystem to participate in that potential upside — regulators and policymakers must be convinced that there are use cases that only blockchain and cryptocurrencies can solve efficiently and effectively. And it requires that they are okay with the speculative nature of crypto — and won’t strangle the life out of blockchain and all cryptocurrency assets just because it’s different.
Must-believe #5: Coinbase has a sustainable business model.
Nearly all of Coinbase’s revenue comes from the fees it charges for traders to trade and store crypto assets on its platform. Some analysts have suggested that Coinbase’s high stock price and market cap are at risk, as new competitors, pureplay crypto exchanges and banks get into the business and drive prices down. That suggests the need for Coinbase to find new and diversified sources of revenue to blunt that risk. Ironically, it was increased competition from Microsoft (and yes, I do know well the story of the landmark antitrust case) as well as its business model that diminished Netscape’s importance over time, and ultimately caused it to fade into the internet history books.
Other analysts point to the upside potential of Coinbase’s global regulatory moat, its importance as a launch point in the cryptocurrency (not just crypto speculative asset world) and a valuation that should peg it less like an exchange and more like an enabling commerce platform.
Provided, of course, that points two through five above can be overcome.
Innovations by the private sector in using faster, smarter blockchain technology to streamline the movement of money from person to person — and to and from any account or digital wallet — has uncovered a number of important use cases for which blockchain and crypto are chipping away at the inefficiencies of once-intractable payments inefficiencies.
The question yet to be answered is how Coinbase will capitalize on that transformation, at scale, in a timeframe that investors — and the “average Joe” consumer — will find relevant.
Points (a) and (c) seem not only plausible, but are developments we see unfolding today. Points (b) and (d) totally depend on cryptocurrencies, as distinguished from dollar-denominated stablecoins or digital fiat, as key for the solutions. That remains a big “if.” And if I had the answer to that, my next column would be all about Netscape 3.0, dictated while driving the open road in my brand-new $3 million Aston Martin Valkyrie.