Coinbase debut is a ‘watershed’ for crypto — but there are risks ahead

Coinbase will go public on Wednesday via a blockbuster direct listing, and investors are hailing this as a “turning point” for the cryptocurrency industry.

Digital currency exchange could be worth up to $ 100 billion, making it more valuable than major trading venues like the New York Stock Exchange’s parent company Intercontinental Exchange and Nasdaq.

This is because the prices of Bitcoin and other virtual currencies soared over the past year as investors wanted to diversify their portfolios in the belief that inflation was imminent. Bitcoin hit a new record high of more than $ 64,000 on Wednesday and has more than doubled its value since the start of the year.

Coinbase’s public market debut is “potentially a turning point for the crypto industry and will be something the road will focus on to gauge investor appetites,” said Dan Ives, tech analyst at Wedbush Securities.

“It will legitimize a lot of what these companies are doing,” said Marcus Swanepoel, CEO of the London-based crypto platform Luno, of the Coinbase debut. “On the one hand, it will show how big the industry is and how fast it is growing.”

Coinbase is the largest cryptocurrency company to date to go public. According to CoinMarketCap, it is the second largest exchange for digital assets in the world in terms of trading volume. With its easy-to-use app, crypto was brought into the mainstream.

However, there are a number of risks ahead of us. Cryptocurrencies are notorious for their extremely volatile price movements, and skeptics believe it may be a massive market bubble that will eventually burst. Meanwhile, global regulators are increasingly trying to get crypto under their control, and the Indian government is even trying to ban digital currencies.

volatility

Coinbase estimates revenue of $ 1.8 billion in the first quarter of 2021, a whopping 844% increase from $ 190.6 million in the same period last year. This was mainly due to the enormous price jumps in digital coins such as Bitcoin and ether.

Given that Coinbase’s business is heavily reliant on the performance of major cryptocurrencies, there is a risk that momentum will swing in the other direction if the market declines significantly.

“Crypto companies need to figure out how to ultimately diversify their revenue streams,” said Hunter Merghart, a former Coinbase manager who is now the US head for Luxembourg-based cryptocurrency exchange Bitstamp.

“I think we’re still in the investment phase right now and the entire crypto pie will continue to grow.”

Bitcoin notoriously soared to nearly $ 20,000 in late 2017 before crashing to nearly $ 3,000 the following year. This price volatility has been a major criticism of Bitcoin’s critics, who say it fails important tests for currencies, such as as a medium of exchange or a store of value.

However, crypto investors believe that such a sharp drop in prices – known in the industry as the “crypto winter” – is unlikely in the near future. They see Bitcoin as a type of “digital gold” that does not correlate with other assets and can serve as a hedge against rising inflation.

“Bitcoin prices have risen sharply in the past 10 years,” said Swanepoel. “When it comes down, it sets a new baseline and growth continues on that new baseline.”

“I actually think the baseline will be significantly higher this cycle,” he added. “If you look at the commodity markets, they have normal cycles and then ‘super cycles’. I suspect this is a super cycle for crypto. It can accelerate much longer now.”

regulation

Earlier this year, US Treasury Secretary Janet Yellen warned in her confirmation hearing that Bitcoin and other cryptocurrencies are primarily used for illegal activities and that the government may need to “restrict” their use.

Coinbase says it is regulated and has partnerships with a number of banks. However, it warned in its prospectus that negative changes in regulations could “adversely affect” the financial situation.

Before former President Donald Trump’s tenure ended, the Treasury Department proposed a rule requiring financial service providers to record the identities of cryptocurrency holders. This has proven controversial for many crypto companies.

“The regulatory risk is high because crypto platforms are currently not subject to the same rules as conventional exchanges or trading platforms,” ​​said Stéphane Renevier, analyst at Finimize, the platform for financial education.

“Some of Coinbase’s activities (like some of its world-class brokerage services and using its own capital to trade) may be subject to stricter oversight in the future,” he added. “Given the extremely rapid evolution of the regulatory landscape, the company is always at risk of a status change that could affect some of its most profitable activities.”

Jesse Powell, CEO of Coinbase rival Kraken, told CNBC that he believed that cryptocurrencies “could be cracked down”.

“Cryptos Tech Giant”

Garry Tan, founder of venture capital firm Initialized and an early investor in Coinbase, said the cryptocurrency market is still in its infancy.

“We’re not there yet,” he told CNBC. “We’re just getting started, but it’s not that crazy anymore.”

But Tan and other Coinbase cops say the company has created a competitive “moat” around its business that should allow it to thrive as new regulations come in.

“Coinbase is like the tech giant at Crypto,” added Tan. “Coinbases (debut), which exists as one of the most important tech companies in Silicon Valley, is very powerful because it means that just like the PC revolution needed Apple and Microsoft, the crypto revolution needed Coinbase.”

Crypto industry insiders say Coinbase is only part of the story. There are other emerging trends in the market, such as digital collectibles and what is known as decentralized finance, which aim to restore traditional financial products without the need for middlemen like banks. Additionally, Coinbase could face increased competition from rivals like Binance and Kraken, the latter of which is weighing its own stock listing for the next year.

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