Cryptocurrencies

Coinbase IPO

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Coinbase today filed its S1 document with the SEC signaling its intention to launch an IPO (Initial Public Offering).

Coinbase is a digital/crypto currency exchange, founded in 2012 and recently transitioned to become a fully remote company with no headquarters building. The company brokers the exchange of cryptocurrencies such as Bitcoin and Ethereum for fiat currencies (such as US dollars or Euros).

Actually it is not really an IPO, it’s a direct listing which means employees and early investors can sell stock but the company is not “Offering” any new stock to the “Public”. It will however be listed on the NASDAQ exchange and its stock will be publicly tradeable.

The S1 document provides an insight into the previously unseen operations and finances of the cryptocurrency exchange.

Looking through the S1 reveals that since inception it has generated $3.4b in revenue, largely from transaction fees. Their customers have during this time traded $456b of crypto-assets on the platform which suggests an average transaction fee of 0.75%.

This is a huge margin compared to other financial exchanges which generate an estimated 0.01% of volume in exchange fees. This margin, together with its vast user base (42 million verified users), scope for future growth and general positive sentiment towards crypto assets, has resulted in an estimated initial market capitalization of around $77b.

How does this financial performance stack up against other companies in the space?

Coinbase is the first crypto exchange to announce an IPO so we can only really compare it against traditional financial exchanges. Here I have used some the Excel Price Feed formulas to build a table in Excel to compare Coinbase against 5 of the biggest publicly quoted exchanges:

Comparison of stock exchange financials (including Coinbase).

Looking at this table we can see that Coinbase, based on its projected valuation, will become the most valuable publicly traded financial exchange in the world. It still has a long way to go to reach the huge revenues of ICE (which owns the NYSE), Nasdaq and CME but it has already ahead of Euronext which owns a bunch of European bourses:

Stock exchange revenues

Perhaps more important that its financial data and future prospects is this quote from the S1:

We have applied to list our Class A common stock on the Nasdaq Global Select Market under the symbol “COIN.”

This in itself will probably add a few billion in market cap…

All data and the chart shown is provided by Excel Price Feed Add-in market data formulas (Yahoo Finance data).

Tesla’s Bitcoin Gamble

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Bitcoin

The cryptocurrency and stock worlds collided yesterday with the news that Tesla has bought $1.5bn worth of Bitcoin and will start accepting the cryptocurrency as payments for its vehicles.

Here is the key paragraph from the 10-K statement:

In January 2021, we updated our investment policy to provide us with more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity. As part of the policy, which was duly approved by the Audit Committee of our Board of Directors, we may invest a portion of such cash in certain alternative reserve assets including digital assets, gold bullion, gold exchange-traded funds and other assets as specified in the future. Thereafter, we invested an aggregate $1.50 billion in bitcoin under this policy and may acquire and hold digital assets from time to time or long-term. Moreover, we expect to begin accepting bitcoin as a form of payment for our products in the near future, subject to applicable laws and initially on a limited basis, which we may or may not liquidate upon receipt.

https://www.sec.gov/Archives/edgar/data/1318605/000156459021004599/tsla-10k_20201231.htm

In the corporate finance world this is a very unusual move by Tesla.

Companies usually park any spare cash in low yielding but very safe investments such as government bonds or just keep it on hand as cash in the bank. Tesla, however, with Elon Musk at the helm, is anything but a “usual” company. As I wrote about earlier on this blog, even though Tesla is the most valuable car company in the world its revenues are nowhere near reflecting its huge valuation.

Tesla, though, can certainly afford this investment; its currently sitting on $19bn+ in cash:

But why has Tesla invested in Bitcoin?

Tesla didn’t give a specific reason, other than it provides “more flexibility to further diversify and maximize returns on our cash”. That is all well and good while Bitcoin is increasing in value (currently at $45,000 and up over 50% this year) but how will investors react if Bitcoin heads back down to $10,000 or lower, a level that it was trading at only 5 months ago?

Bitcoin is notoriously volatile; it can move +/-10% in a matter of minutes for no apparent reason. Now we have one of the largest S&P500 companies holding a sizeable Bitcoin position on its balance sheet. I do wonder what Tesla CFO Zachary Kirkhorn makes of all this? A recent Bloomberg report described him as “introducing a more conservative approach to forecasting and provided greater discipline in cost-cutting that has helped Tesla act more like the S&P 500 company it has become.” A $1.5bn Bitcoin investment is quite the opposite of acting like a S&P company!

And I do hope that the Tesla Finance Department has safely stored the details of its $1.5b investment:

Of the existing 18.5 million Bitcoin, around 20 percent — currently worth around $140 billion — appear to be in lost or otherwise stranded wallets, according to the cryptocurrency data firm Chainalysis.

https://www.nytimes.com/2021/01/12/technology/bitcoin-passwords-wallets-fortunes.html

Despite all this investors reacted positively to the news, the stock was up 1.3% whilst Bitcoin surged over 15%. So already the investment is paying off, although no information was provided as to when and at what price the Bitcoin transactions were executed at:

Bitcoin (BTC) price chart

How does this news square with Teslas environmental mission statement?

Well the short answer is that it doesn’t and in fact goes completely against it. Bitcoin consumes annually the electricity output of a small country. Surely if Tesla were serious about tackling environmental issues they would not be investing in Bitcoin? As the price of Bitcoin increases it becomes more economically viable to dedicate more computing resource to Bitcoin mining activities. It is likely that this news from Tesla together with the sharp spike in the Bitcoin price has enabled another warehouse full of machines to start working 24/7 to mine more bitcoin…

All data and the chart shown is provided by Excel Price Feed Add-in market data formulas (Yahoo Finance data).