It may well be the biggest initial public offering in terms of anticipation in this century. Quantifiably, many analysts believe that Coinbase, the ultra-popular cryptocurrency exchange, will command a valuation of $100 billion, making it the biggest IPO since Facebook (NASDAQ:FB). But the social media pioneer never had such a following like this.
It’s not just about the exchange and public wallet service. Coinbase is really the gatekeeper between two parallel dimensions: separating the fantastical (and more importantly, the possible) from the dreary stagnation of reality. What’s more, an increasing number of major institutions have adopted and embraced cryptocurrencies, making it the must-have asset category.
A cursory look at Coinmarketcap.com reveals that the global valuation for all crypto coins is $2.1 trillion. To put this into perspective, this figure is more than the GDP of Brazil, according to data from the World Bank. If cryptos were a nation, it would easily rank among the top 10 economic powers of the world.
But herein lies the problem. Brazil is a massive country that, despite its political troubles and battles with corruption, is an accretive member of the international community. In other words, it actually generates its GDP metric through utilitarian economic activity. The same goes for the other trillion-dollar economies – like Canada – that don’t quite match the valuation of the crypto sector.
That has to weigh heavily on the Coinbase IPO. With such sky-high enthusiasm for all things blockchain, upside sustainability is probably a burgeoning concern. For instance, Coinbase more than doubled revenue in 2020 to $1.14 billion. But a $100 billion valuation would put the company at nearly 88-times last year’s sales.
As awesome as cryptos are, the math doesn’t add up. To grow into the rich premium, Coinbase might have to become the world’s biggest asset exchange. While anything is possible, I would say that it’s improbable.
Government Regulation Is the Achilles’ Heel for Coinbase
Hang around the blogosphere and you’ll find that, contrary to mainstream assumption, the crypto sector is hardly a monolith. Many folks are enthused about Coinbase and its upcoming IPO, believing that it will legitimatize virtual currencies like nothing else has before it. For what it’s worth, I believe this thesis has serious sway.
At the same time, not everyone is eager to participate in the Coinbase IPO. One of the biggest criticisms about the platform is the reason why so many investors love it: the fees that it charges are almost exploitation-level usury, turning off many users. And sure enough, its own IPO is priced to the hilt.
Still, people keep opening accounts to Coinbase because again, it’s the gatekeeper. There’s a difference between being crypto rich and real-world rich. It’s the reason why Mark Hanna of The Wolf of Wall Street fame was so eager to keep his clients on the Ferris wheel. When you make a fantasy sector like cryptocurrencies real, strange things start to happen.
I call this strange thing the IRS. While so many crypto proponents and conspiracy theories are up in arms about government crackdowns on cryptocurrencies, the harsh reality is that the U.S. has already put the screws on its citizenry. You see, you can be crypto rich all you want – and the feds won’t do anything about it.
However, cross the wormhole between the dimensions of crypto land and U.S. jurisdiction and you’re going to have some problems if you don’t play by the rules.
Therefore, one of the biggest problems Coinbase is going to face longer term is the IRS dragnet. The tax agency is not stupid. Its agents will question how a warehouse manager making $50,000 a year is driving a $300,000 Lamborghini.
As the crypto rich become real rich, a good chunk of these folks may not pay their taxes. The onslaught of very public arrests and fraud charges may put a dent on the crypto sector, potentially hurting Coinbase.
Nothing Special to Talk About
And that brings up another criticism of Coinbase – though it’s a convenient platform, there’s nothing special about it. Theoretically, anybody with enough capital can replicate its business model (though maybe not its outright success).
Years ago, Coinbase drew criticism from crypto advocates when the exchange said it will cooperate with government requests for information, particularly in law enforcement cases. It did away with the privacy and anonymity element for which cryptocurrencies are well known.
But eventually, if you want to actualize your crypto war chest, you must pass through the aforementioned wormhole. Whether that wormhole has a Coinbase logo or not is irrelevant. If you want that Lambo, you need to convert cryptos into fiat currencies – and such transactions are very much visible.
That means as an American, you have very little recourse outside of renouncing your citizenship of avoiding the IRS. Coinbase can’t help you in this regard nor can any other exchange. In that sense, these crypto exchanges are fundamentally all the same.
That’s not to say that the Coinbase IPO isn’t a big deal because it is. I just don’t know about it being worth 88X sales.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.