Should you buy Coinbase shares?
Coinbase is set to be one of the most anticipated public listings of 2021, but this is no normal IPO.
With Bitcoin hitting a new record high above US$64,000, it seems the stars are aligning for Coinbase's hugely anticipated public listing.
Coinbase Global Inc is one of the largest cryptocurrency exchanges in the world. Its listing on the NASDAQ is seen as a landmark moment by crypto enthusiasts and a sign of the industry maturing.
But this is no ordinary initial public offering (IPO). Coinbase is sidestepping the traditional IPO route and going public via a direct listing, which is important for potential investors for a number of reasons.
What is a direct listing?
Direct listings are relatively rare, which is why they cause confusion.
In a traditional IPO, an investment bank (called an underwriter) manages the listing process, from the marketing side of things to the sale of shares.
They determine the number of shares that should be issued to the public and at what price. Because they'll buy up a certain number of shares, they can help to level out supply and demand of stock on the day.
In a direct listing, no new shares are issued for the IPO and there is no underwriter involved. Instead, existing private shareholders of Coinbase will sell their stock directly to the market. This means that the company can skip the hefty fees involved in hiring an investment bank.
However because there is no set number of shares being issues, no target market cap and no IPO price, it leaves a lot of uncertainty for potential investors.
With no investment bank managing the sale of stock, it could also result in much greater volatility than is normal.
What price will Coinbase trade at?
Although there's no official IPO price, NASDAQ announced a "reference price" of $250 per share for COIN stock and a US$49 billion valuation on Tuesday.
That's lower than the average price traded in the futures market in the first quarter of the year, which was $350.
The actual price will be decided by the volume of buy and sell orders made by investors on the day.
Valuations have also ranged from around $90 billion to $100 billion in the lead up to the listing.
Is Coinbase a buy on the day?
Coinbase is getting a lot of people excited, however there are some obvious risks to buying shares on the day of the IPO.
Firstly, stocks tend to be extra volatile the day they list because of the hype surrounding the event. Even if you set a "limit order" when buying shares, there's no certainty your order will go through.
CMC Markets market analyst Michael McCarthy also believes the company's valuation is deceiving. He says there's a lot weighing on the expected revenue of $730-$800 million the company made in the first quarter of this year.
"That's more than double what they made last year. Some people will say that's spectacular growth. But let's remember that Bitcoin has gone from below $20k to $60k," he told Finder.
"And it's clear that a lot of their revenue is tied to the value of cryptocurrencies themselves."
Coinbase makes money from the exchange fees it charges on coin transactions. So if a cryptocurrency is trading at a higher price, the money it makes from these transactions also goes up.
"I think it's clever by Coinbase to bring it to market now... but this is setting off alarm bells for me."
Coinbase currently boasts around 45 million users and $90 billion of assets on the platform.
"What really worries me is I'm seeing a lot of commentators say that this is a safer way to get exposure to cryptocurrencies. No it's not. It's leveraged exposure to the most volatile market in the world."
Like many risky investments, McCarthy said there is also potential for big profit.
"Given the huge volatility, there could be huge rewards in buying stock. As long as people understand that they're taking not just high risk, but extreme risk."
Looking for a low-cost online broker to invest in the stock market? Compare share trading platforms to start investing in stocks and ETFs.
Should you buy Coinbase shares?Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.