Direct Listing - Why Coinbase's Approach To Going Public Can Be Tricky

Founded in 2012, Coinbase is a San Francisco-based cryptocurrency exchange platform. The company allows individuals and investors alike to purchase, hold, and trade many of the largest cryptocurrencies available today. I personally recall, in what will probably go down as my biggest investing mistake ever, purchasing my first .47 BTC for ~$250 on the Coinbase app back in 2014, currently worth  ~$25.85k at the time of this writing, only to sell it at a tiny gain less than a month later. Just a cool 100x investment swing and a miss, but hindsight is always 20/20, and one must earn their stripes somehow! 

And on April 14^th, the company went public (Ticker: COIN) by floating its shares through a direct listing on the NASDAQ stock exchange. For many investors, this was an important event in cryptocurrency’s long-standing battle toward mainstream acceptance. And while the event is surely momentous for Coinbase and the Crypto community, this move by Coinbase has turned heads for another reason - the decision to forgo the more traditional IPO process for a direct listing.

Why Is Coinbase Going Public Important?

This is the first time a cryptocurrency-based company has gone public on the stock exchange. It listed on the NASDAQ with a reference price of $250 per share, valuing the company at around $65 billion based on its number of shares outstanding. This was a historic day for cryptocurrency, marking its “official” entrance into mainstream trading platforms. Although cryptocurrency has been around for over a decade, institutional investors have been wary of putting money towards this unregulated asset. 

With Coinbase now a publicly-traded company, investors may be more comfortable with the idea of owning stock in an SEC-reviewed company. Cryptocurrency (like Bitcoin and Ethereum) has been viewed with skepticism and exuberant speculation over the years. Still, this move for Coinbase may be considered another step towards legitimizing and demystifying what many believe to be a new asset class. And with its increased legitimacy, over the last few years, many large institutional investors like Hedge Funds, Pension Funds, Endowments, Insurance companies, and even Corporations have begun investing in Bitcoin. 

A Reminder About Cryptocurrency

It’s important to remember that cryptocurrency is not a currency per se. It’s a speculative, digital asset class that is not necessarily an appropriate investment for everyone. Only people with a high-risk tolerance should consider cryptocurrency assets within their portfolio strategies. 

Like other alternative assets, cryptocurrency can be illiquid at times, and its current values may fluctuate from the purchase price rapidly. Cryptocurrency assets can be significantly affected by a variety of forces, including economic, financial, and business conditions as well as simple supply and demand. For further reference, any companies mentioned are for illustrative purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Any investment should be consistent with your objectives, timeframe, and risk tolerance.

IPO vs. Direct Listing

Coinbase isn’t the first well-known company to do a direct listing, as larger companies including Palantir, Slack, Spotify, and Asana all chose this method as well. But compared to those who choose to do an IPO, the direct listing method is rarely used. Though, and perhaps fueled by the current climate and sentiment towards Wall Street Investment Banks, it appears to be gaining popularity. 

IPO

If a company chooses to do an IPO, there is a well-traveled path to follow. It must file documentation with the SEC and work with an investment bank (or banks), which guides the company through the entire process. The work that goes into an IPO before a company officially goes public can often draw attention to the company, drumming up interest amidst investors before its debut on the NYSE or NASDAQ. Commonly, management teams go on 'Road Shows,' meeting with large institutional investors who are prospective investors in the company. 

Direct Listing

If a company chooses to do a direct listing, the process tends to be more straightforward than an IPO. The company’s shareholders sell stock directly to the public through the exchange, which works with professional traders to set a reference price for the initial offering. With a direct listing, financial institutions aren’t as involved as they are with an IPO - they aren’t acting as the underwriter. This method of going public is typically reserved for larger companies with established businesses with good brand recognition that can weather putting their shares on a public exchange without much of the fanfare typically involved in a traditional IPO.

Direct Listing Considerations

Because of its more streamlined process, doing a direct listing may cost a company fewer fees while allowing them to maintain control over the initial stock price as well as bypass shareholder lock-up provisions. Such lock-ups typically disallow the company's common shareholders prior to the IPO from selling their stock for 6-9 months after going public. But doing a direct listing can be tricky and leave companies open to potential complications.

Volatility

The financial institutions that underwrite an IPO help support the stock price of the company’s shares, at least in the short term. During the initial process, they set the IPO price and drum up interest amongst investors beforehand. With a direct listing, there is no underlying support by an investment bank. The stock may fluctuate significantly during its first few days, creating levels of volatility that make investors wary. For example, COIN stock started trading the day of the listing at around $380/sh, then increasing to about $430/sh, to then close the day at about $330/sh—quite a lot of volatility. 

Misjudging the Market

The hype that banks can create surrounding a traditional IPO can help attract interest and give a company an idea of how many investors are expected to buy shares. With a direct listing, the initial supply and demand are less known. It is at the mercy of the insiders who wish to sell and the outsiders who want to invest. There is no indication ahead of time and no bank advocating institutional investors on your behalf. This can make it harder for a company to predict demand during the first few weeks of trading.

The Bottom Line? By going public, Coinbase has made significant headway for the entire crypto economy, making this event exciting for investors interested in Bitcoin, Etherium, and other major cryptocurrencies, as well as those interested in investing in Coinbase itself. And doing so through a Direct Listing was a testament to the confidence in their business prospects as it is a more uncertain path than the traditional IPO.

So, If you’re curious about your own portfolio, how this development plays into it, and if you should be investing in cryptocurrencies, please do not hesitate to reach out directly. We'd be happy to help break this down further, get to know you and your unique financial standing, risk tolerance, and discuss how appropriate investing in cryptocurrency may be for you in your wealth strategy.