Coinbase is already one of the biggest cryptocurrency exchanges in the world. The exchange's size has also spilled over to mean significant growth for the company, with Coinbase becoming the first native crypto firm to file for an Initial Public Offering (IPO). The process has been pretty much a long time coming, but it hasn't been so smooth.
With the IPO plans in place now, it's worth looking back at how Coinbase got here and the steps taken to ensure this position.
2020: Growth and Industry IPO Rumors
2020 came with a lot of excitement for investors in the crypto space. Bitcoin was named the best-performing financial asset of the past decade in 2019, and the halving also gave enough cause for excitement. It was an exciting time to be in the crypto space, and many in the industry believed that crypto firms could eventually ride the wave towards IPOs.
In July, Reuters reported that Coinbase had been looking into the possibility of an IPO as the company believed it was a perfect time. According to the report, the exchange had fluid plans, although it had begun hiring investment banks and law firms to help with the listing process.
Reuters also reported that Coinbase could pursue a direct listing as opposed to the traditional IPO. Through the direct listing, Coinbase would begin publicly trading without pricing its equity via a bloc sale. The method reduces the chances of a stock being undervalued, and it is much more convenient than a traditional IPO.
Along with Coinbase, other companies with IPO rumors included chip manufacturer Bitmain and blockchain giant Ripple Labs. Speaking at the World Economic Forum, Brad Garlinghouse, Ripple's chief executive, said:
"In the next 12 months, you'll see IPOs in the crypto/blockchain space. We're not going to be the first and we're not going to be the last, but I expect us to be on the leading side… it's a natural evolution for our company."
December 2020: IPO Filing
While the next few months went without any word on the IPO front, they were notable for significant growth in the crypto market. Institutions flooded the crypto market to protect themselves and their reserves from the coronavirus, and the industry grew significantly as a result.
Looking to capitalize, Coinbase struck. In December, the company announced it had filed a Form S-1 with the Securities and Exchange Commission (SEC), cementing its plans to go public. The news immediately captivated the crypto market, showing everyone that it had matured and ready for the big leagues.
In the coming days, reports confirmed that the San Francisco-based exchange had tapped Goldman Sachs to help lead its public offering. The exchange reportedly got a link to Goldman Sachs through Fred Ehrsam, one of the bank's former traders. Ehrsam worked with Goldman between 2010 and 2012, after which he quit to build Coinbase. He left the exchange in 2017, but he maintains a position on its board.
New Year, New Plans
Moving into January 2021, Coinbase's IPO plans continued to gain traction. It helped that the company had grown significantly over the years. Coinbase's last fundraising round saw the company achieve an $8 billion valuation. However, analysts at Messari valued the company at $28 billion.
In a report, Messari highlighted that Coinbase had grown its central exchange while expanding to trading, custody, and payment processing via debit cards. With Coinbase Custody being the most significant value driver, Messari predicted that the exchange would see even more growth if it decided to list.
While many expected a traditional IPO, Coinbase shocked everyone when it confirmed that it would explore a direct stock listing instead.
In a January blog post, the exchange confirmed that it would pursue a direct listing of its Class A common stock, per the SEC's approval. The direct listing format will not offer new shares but will sell existing ones to investors. Via this format, people holding stock in the company can sell without any lockups and easily profit.
Coinbase also pointed out that the direct listing won't need underwriters' services - unlike traditional IPOs. Considering that direct listings help avoid share dilutions, they seem perfect for the mobile and nimble company that Coinbase hopes to continue.
Over the past few months, Coinbase has continued to grow across its different fields. In March, the company listed 114,850,769 shares of Class A common stock on the Nasdaq exchange as part of its preparations for the direct stock listing. Bloomberg also reported that the company had seen its stock trade between $350 and $375 at private auctions. This gave it a pre-IPO valuation of $100 billion.
Despite the progress, Coinbase ran into problems. Earlier this month, the Commodity Futures Trading Commission (CFTC) confirmed that it had fined the exchange $6.5 million after allegations of self-trading. According to the filing, Coinbase had reported Bitcoin trading data inaccurately, while a company employee "self-traded" to falsify volumes and demand numbers for Litecoin.
The CFTC order pointed out that Coinbase operated two automated trading platforms - Replicator and Hedger - between January 2015 and September 2018. However, the exchange failed to report that they had often matched trades. As a result, the exchange's API delivered fraudulent trading data to several entities - including CoinMarketCapo and the CME Bitcoin Real Time Index.
"Reporting false, misleading, or inaccurate transaction information undermines the integrity of digital asset pricing. This enforcement action sends the message that the Commission will act to safeguard the integrity and transparency of such information," the statement read in part.
After reports of the fine, Coinbase reportedly delayed its stock listing until the second half of the year. The company appears focused on avoiding any controversies, and it hopes to ride the wave out for the next few months until activities stabilize once again.