Coinbase is a US-based cryptocurrency secure exchange that makes it easy to buy, sell, and store cryptocurrency like Bitcoin, Ethereum, etc. It offers products for both institutional clients and retail clients.The platform provides trading and storage services for 58 cryptocurrencies. Coinbase Prime is a platform dedicated to institutional clients. It also offers a debit Visa which enables clients to spend cryptocurrencies anywhere Visa is accepted.

Coinbase is going for a direct listing on Nasdaq under the ticker ‘COIN’. A direct listing is an alternative to an IPO, and it provides investors and employees the liquidity to their ownership stakes on the listing. This may not be beneficial for the company as no new capital is raised or shares are being issued. However,Coinbase will save millions of dollars in costs usually incurred in IPO.

 Snapshot

• Founded: 2012
• Notable Investors: Andreessen Horowitz,Paradigm,Ribbit Capital,Tiger Global, and Union Square Venture
• HQ: San Francisco CA, United States
• Total Funding: $847 Mn
• CEO/ Management experience: Brian Armstrong is the co-founder and the Chief Executive Officer. Brian previously founded UniversityTutor.com. Fred is also co-founder and serves as managing partner at Paradigm (Crypto Fund).

Business Model

Coinbase makes money by charging fees for its brokerage and exchange services. In addition to the brokerage fees, Coinbase also charges variable spreads on purchases and trades. There is also a “Coinbase Fee” in addition to the spread and the cost of depositing money mentioned below in the chart. This fee is dependent on the value of the purchase, payment type (debit/credit), and region you are purchasing from. Customers can upgrade to Coinbase Pro for free after they have sufficient knowledge and experience.For advanced clients, Pro services offer research charts and more complex trading options.Company Highlights

Payment Method	Coinbase Fee
Bank Account	1.49%
Coinbase USD Wallet	1.49%
Debit/Credit Card	3.99%
ACH Transfer	Free
Wire Transfer	$10 ($25 Outgoing)
Crypto Conversion	2.00%

 Fee Structure at Coinbase

Competitive Advantage

Coinbase’s strategy has been to secure virgin markets by focusing on rapid customer volume growth, being the first to implement no fee forthe first $1 Mn of cashouts. This has been a great strategy leading to rapid customer growth.It also developed a pricing model that takes advantage of bitcoin price volatility by monetizing cashouts, which protect bitcoin users against volatility.

Over the years hacking has been one of the major risksleading to bankruptcyto many exchanges. Coinbase boasts an industry-leading security system to protect crypto assets and user data to avoid such ill fate. There has been no reported case of hacking for the company to date.

Market Sentiments

Coinbase is poised to list at a multiple of over 50x revenues.The market is bullish on Coinbase and the future of crypto assets. Crypto Assets have traditionally been highly volatile and have had multiple boom and busts in just one decade. Post the pandemic, the acceptance of crypto-asset has led to prices and trading volume rise exponentially with more acceptance by institutional investors, Coinbase on its part has also planned its listing when the market sentiment is at an all-time high with bitcoin touching a record ATH$60,000 and investors being super bullish on cryptocurrencies. The market is expecting the listing of Coinbase at a very high valuation of around $70Bn – $100 Bn.

Key Risks

• In the past, there have been many security breaches and loss of crypto assets held by users ex: Mt. Gox. Such a catastrophe could adversely impact Coinbase’s brand and financial condition.
• Cryptocurrency is highly regulatory and evolving and with many counties banning cryptocurrencies, any adverse regulation can be detrimental to the running of Coinbase.
• The crypto market is highly innovative, the competition will further intensify in the future as existing and new competitors introduce new products or enhance existing products leading to lower revenues for Coinbase. Exchanges such as Binance, Kraken, Bybit, Bitmex, and Bitflyer have much larger trading volumes than Coinbase and differentiated products such as derivatives and crypto financing.

Financial Highlights

• Total Revenue (2012-2020): $3.4 Bn
• Revenue break-up: 96% – Transaction volume-based fee, 4% – Subscription products and services
• Subscription and Services growing 126% YOY and more stable than the transaction-based fee.

Other Information

Coinbase has two classes of common stock, Class A common stock and Class B common stock. Each share of Class A common stock is entitled to one vote. Each share of Class B common stock is entitled to twenty votes and is convertible at any time into one share of Class A common stock. In the Listing, only the Class A of 114.9 Mn common stock is available.

• Supports 90 crypto assets
• Monthly Active Users: 2.8 Mn
• Lifetime Trading Volume: $456 Bn
• Total Assets on Platform: $90 Bn
• Retail Users: 43 Mn, Institutional Investors – 7000

Market Opportunity

The Growth of Crypto Assets has grown at a CAGR of 195% over the last decade,the size of the market has hit $2 Tn in April 2021 and is poised to continue growing at an accelerated rate with increasing institutional and retail participation. Coinbase today has around 12% of the total crypto assets in its users’ wallets and will look to increase its market share.

Market Competitors

The Top 10 Crypto Exchanges have only ~25% Market Share, Overtime, Coinbase, and other big crypto exchanges will be leading market share gains at the expense of smaller players.

Valuation

The Valuation of Coinbase is in line with other fast-growing exchanges such as Robinhood at 56x revenue multiples. Being the first crypto exchange to be listed, there are no direct competitors to compare Coinbase with.Hence, we are using Robinhood which is a private startup and fast-growing with innovative products and services and has recently started providing a crypto exchange on its platform.

 

Being listed directly, there is a possibility of scarcity premium due to limited supply of Coinbase shares leading to higher valuations.

	Valuation ($Bn)	Net Revenue ($Bn)	EV/Revenue
Robinhood 2020	40.0	0.7	58.8x
Robinhood 2021	80.0	1.4	57.1x
Coinbase 2020	68.0	1.2	56.7x
Coinbase 2021	100.0	1.2	77.0x

In the S-1 filing, Coinbase reported that the average share trading price was $343.58 in the private market in the Q1 of 2021 which is valued at $68 Bn. However, in the secondaries, the shares of Coinbase were trading at a valuation as high as $100 Bn, this would bring the multiple to around 77x multiples. Assuming an estimated 266.2 Mn outstanding shares, the shares are expected to trade in the range of $360 – $370. For now, 114.9 Mn shares have been registered to trade on the exchange.

Investing in Coinbase! Should you be cautious?

With investor sentiments at an all-time high, Investors looking for a quick buck can buy the shares during the direct listing and continue holding Coinbase as long as the crypto momentum continues. Long-term Investors however should understand that Coinbase fortunes are directly linked to the value of crypto assets. Expect the stock to be volatile and with some periods of under performance when crypto assets are in the bust phase. We recommend the investors to be optimistic about the long-term prospects of Coinbase but understand that there would be periods of under performance from time to time.

An NFT is an on-chain token of an off-chain asset. At the most bare-bones, it is a social contract between the asset creator and the surrounding community.

So, what makes it different from a crypto currency and what is this fuss about non fungibility. An NFT is a digital token that’s like a cryptocurrency but can’t be exchanged for another NFT. This is what makes it non fungible. A bitcoin for a bitcoin, but not one NFT for another. Each NFT is different and unique.

This token is added to a blockchain that supports this special ‘NFT type’ token (such as Ethereum) recording the details of ownership of some commodity, somewhat like how a house deed records the ownership of a house.

The only catch is the commodity, the off-chain asset, must be ownable and somewhat nonfungible. So, you can’t have an NFT on currencies or gold (non-fungibility), nor on Mars or Niagara Falls or the Mona Lisa (unless you own the Mona Lisa of course, then you can do whatever you want, also its highly likely won’t be reading this anyway).

Examples of NFTs Trades: 

• Digital Art: The $590,000 selling of the famous Nyan Cat Gif, for example, could have only happened because of the meme’s enormous success over the years. 
• Sports Collectibles: Similarly, the NBA’s highest-selling NFT was a highlight reel of LeBron James, which sold for $200,000. Less well-known players, on the other hand, had reels that sold for as little as $9.
• Tweets: In March, Jack Dorsey’s original tweet sold for $2.5 Million, paving the way for more similar deals.

Why all this chatter on NFT then?

Because NFT allows storing more data per block. Bitcoin blocks allow only 1MB of data for example, just enough to record a bunch of transactions and some other details. 

This single feature elevates the NFT from more than just a ledger that records transactions (essentially what a cryptocurrency is) to record/store the ownership of pretty much anything such as jpeg files, music files, videos, internet domains, real estate, vintage cars, in-game purchases, art pieces, ad spaces, unlisted shares, horses, just anything.

So just to make things clear, if you are an artist, this is an easy way to monetize your work securely. NFTs also allow a share to the artist each time the NFT changes hands.

As a buyer, which you most likely are, you can buy NFTs of an autograph or highlight reels of an upcoming sports star that you think may strike it big. If in case that happens, it is likely the value of the NFT would have climbed manifolds.

Role of the community in guaranteeing NFTs

Unlike the fiat currencies that are legally backed by central banks, gold, governments and who knows what, a particular NFT only falls back on its scarcity to back it up (the other two tenets of an NFT are its utility and authenticity, both of which are not as effective as an NFTs scarcity is). The ploy of scarcity is a delicate one. The artist or NFT holder may not be able to enforce his ownership, may not get any special rights to own it, may very simply be fooled into buying that NFT or the creator may break its promise. It is the community however that enforces scarcity and hence values it. The creator of the NFT has no say in it.

The value of the NFT comes not from the NFT or the art or the off chain assets that it brings on the chain, it is the NFT and on chain assets’ community and its interactions that hold and/or derive value. It is not the NFT, but the community that is holding value. Most NFTs are worthless, but a few NFTs are focal points of creators and admirers both. Call it a digital bandstand or an art gallery if you wish. 

NFT “An Opportunistic Future”

• NFT can be a new revenue stream for gaming, sports, art and technology.
• Like Decentraland, NFTs can transform our attitudes toward ownership and make it possible to own a real-world asset that’s thousands of miles away.
• Many crypto unknowns could introduce cryptocurrencies for the very first time through NFTs.

Risk associated with NFT

• It may end up like the initial ICO (initial coin offering) craze as people’s attention shifted to other technology and the space cooled down.
• What may seem like a hot commodity today may not be as so in the future as seen in the case of Jack Dorsey’s tweet.  
• Complaints of several pieces of art being stolen and purchased as NFTs leaving the original art creators with no proof of their work.
• NFT owners must also trust that the maker will not produce another batch of tokens with nearly identical artwork, devaluing the NFT they paid for.

Why the craze of NFT holds despite the associated risk? 

NFTs can be called collectibles. People buy paintings or any other kind of physical art for the same purpose. Utility, authenticity, and scarcity are typically the driving factors behind their demand. 

The obvious one is utility. People are willing to pay for an NFT ticket because it helps them to attend a meeting. Alternatively, they are more likely to purchase art if they can view it in a virtual environment. They’re also willing to spend money on an object that gives them unique abilities in a game. The definition of authenticity explains how an NFT works. What was the source of it? Who has owned it previously? Finally, Leonardo Da Vinci’s famous painting “The Mona Lisa” better describes scarcity. There may exist millions of copies, yet there’s only one original Mona Lisa.

The big player of the NFT market

OpenSea is the first and largest marketplace for user-owned digital goods, which include collectibles, gaming items, domain names, digital art, and other assets backed by a blockchain-based in New York. The number of unique participants after the bubble of 2018 has grown steadily from 8,500 accounts in February of 2018 to over 20,000 accounts in December of 2019. The market is driven by a core group of power users. On OpenSea, the median seller has sold $71.9 worth of stuff, whereas the average seller has sold $1,178 worth of stuff, indicating a large number of power sellers.

Market sentiments and perception

The market for non-fungible tokens is quite small (yet). It is also harder to measure than cryptocurrencies due to the lack of spot prices. Focussing only on secondary trading volume (peer-to-peer sales of NFT, not the creation of NFTs) as an indicator of market size the current secondary market is expected to be roughly $2 – $3 Million USD in volume per month on average.

The total trading volume of non-fungible token (NFT) artwork hit an all-time high of $8.2 Million in December 2020 compared to $2.6 Million in November 2020.

It might sound like a gold rush right now, but the main question is how long will value be produced in all of these new forms if the supply is unlimited? And what would be the most prudent position to take?  A good way to get a piece of the action, yet to stay unharmed is to service the bubble, not to take part in it. Case in point: do now what Levi’s or Wells Fargo did then. NFTs will tokenize everything. It won’t be long before off chain assets get on the blockchains. All valuable assets will then be stored on a decentralised digital ledger, with the NFT being a token of digital representation of an object or person on the chain.

“SPAC popularity has quadrupled in the past year or two and is bringing a new wave in the investment sector, especially the celebrity engagement in the world SPAC worked as the icing on the cake. This uncertain bubble is growing huge, as the bubble of uncertainty.“

Overview

SPAC named as Special Purpose Acquisition Companies was developed to avoid the old lengthy and costly way of moving with a traditional IPO process. But now it is getting misused to bring up incompetent companies to go public which does not have the necessary requirements to become public under any circumstances. The goal is to bring in capital and deposit into an interest-bearing trust account, the SPAC aims to buy an established privately owned corporation through a “business combination.” After a SPAC raises funds, it usually has two years to make an investment, with the possibility of an extension if enough SPAC stockholders vote to do so. If the SPAC is unable to reach an agreement within that time frame, it is required to refund the money to its investors, and the SPAC’s sponsor forfeits any initial investment. The investors have no clue about the company getting acquired.

Now Let us take a moment back and think, will you ever give a blank check to someone without knowing where is it getting spent. How many of us will do that? hopefully none. This is exactly what is done in SPAC and that is why it is called blank check companies. The investors pay without knowing and analysing as there is almost no way to perform a distinctive calculation to understand about the acquisition as there is no prior announcement of acquisition.

Risk from an Investor’s Perspective

Under securities law, only past financial statements can be disclosed in standard IPOs. SPACs, on the other hand, will use forward-looking forecasts to market the business mix. For fast-growing but not yet profitable businesses, being able to present forecasts will help them tell their story to investors. If you are an investor, then you know what happens when a bubble bursts.

Let us take a basic example and understand, if you could buy SPAC shares for $10 and then get approximately $10 back, what you’ve lost is the chance to put the money to better use elsewhere. If you as an investor, on the other hand, do not participate in the SPAC IPO. Instead, if you purchase stock on the open market, let’s take SPAC shares have been trading 50 percent to 75 percent above their IPO prices in recent months, even before they name an acquisition target. You won’t get your $15 back in liquidation if you buy a SPAC for $15 per share and it never makes a deal. You’ll get $10, which is a 33% loss. Akazoo, an AI music streaming company that was expected to merge with Modern Media Acquisition Corp in 2019, may be the most unfortunate of the failed SPACs. Instead, it was revealed that Akazoo’s previous management had falsified the books and records to a significant degree, effectively nullifying their claimed 5.5 million subscribers.

This is not new in case of SPACs. Despite this let us go through the celebrity industry involvement in SPAC making it even more popular sports figures Alex Rodriguez and Shaquille O’Neal, former house speaker Paul Ryan and the list is goes on. The count moves to 474 SPACs raising $156 Bn. After investing your hard earned wealth what you get is Ambiguous valuations, questionable disclosures and a misalignment of interests. SPAC is making the people minting SPACs rich and giving a hope to the investors to get rich later without a basis but a promise of gamble. It is often seen that the SPAC sponsor tends to wash off their hands by selling off their part of shares, as an investor what do you think is the confidence level that is getting reflected where the SPAC Sponsor sells off his part leaving other is dismay. The actual purpose of SPAC is getting diluted and is becoming a tool to just skipping the IPO process and going public with litigation risk is present as recent cases have demonstrated.

See, for example, Bogart v Israel Aerospace Indus., Ltd. (standing of SPAC sponsor to bring a claim for breach of duty to act in good faith); Rufford v. Transtech Serv. Partners, Inc. (challenge to fees being paid to SPAC sponsor); Welch v. Meaux (alleged securities fraud in connection with SPAC business combination); and Olivera v. Quartet Merger.Corp. (SPAC shareholder suing SPAC for failure to honour his redemption right). CEC Entertainment (owner of Chuck E. Cheese and Peter Piper Pizza) and Leo Holdings declined to combine in 2019. CEC executives gave no specific reason for the termination, but they did lose out on a $1.4 billion contract. Since then, the company has applied for Chapter 11 bankruptcy protection.

Performance of SPACs : The Numbers Game

Now let’s bring in numbers which is the ultimate factor for investors from August 2020, the 56 SPACs studied outperformed the S&P 500 by an average of 11 percentage points in the first three months following an acquisition, but lagged the broader market in the 12 months following the transaction. According to a separate study, SPACs under consideration that went public since 2015 have lost an average of 18.5 percent, with median returns of -36.1% compared to a 37.2 percent increase for typical IPOs. Table below consists of the recent SPAC (with definitive agreement) performance.

Name	Commons Price	% Change wrt 08/03/2021	Unit Price	Warrant Price
Colonnade Acquisition Corp.	$10.47	-12.97%	$13.45	$2.54
Alussa Energy Acquisition Corp	$10.49	-4.03%	$12.09	$2.22
Aspirational Consumer Lifestyle Corp.	$10.30	-4.01%	$10.95	$1.70
FTAC Olympus Acquisition	$10.47	-3.24%	$11.17	$2.27
10X Capital Venture Acquisition Corp	$10.33	-2.55%	$11.23	$1.57
Thunder Bridge Acquisition II	$10.36	-2.36%	$11.98	$1.99
NavSight Holdings, Inc.	$10.43	-2.16%	$11.05	$1.64
Vesper Healthcare Acquisition Corp.	$10.25	-2.01%	$10.80	$2.15
NextGen Acquisition Corporation	$10.31	-1.62%	$11.03	$2.12
Starboard Value Acquisition Corp.	$10.05	-1.57%	$10.26	$1.71
TPG Pace Tech Opportunities Corp.	$10.26	-1.25%	$10.71	$1.36
Fusion Acquisition	$10.37	-1.24%	$11.30	$1.56
Altimar Acquisition Corp	$9.95	-1.09%	$10.42	$1.57
Fortress Value Acquisition Corp. II	$10.07	-0.98%	$10.38	$1.40
Forum Merger III Corporation	$10.20	-0.97%	$10.88	$2.05

 

It is not surprising as a bubble when it grows beyond a limit it will burst. It might sound like a normal fact when I say Dozens of SPACs are trading below $10 at which the shares were sold assuming they are yet to announce their deals, but surprisingly many SPACs started trading at large premium to their cash holding, like Churchill Capital Corp.IV traded at $64 even before its deal with Lucid Motors Inc, which is a highly unlikely behaviour but it shares has fallen by 60% since then.  To continue the discussion let us look into the former financial disappointments by SPACs, one of the prominent example that comes to the mind is the case of Nikola Corp. so called rival of Tesla, which was targeted by Hindenburg announced that it would produce fewer than 20% of the electric trucks it has planned.

Based on our analysis all the forecasts made was turned into scraps, a complete financial disappointment. If that was not enough let’s see the case of Quantumscape Corp. and Hyliion Holdings Corp., former SPACs, have already lost 2/3rd of their value after attaining peak last year. The performance of SPAC post-merger is often disappointing.

Investors Beware

Let us see the upcoming facts in the world of SPAC, there were nearly 250 special purpose acquisition companies, or SPACS, that raised more than $83 billion in 2020, with an average size of $334 million. So far this year, 75 people have been counting. Walmart Inc.’s Flipkart is reportedly exploring going public in the U.S. through a merger with a SPAC as it aims to fasten the listing process, also E-commerce players like Grofers also are exploring ways to go public through SPAC. Now see the example and look from a investors prespective, it has a revenue of around 34 million USD, showing a increase of 54% in income but also has a 74.4% year on year increase in loss. Its revenue is no way even near to 100 million but is going public with presenting a forecast of growth in future. Would you Invest in it?.

It is an obvious fact that it can no way follow the traditional IPO method so coming in through the SPAC. Don’t you think SPAC is increasingly becoming a loophole rather than an effective tool of reducing the tedious process of traditional IPO. It should be conclusive of the fact that investors shall be beware and should examine and analyse whenever it comes to the point of investing in a SPAC before thinking it to be a highly profitable investment in near future, otherwise you may end up losing money. Fate of a bubble on growing beyond the threshold is inevitable.