Would FX Brokerage Be Able To Replicate Coinbase’s IPO Success?

By Richard Perona, Vice President of Institutional Sales at Advanced Markets

Coinbase Background

Coinbase Global, Inc., known as Coinbase, is an American company that offers a cryptocurrency exchange platform and operates remotely – the first company of its kind without an official, physical headquarters. The company was founded in 2012 by Brian Armstrong and Fred Ehrsam from a $150K start up incubator. 

As of March 2021, Coinbase was the largest cryptocurrency exchange in the United States by trading volume and has almost 43 million verified users. (almost 4 times that of Robinhood).

Going public

On April 14th, 2021, Coinbase went public on the Nasdaq exchange via a direct stock listing. In a direct listing, a company floats its shares on a stock exchange, but without hiring banks to underwrite the transaction as in the case of an IPO. There are no hired investment banks to sell shares to their institutional investors.

Coinbase’s (ticker: COIN) stock opened at $381, valuing Coinbase at nearly $86 billion, peaked at $429.54 and then dropped. Shares closed at $328.28, up $78.28 from Coinbase’s $250 reference price. Nasdaq issued the $250 reference price on Tuesday, April 13th 2021. 

COIN remained above $300 as of April 28th.

Financials

As part of its SEC filing to go public, the company reported 43 million verified users, 7,000 institutions and 115,000 ecosystem partners in over 100 countries. It also reported net revenue of $1.14 billion in 2020, up from $483 million the previous year. The company also reported a net income of $322 million for the year after posting a loss in 2019. Out of the $782 billion worth of assets on the crypto market, some $90 billion worth is held on the Coinbase platform.

Coinbase, whose users primarily deal in bitcoin and ethereum, reported last week that its revenue soared 847% in the first quarter to $1.8 billion and that it now has 56 million verified users.

Coinbase effect

In April 2021, Fortune wrote about the “Coinbase Effect,” which is a new phenomenon in the world of cryptocurrency. The idea is that the price of cryptocurrencies, scheduled to be listed for sale on a dominant crypto exchange such as Coinbase, begin to rise in the days after the listing news becomes public. According to Barron’s, the effect of getting a cryptocurrency listed on the exchange plays a big role in determining which cryptocurrencies gain acceptance and which ones are left behind.

Coinbase Valuation

Some Pro Crypto Analysts described the Coinbase listing as seminal, saying, Coinbase’s direct listing is a watershed moment for the crypto industry.”

Others said the listing is a reflection of cryptocurrencies’ having arrived at the mainstream. “Coinbase is a foundational piece of the crypto ecosystem and is a barometer for the growing mainstream adoption of bitcoin and crypto for the coming years in our opinion,” 

Some analysts have cautioned that the implied valuation for Coinbase as a crypto exchange has gotten too lofty, especially when compared to traditional stock exchanges such as Nasdaq Inc. NDAQ, where Coinbase will directly list, and Intercontinental Exchange ICE, the parent company of the New York Stock Exchange.

“So the implication is that Coinbase’s revenues are correlated with the level of activity in the cryptocurrency and especially bitcoin and ether.”

Lisa Ellis, an analyst from Moffett Nathanson, said investors need to have a long-term investment strategy with at least a one-year horizon in bitcoin, which could still go to zero by some bearish accounts, but a three-year outlook is better because the crypto complex has tended to operate in three-year cycles of boom and then bust.

Others suggest that it may prove a new top for the market and put crypto prices under pressure after a precipitous rally in recent days and a fresh record for bitcoin.

FX Brokerage Valuation

Based on our research on merger/acquisition deals of FX brokerages, there has been an average of $3.6 million median capital invested per year and a total of $6.3 billion dollars invested in the past 12 years. One of the brokerages acquired in 2010 reported revenue of $39.08 million while posting an EBIT loss of $23 million. (Download the see the brokerage’s name). The deal was valued at 1.41 times the revenue and valuation/EBIT comes out to -2.34. The valuation of an FX Brokerage takes into account a mix of tangible assets, intangible assets and goodwill. Tangible assets assume the highest weighting, including the financial license, clients and IBs, software license and others. Intangible assets are human talents, reputations and leads lists. 

In order to assist those looking to buy or sell a brokerage business, we have summarized the valuations of all the merger and acquisitions of FX brokerages that have happened over the past 12 years. 

Should you want to have your business valued by an experienced FX industry M&A consultant or if you require further information on current market valuations, please contact Advanced Markets