Coinbase success – but what does it mean?

Blain’s Morning Porridge – 15 April 2021: Coinbase success – but what does it mean?

“Every time you question the basis of Bitcoin a tiny little fairy dies…” 

This morning: Coinbase’s direct listing was a muted success. It looks likely to trade in line with volatile bitcoin and other cryptos. On the back of the claims of increased “adoption” of Crypto by the Street, the exchange has first mover status meeting the need for the facilitation of safe crypto investment while expanding services for holders – but what does it fundamentally mean about the long-term future of the “crypto-ecosystem”?

Interesting moment yesterday. Traditional investment banks took a lift on superb numbers from the US names. In contrast, Coinbase, the hot new stock for the digital age tumbled after its much anticipated IPO priced. Yet – and I never ever thought I would write this – it feels like cyber/cryptocurrencies are here to stay. You can’t simply uninvent them.

That doesn’t mean I suddenly agree cryptos make much financial sense. When I come across something Bitcoin does better than Fiat money that doesn’t involve breaking the law, I will be sure to let you know.

Listening to crypto-fanatics grandiloquently explaining the growing importance of the “crypto-ecosytem”, or the ways in which crypto-applications will solve modern finance and investment – it feels to me like someone invented something terribly clever and all they need now is a problem for it to addresss. But too often BC proponents are simply snake oil salesmen. The crypto sector seems to attract more wideboys than an Essex nightclub.

The reason I mention all this is Coinbase’s direct listing yesterday. It is the ultimate “Zeitgeist Stock” – seizing the moment and the mood. There is absolutely nothing wrong with the concept. Coinbase is built around a clear need, the facilitation of one of the biggest investment themes of this curious modern age: the belief in and demand for cryptocurrencies.

However, the COIN deal was less than the blowout success many expected. It opened at $385, rose on an initial surge to $430, before sliding through the day to close at $328. Bitcoin and other crypto’s also fell – confirming Bitcoin is very much part of the pretty-much still self-contained Crypto-ecosystem.

The question for investors is: just how relevant is that digital-coin ecosystem for the real investment world? Is Crypto destined to be more than a niche, or will regulation and government backed digital currencies push them into the appendices of market history?

Don’t get me wrong – Coinbase has every right to bask in success and congratulations for meeting a clear need. If the public believe crypto-coins are our future, then Coinbase enables them to invest in that belief. It’s no different to gambling companies that allow punters to bet, or investment managers offering pension plans.

The positive case for Coinbase:

My colleague at Shard Capital, Benni Osei is a bright, engaging and clever investment manager. He is a Coinbase fan because he sees the opportunities to play the “cyber-economy” it presents. He’s much younger than I – and is not befuddled by the advancing financial dementia that clouds my attitude to crypto. He is blessed by an ability to see past the doubts, look to potential futures, and game markets as they happen. If you want to speak to Benni about crypto – it’s worth it.

What’s not to like about Coinbase? If it continues to grow revenues as per last year, it could hit a bull market case of $390 bln valuation by 2026 – predicts Benni. His base case is around $200 bln in 5-years time.

What Benni likes about Coinbase is it’s a one-stop crypto hyper-service: solving the uncertainty that swirls around digital currencies; providing a secure wallet enabling the safe storage of digital assets. It is building a host of services including Store, Stake, Borrow & Lend: effectively investment and banking services for crypto holders. Its far, far more than just an exchange to buy and sell.

Coinbase is among the largest cryptocurrency exchanges on the planet – 11% of digital currency assets are on the site. More to the point for market purposes – its reassuringly profitable. Its growing on the back of rally in crypto-assets that resumed in 2020. Trading volume soared from €80 bln in 2019 to €193 bln in 2020. It now has $223 bln of assets on the platform – up from $90 bln in 2019. It reaped $3.4 bln in 2020 revenue, mostly from fees. More and more punters investors are being attracted into the cryptomarket – and Coinbase stands to garner much of the associated revenues.

The growth in the range of services means it’s not only attracting retail, but also institutional investors, who are now empowered to do all kinds of clever things in the largely unregulated digital currency multiverse.  (Crashing menacing minor chords as lighting crashes across the background as the implications of crypto-derivatives sink in.) In the minds of crypto aficionados, anything that pulls in more institutional money is great news, attracting greater adoption and legitimacy for digital assets.

I did a quick call round some younger asset managers yesterday asking their opinions on Bitcoin. Most are convinced it’s got high value – although opening at a $85 bln valuation it already feels fully priced from an investment perspective. Y’day’s price slide is seen as buying opportunity by many. I expect it will trade in line with Bitcoin volatility.

As users grow on the back of adoption, as volatility spurs trading on Coinbase, and it expands its range of services, then there is a real opportunity for Coinbase to become the Amazon, the Paypal, the Apple and the Tesla of the crypto-service industry.

A lot of commentators are comparing Coinbase with Facebook. But FB was unique – there is only one Facebook, although it may be replaced by other social media sites as fashions and demographies change. Coinbase is not the only digital asset exchange, and others will seek to eat its lunch – already other exchanges are lining up their IPOs – which will cut costs and fees across the crypto-service industry to generate market share and profile.

Whatever… Coinbase has picked it’s moment well and achieved great success.

The case against Crypto – Chapter 492.

My problem is I just don’t understand why the need exists to buy and sell imaginary digital currencies. I understand finance is evolving, and digital currency is the future – but expect it will be digital dollars, sterling and Euros that dominate. It’s not what I think I know that matters, it’s what the market believes that sets prices – as $65k on Bitcoin (briefly) demonstrates… What do I know?

People have tried to explain why cryptos make sense. I can see there are situations they might. Maybe there is more to them that illegal trades on the Silk Road Dark Web, or facilitating cybercrime ransoms?

Annika Masrani, at supply chain financing firm Almastone (they are nothing like Greensill) is one young financier who has taken time to try and teach me something new. She alerted me to the possibilities of Cardano as a single Africa currency system outside the control of middlemen to suborn payments. The founder of Cardano says the coin could replace unstable local currencies, and allow local businesses to deliver solutions free of hyperinflation, enabling growth. Its decentralised system could shield users from manipulation by governments and financial monopolies.

That kind of makes sense. The ability of reduce friction and create wealth is great. I did take some issue with the juiced up hype that; “A farmer in Ethiopia could use access to blockchain-based financial instruments to elevate their farming from subsistence to commercial levels, freeing capital to send their children to a sports academy abroad.” Corruption may be the main thing holding back equality and growth in Africa, but that’s unlikely to be solved overnight by better finance mechanisms – that’s as much an issue for sociology, law and order to solve.

Cryptocurrencies boil down to a matter of trust. I am assured blockchains are uncorruptible and that makes them, somehow, better than real money – or should I say “traditional” money. All cryptos have at their heart a distrust in conventional money. They exist to replace conventional money because it can no longer be trusted, and/or they are a better form of money.

I really don’t understand how.

For the last 12 years of writing the Morning Porridge I’ve railed at the distortions Central Banks have caused by QE and inappropriate interest rates, and the danger that governments borrowing will drive inflation (a deliberate choice) and currency instability (a consequence). These are monetary and fiscal events we understand. How would crypto currencies solve these drivers of financial crisis – except by being outside the financial system and creating crisis all of their own?

My initial view of crypto-currencies was that they fed on an extreme right wing libertarian philosophy, based on the belief any government was bad, and they should not be trusted to “own” the utility of money.

But, now we are at another extreme – total transparency on money provided by the Blockchain. I recently read a piece of crypto-puff saying: “blockchain based currencies will solve issues of transparency and trust, where banks invest in fossil fuels and arms companies unbeknownst to their customers, by enabling customers to verify their investments are ethical.”

Interesting thought. I always though money was fungible – one of its key characteristics. Will I end up in jail if the bitcon I bought my Tesla with is then used to fund a spy satellite which ultimately directs a terrorist atrocity? Will I use the “transparency” of the blockchain to make investment decisions? Not if everyone can see what I am doing!

Let me try to explain simplistically why crypto-finance may not work. The great success of banking and fungible money is very simple: for every pound you invest in the bank, the bank then lends £8 to other people. Creating value and growth. There is not future for banks if they can’t create money – and therefore limits economic growth. Bitcoin blockchains don’t allow that.

As I wrote earlier this week, Cryptos are evolving. I can see some sense in Cardano. I might even buy some on Coinbase. But Bitcoin? C’mon… It’s the most popular, but it’s the digital equivalent of Duplo…

Five Things to Read This Morning

FT – Supersize Coinbase listing depends on Bitcoin

WSJ – Wall Street Business Power Goldman and JP Morgan to Record Earnings

BBerg – US to Impose Russia Sanctions Over Election and Solar Winds

BBerg – Beijing wins when World Thinks Twice About Taiwan

Torygraph – The inside story of an obsessive control freak who fooled the world

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Out of time and back to the day job…

Bill Blain

Shard Capital