Coinbase's Direct Listing Marks a Milestone for Cryptocurrency! Summarizing Details from SEC Documents

Although relatively unfamiliar to users in Taiwan, Coinbase is considered a unicorn in the United States and the cryptocurrency industry. Its direct listing has set a milestone for the crypto industry, and many unknown business details are revealed in the documents previously submitted to the SEC.

Gradually Moving Towards Institutional Trading

According to the S-1 filing submitted to the SEC, the influx of institutional traders seems to have fundamentally changed Coinbase's business structure. Since 2018, retail trading volume has been consistently declining, dropping from 80% in Q1 2018 to 36% in Q4 2020. The filing states:

Compared to retail trading volume, institutional trading volume is less affected by the volatility of cryptocurrency assets, with smaller cyclical fluctuations. With the growth of institutional trading, we expect the correlation between Bitcoin price, cryptocurrency volatility, and trading volume to decrease.

Furthermore, Coinbase has seen steady profit growth since mid-last year, coupled with significant trading activity in Q1 of this year, indicating the potential for substantial revenue growth.

Adding Bitcoin to the Balance Sheet

While not surprising, Coinbase publicly stated for the first time that it holds Bitcoin in its cash reserves. Head of Institutional Sales, Brett Tejpaul, mentioned in a announcement:

Since 2012, Coinbase has held Bitcoin and other cryptocurrencies on its balance sheet, and we will continue to make crypto investments as we believe in the long-term potential of the crypto economy.

As disclosed in the SEC filing, Coinbase holds approximately $130 million in Bitcoin, $23.8 million in Ethereum, and around $34 million in other cryptocurrencies.

Several Wall Street Giants Serve as Trading Advisors

According to recent reports, Coinbase plans to list on the Nasdaq Global Select Market under the ticker symbol "COIN." Coinbase has enlisted Wall Street institutions such as Goldman Sachs, Citigroup, Allen & Company, and JPMorgan as trading advisors, with the following ownership stakes:

• 20.7%: CEO Brian Armstrong
• 15.4%: a16z related institutions
• 7.2%: Union Square Ventures (USV) related institutions
• 6.2%: Ribbit Capital
• 1%: Paradigm

Is Coinbase Profitable?

Previously, The Block's Research Director Larry Cermak, who accurately predicted Coinbase's valuation, pointed out:

Coinbase's fee revenue accounts for 96%, and based on the $362.6 billion in trading volume in Q1 of this year, it generated $2.44 billion in revenue in just Q1, which is double the revenue for the entire year of 2020.

However, Sam Bankman-Fried, the founder of FTX, who previously had reservations about Coinbase's profit model, rebutted Larry's speculation, stating:

Coinbase charges fees below 0.10% for institutional trading and 1-10% for retail trading; institutional growth was 140% from 2019 to 2020, while retail was 80%; now trading volume has grown by 750%, is it driven by institutions or retail? This will make a big difference in fee revenue.

It's not obvious this is true.

They make ~0.10% on their insto trades, and ~1-10% on their retail trades.

From 2019 to 2020 instos grew 140% and retail grew 80%

Now volume is up ~750%. How much of that growth is from retail vs instos?

Makes a huge difference! https://t.co/WZN7RyL51z

— SBF (@SBF_FTX) February 25, 2021

Larry responded with the following chart, believing that overall revenue can still be estimated from the segregation of institutional and retail trading volumes.

Sam pointed out that Coinbase's definition of retail trading is not clear, which is crucial in determining revenue. However, he also noted that he could be wrong, and for FTX, trading volume continues to grow along the user growth curve, rather than market conditions.