Dow Jones Stock Market Today – The ‘Coinbase Effect’ Helps Explain a Possible $100 Billion Valuation
The promise of cryptocurrencies is that they have no gatekeeper, because control over them is decentralized. But there is at least one gatekeeper that can make or break digital assets.
Coinbase, the dominant U.S. digital asset exchange, plays a big role in what cryptocurrencies gain acceptance and which ones may be left behind.
There are now thousands of coins, and most of them are expected to fail. One path to success runs through Coinbase, whose decision to list or not list an asset can cause enormous price swings. There are now fewer than 60 cryptocurrencies that Coinbase supports for at least some clients, though some are only available in some jurisdictions or for some services. The lack of clear legality for many cryptos means Coinbase’s determinations can be make-or-break for much of the crypto universe.
The “Coinbase effect” is similar — though different in some key respects — to the role that S&P Dow Jones Indices plays in anointing certain securities to major indexes like the S&P 500.
Coinbase’s impact is arguably even more important than that of a stock index company, because, unlike stocks, most tokens have not received the blessing of regulators. Getting Coinbase’s imprimatur has become particularly important for many entrepreneurs looking to enter the space — and it’s a crucial factor for investors looking to put money into more cryptocurrencies beyond just the household names like Bitcoin and Ether.
Coinbase’s role as a gatekeeper is one gauge of just how important the exchange is to the market — and why its direct stock listing this Wednesday could value the company at more than $100 billion, a remarkably high multiple of its $1.3 billion 2020 revenue.
A multiple of 80 times revenue might seem stratospheric for a traditional tech company, but perhaps not so outlandish for a linchpin of an industry now worth $2 trillion.
A report released last month by the crypto research firm Messari found that assets listed on Coinbase had an average gain of 91% in the five days after the listing announcement. That said, the number masks a wide variance in outcomes that is severely skewed by a few outliers. Performance ranged from a 32% drop to a 645% gain. After removing the outliers, Messari found that the average gain was 29%.
It’s not just the price effect that matters. A Coinbase listing can open tokens to millions of new users — 56 million people had Coinbase accounts at the end of the first quarter.
Cryptocurrencies are often designed to be more than just assets . Many have utility as tokens in a network that can be used for specific purposes like buying file storage. Shareholders, by comparison, are often passive actors who simply want their stock to rise. Increasing the number of token-holders is doubly important in the crypto world.
For Matthew Liu, the co-founder of Origin Protocol, Coinbase’s decision to list Origin tokens last week was a huge moment.
“When Coinbase decides to list you, it’s a very powerful branding effect,” he said in an interview with Barron’s. “That’s one very positive thing. But more important is that Coinbase is an exchange that has millions of users, and many of these users are what we call crypto normals. So a lot of retail people that are just learning about cryptocurrencies. And also very importantly, Coinbase is based in the United States.”
Origin’s ownership base had mostly been outside the U.S., but Liu says he is now likely to get more U.S. users. Origin aims to be a kind of Shopify of the crypto universe, building consumer-friendly applications for complex products like nonfungible tokens (NFTs).
The Coinbase listing “allows us to bring our cryptocurrency and commerce products to the US mainstream, which is a very desired audience,” Liu said. “And it’s just a very, very validating moment for us as a company.”
Origin’s price went about 30% the day of the announcement, though it has since lost some of that bounce and was down about 6% on Monday.
Liu says that Coinbase’s impending listing, set for this Wednesday, makes the timing even more fortuitous, because its public market debut will be “a big validation for the entire cryptocurrency and blockchain industries.”
“We think that there’s going to be a ton of new entrants into this space,” Liu said.
Coinbase’s method for deciding whether to list a token is complex and some of it remains mysterious. Asked about his conversations with the company before listing, Liu sent Barron’s the Coinbase blog post about the listing. “I am not at liberty to describe the rest of the listing process,” he added.
Liu said he wasn’t told of the listing decision until it became public to everyone. Coinbase executives could not speak in detail about the process because of the impending stock listing.
Coinbase allows creators and users of cryptocurrencies to submit applications through a public website and then reviews them for security, legal, and compliance issues. Coinbase can also decide on its own to list cryptocurrencies with or without an application.
The process can take weeks and involves such complex issues as reviewing legality in jurisdictions all over the world. In addition, the company has to review the technology behind each protocol and figure out how to make it integrate seamlessly with its platform.
The process hasn’t always been smooth. Coinbase pulled its listing of XRP, one of the most valuable cryptocurrencies, in December after the U.S. Securities and Exchange Commission sued the company behind the cryptocurrency. And Coinbase’s listing of a Bitcoin spinoff called Bitcoin Cash caused controversy given the rise in the value of Bitcoin Cash prior to the announcement. Coinbase said its internal investigation of activity around that listing, conducted by a law firm, turned up no wrongdoing.
While Coinbase’s role as a gatekeeper is crucial, it is often dependent on circumstances. Tokens that have a broad user base or are not controversial may not always move much on the Coinbase announcement. The Coinbase effect has less of an impact as it used to, some industry experts said.
The effect has “diminished significantly” from a few years ago, when Coinbase listed fewer than 10 assets, noted Matt Hougan, chief investment officer of Bitwise Asset Management, a cryptocurrency fund provider. Outside factors can also be important.
The research firm Messari found that the market impact is often dependent on the performance of the wider crypto universe, so a big debut could struggle if Bitcoin and other tokens are having a rough day.
In addition, the Coinbase effect may diminish as governments give more regulatory guidance about cryptocurrencies, and as other exchanges grow in prominence. It will be worth watching if the value of Coinbase’s stock changes based on these issues as well.
“We continue to gain more regulatory clarity for cryptoassets in general in the US,” Garrick Hileman, head of research at Blockchain.com, wrote in an email to Barron’s. “More exchanges are also achieving regulatory and compliance parity with Coinbase, with some even exceeding Coinbase in some areas such as gaining bank charters. These developments will erode the signaling value carried by a Coinbase addition compared to times when regulations were murkier and Coinbases possessed a greater compliance lead over its competitors.”
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