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The Coinbase IPO – Does This Newfound Legitimacy Give Way to a Crypto Takeover? 

Image: Marco Verch / Flickr

As cryptocurrencies continue to compete with traditional forms of currency, Coinbase has officially legitimised its position in the market.

Through a direct public offering, the company sidestepped costs associated with traditional Initial Public Offerings (IPOs) and sold its stock directly to investors. This meant that the price was derived directly from the market.

What is Coinbase?

Coinbase is a platform that facilitates the exchange of over 100 cryptocurrencies. It allows for quick and low-cost transactions due to the absence of an intermediary.  

It profits through additional fees and a commerce section, essentially serving as PayPal for cryptocurrencies.  

Very recently, Coinbase developed notoriety through Elon Musk’s bulk-buying of Bitcoin (worth $1.5bn) as the business magnate continues to funnel Tesla’s profits into the currency as a part of its corporate treasury strategy, whilst also calling for Coinbase to begin trading the semi-satirical cryptocurrency ‘dogecoin’.  

Cryptocurrency has reached a milestone in the push towards legitimacy. The offering also provides Coinbase with a competitive edge in the trading markets. Since it is currently registered as a money services business, it is far less regulated than its financial service counterparts.   

Confidence in it also continues to grow, as evident in the company’s huge uprising. Compared to last year, it experienced a 139.82% increase in revenue growth, whilst the value of total assets held on the platform increased by 250% from Q4 2020 to Q1 2021 alone.  

What does this IPO mean for Bitcoin and the global economy?

On April 14th, the cryptocurrency exchange platform made their NASDAQ debut by issuing 114.9 million shares, each worth $381, accounting for 44% of their company and giving them a market cap of $85.78B.

Source: Futures CME daily settlement report

When one considers the vast quantities of money circulating around cryptocurrencies, the spill over into investment decisions and the real economy cannot be ignored, especially because of the exponential growth rates that Coinbase is experiencing.  

Over the last two years, hedge funds and financial institutions have flocked to Coinbase, doubling the platform’s previous number of institutional customers, whilst the value of its collective assets increased by 689% in the same time period (rising from $6.5B to $44.8B).  

The most commonly traded cryptocurrency (voted the “best-performing asset” in 2020 by the NASDAQ) is Bitcoin, whose prominence undoubtedly challenges existing currencies and commodities.  

Last year, the USD - the world’s reserve currency – saw a 9% decrease in value, compared to the fivefold increase in the value of Bitcoin.  

Through its convenience and higher growth rates, the appeal of cryptocurrency has also manifested into an admittedly riskier alternative to crowdfunding for many start-ups.   Other low-profile benefits also include the effects on the remittance industry, which are noteworthy in a time of increasing migration rates.

As attitudes begin to shift, could we see a future where cryptocurrency becomes our go-to currency?

The uncertain future of Coinbase and Bitcoin

Even so, whilst this signifies a step towards legitimacy, it should not be taken as a sign of the demise of traditional currency.

The economic issues and technological constraints that accompany Bitcoin ‘mining’ cannot go unnoticed by many investors. 

Structural issues within the mining process leave Bitcoin very open to volatility. Firstly, when a Bitcoin is ‘mined’,  there is only a chance of obtaining a Bitcoin, as there is no guarantee that the device solves the computational puzzle needed to create it.  

Further, the legitimacy of this process is left to a vote by certain existing Bitcoin owners, leaving room for fraudulent issues known as “Forking”, whereby the vote can be faked, either by pretending it was legitimate or pretending it was not.  

This has occurred in the past several times, causing the creators to update their software. At present, there are an estimated 105 Bitcoin forking projects, and regulation is not in sight. 

The average yearly energy consumption of the Bitcoin network. Source: CBECI

With a global surge in environmentally friendly policies, it seems unlikely that the go-to currency will be one that requires this much energy to create.  

The rise of quantum computers is also a very legitimate threat to Bitcoin. Not only do they have the power to mine Bitcoin much more efficiently, but they also provide a threat to its security.  

The existence of quantum computers alone provides enough of a challenge to render Bitcoin more volatile. Many experts believe that this is a Bitcoin crash waiting to happen, as this is currently an “arms race between exotic forms of cryptography and quantum algorithms to break them.” 

Bitcoin and Coinbase also suffer from reputational issues. For a significant time, Bitcoin was most commonly associated with online drug trades, as dark web sites such as Silkroad (the equivalent of Amazon for the black market) predominantly traded in Bitcoin prior to its FBI siege.  

Since Coinbase has facilitated many of these trades, it may still be some time before it shakes off its questionable reputation.

Concluding thoughts

In practice, everyone understands money but not everyone understands how cryptocurrencies works or why it has value. Since it is easily exploited and fairly unregulated, there is still room to make money in the short term. But for now, the long-term implications of this growth are very uncertain.  

When the collective knowledge and legislation catches up, cryptocurrency might attain the stability it requires to become the dominant form of currency. However, for the foreseeable future, whilst it is likely to continue to overtake many assets, it is unlikely to overtake traditional currencies. 

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