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Coinbase Went Public With a Direct Listing. Here’s Why that Approach Can Be Tricky

Founded in 2012, Coinbase is a San Francisco-based central cryptocurrency exchange space. The company’s shares began trading on Wednesday, March 14 with a direct listing on NASDAQ. For many investors, this was an important event in cryptocurrency’s long-standing battle toward mainstream acceptance.

At the same time, this big move for Coinbase is turning heads for another reason - the decision to forgo the more traditional IPO process for a direct listing. 

Why Is Coinbase Going Public Important?

This is the first time a cryptocurrency-based company has gone public on the stock exchange. It listed on the NASDAQ with a reference price of $250 per share, valuing the company at around $65 billion based on its number of shares.

This was a historic day for cryptocurrency, marking its “official” entrance into mainstream trading platforms. Cryptocurrency has been around for over a decade, but investors may have been wary to put money towards this unregulated asset. With Coinbase now a publicly traded company, investors may be more comfortable with the idea of owning stock in an SEC-reviewed company. Cryptocurrency like Bitcoin and Ethereum may have been viewed with skepticism and speculation, but this move for Coinbase may be considered another step towards legitimizing and demystifying this asset type.

A Reminder About Cryptocurrency

It’s important to remember that cryptocurrency is not a currency at all. It’s a speculative asset class that is not appropriate for everyone. Only people with a high-risk tolerance should consider cryptocurrency assets.

Like other alternative assets, cryptocurrency can be illiquid at times, and its current values may fluctuate from the purchase price. Cryptocurrency assets can be significantly affected by a variety of forces, including economic conditions and simple supply and demand. Any companies mentioned are for illustrative purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Any investment should be consistent with your objectives, timeframe and risk tolerance.

IPO vs. Direct Listing

Coinbase isn’t the first well-known company to do a direct listing, as larger companies including Slack, Spotify and Asana all chose this method as well. But compared to those who choose to do an IPO, the direct listing method is rarely used.

IPO

If a company chooses to do an IPO, there is a well-traveled path to follow. It must file documentation with the SEC and work with an investment bank (or banks), which guides the company through the entire process. The work that goes into an IPO before a company officially goes public can often draw attention to the company, drumming up interest amidst investors before its debut on the NYSE or NASDAQ.

Direct Listing

If a company chooses to do a direct listing, the process tends to be more straightforward than an IPO. The company’s shareholders sell stock directly to the public through the exchange, which works with professional traders to set a reference price for the initial offering. With a direct listing, financial institutions aren’t as involved as they are with an IPO - they aren’t acting as the underwriter. This method of going public is typically reserved for larger companies with good brand recognition.

Direct Listing Considerations

Because of its more streamlined process, doing a direct listing may cost a company fewer fees while allowing them to maintain control over the initial stock price. But doing a direct listing can be tricky and leave companies open to potential complications.

Volatility

The financial institutions that underwrite an IPO help support the stock price of the company’s shares, at least in the short term. During the initial process, they set the IPO price and drum up interest amongst investors beforehand. With a direct listing, there is no underlying support by an investment bank. The stock may fluctuate significantly during its first few days, creating levels of volatility that make investors wary.

Misjudging the Market

The hype that banks can create surrounding a traditional IPO can help attract interest and give a company an idea of how many investors are expected to buy shares. With a direct listing, the initial supply and demand is unknown, as it’s at the mercy of those on the inside who are willing to sell and those investors on the outside looking to buy in. There is no indication ahead of time, and no bank advocating to institutional investors on your behalf. This can make it harder for a company to predict demand during the first few weeks of trading.

What does this all mean for investors? Coinbase has made significant headway for cryptocurrency, making this an exciting time for investors interested in Bitcoin or interested in investing in Coinbase itself. If you’re curious about your own portfolio and how this news plays into it, contact your investment advisor right away. They can help break down this news further while offering insights based on your unique financial standings and tolerance for risk.

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

Gordon Asset Management, LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.