Let’s Debunk the Coinbase Myth

The world’s largest crypto exchange: Coinbase, went public with a historic listing on the NASDAQ on April 14, 2021. On the very same day Bitcoin rallied to an all-time high. Since the listing, the price of Coinbase stock (COIN) has fallen $119 (34.91%).

Many analysts, traders and investors saw this as a prominent, hard fought milestone for both cryptocurrency and digital industries more broadly.

Analysts like James Angel, a Professor of Finance at Georgetown University warned investors that the price of COIN would be extremely volatile as it is linked directly to underlying crypto markets.

“Investors should buckle their seatbelts for a wild ride”.

It’s public knowledge that anything tied to crypto is going to be inherently volatile. Just because Coinbase is listed on the NASDAQ does not free it from the fact that it is a cryptocurrency exchange, and its value will be directly tied to the sentiment surrounding crypto.

However, it isn’t the volatility of crypto markets that was the biggest problem for Coinbase in their launch, instead, concern began to arise when rumours began to circulate that senior executives and early investors of Coinbase were “dumping” their shares. In a regular listing where a company comes to market via an IPO this would be immediate cause for concern, as it means that founding team of Coinbase is looking to take profits and ditch their stake in their company for an immediate gain.

But Coinbase didn’t list on the NASDAQ through the conventional means of an IPO. They listed through a mechanism called a direct listing.

IPO vs Direct Listing

An IPO is when a company comes to market and the company itself lists new shares. This means that a massive number of new shares have been created for investors to buy.

IPOs also use underwriters. Underwriters work for investment banks to help sell stock of a company that is going public. These underwriters make large purchases of shares in the company going public and sell them over time to drive capital towards the company. These shares are usually sold at a discount of their true value to asset management firms and hedge funds.

IPOs are also subject to “lock-up” periods in which insiders are not able to sell their stock. This prevents an oversupply in markets and prevents prices from going down.

Now, a direct listing is very different from an IPO in that no new shares are created. This is where all of the confusion and misinformation begins.

Because there aren’t any new shares being issues in a direct listing, insiders must sell their shares in order for the stock to be sold. They are quite literally the only holders of the stock.

So, when the executives from Coinbase started selling their shares after the listing many critics rushed to claim that this was unequivocal proof that Coinbase was a nefarious and “overvalued” company whose insiders were looking to take profits as soon as humanly possible.

The most vocal critic of Coinbase was gold “investor” and avid anti-cryptocurrency pundit Peter Schiff.

Schiff published a spreadsheet outlining that Coinbase executives and founding team were offloading boatloads of shares. This tweet and his subsequent posts elsewhere on the internet did the rounds, sharing this spreadsheet that has now been proven to be a total misreading of events.

Schiff and others made the following information go viral:

• CEO Brian Armstrong sold 71% of his total shares
• CFO Alesia Haas dumped 97% of her total shares
• CPO Surojit Chatterjee sold 86% of his total shares
• CAO Jeniffer Jones sold 63% of her total shares.

These number are nothing more than fabrications from a blatant misreading of the available data. Schiff, a supposedly seasoned investor has obviously analysed the data as though Coinbase listed via an IPO. This sort of commentary from such a public and supposedly well-educated figure blurs the line between a genuine misreading and intentional manipulation of information for his own benefit.

As we’ve already learned, insiders literally have to sell stock in order to create a market for their company.

These figures have since been corrected by Coinbase in a blogpost and subsequent SEC filings.

Here are the corrected figures:

• CEO Brian Armstrong sold $292 million in shares.
  That figure is only equal to 2% of his total liquidity in Coinbase.
• CFO Alesia Haas only sold 15% of their total shares
• CPO Surojit Chatterjee only sold 8% of their total shares
• CAO Jennifer Jones sold 38% of their total shares

Coinbase also brought attention to the fact that insiders from a number of other tech companies sold more or roughly the same amount of stock during their respective direct listings: including Spotify, Slack, Roblox, and Palantir.

So, why did Coinbase choose to go with a direct listing instead of an IPO?

The Pros of a Direct Listing

Firstly, because no new shares are created, a direct listing allows existing stakeholders in the company to create much greater liquidity and immediately available capital for the company.

Secondly, the cost of listing is much much lower than an IPO, as it avoids going through the hefty fees (billions of dollars) that investment banks charge to list. It also helps companies avoid the indirect cost of having underwriters sell large chunks of shares to other firms at a discount.

Generally speaking, companies that opt for a direct listing have to have the following 3 things:

1. A strong brand identity that is attractive to retail investors
2. An easy-to-understand business model
3. Aren’t requiring immediate access to substantial sums of capital

This is because there are no underwriters to hold the value of the stock steady. The company must believe that public sentiment will drive enough demand to their business.

Drawbacks of Direct Listing

Since direct listing don’t use underwriters, who hold large portions of the stock, there is often greater volatility in the stock price in the following months. The availability of a stock that comes to market via a direct listing is entirely dependent on whether or not insiders are willing to sell their holdings and whether investors in the public market want to buy. Thus, the stock price is purely dependent on demand.

Final Thoughts

The sort of misinformation peddled by Peter Schiff, damages investors’ ability to create well-educated, rational decisions in the market and I despise it. As an investment and finance media producer, making sure that my information is as accurate and true as possible is a core principle. Anything short of this leads to the spreading of mistruths and it causes people to make bad investment decisions, where they end up losing their hard-earned cash.

Schiff needs to check his sources in future or just avoid blatant market manipulation before posting. This is unacceptable behaviour from such a prominent and authoritative figure in the world of investing.

Source: https://medium.com/geekculture/lets-debunk-the-coinbase-myth-3789d0aeec09?source=rss——-8—————–cryptocurrency