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Illusions Perdues: In Economics, The Majority Is Always Wrong

05 November 2018 15:25, UTC
Anastasia Ermolaeva

We go on with the topic of the crypto market centralization and the next tool that can provide an opportunity for financial institutions to gain a direct control over crypto companies - an IPO. Oddly enough, this fundraising method is becoming increasingly popular in the crypto space. In 2018, mining companies such as the industry leader Bitmain and its closest rivals Canaan Creative, Ebang Communications, Bitfury announced their plans to hold IPOs as well as some cryptocurrency exchanges, including the canadian Coinsquare and the formerly Chinese Huobi, which is striving to get to the Hong Kong Stock Exchange via a reverse IPO, according to rumors, purchasing more than 70% of shares and thereby acquiring Pantronics Holdings Ltd.

The aspiration to attract financing is natural for companies that operate on the bear market. The decline in the value of cryptocurrencies by 70% provoked a reduction in trading volumes on exchanges, which resulted in a shortage of fee gains from transactions. As for mining manufacturers, they faced a drop in prices for their devices due to lower demand caused by increased electricity costs and a rising complexity of mining, as well as the need for bigger computing powers. But why did crypto business begin to choose IPO? "IPOs and equity markets are still way more liquid than the crypto one. At the end of the day cryptos or tokens have made fundraising easier. But if there is an opportunity to attract capital in the traditional way, many people will still opt for it”, - notes our expert, the top manager and partner of the crypto venture fund Nithin EAPEN.

Initial public offering implies that the company has disclosed its accounting and has been audited by regulators and underwriters, which increase the level of confidence and trust to it by potential investors. With the reduction of risks, a greater number of sophisticated institutional investors are willing to give capital to such an organization, some of which “are blocked by law to invest in anything else than an equity” continues the expert.

The crypto companies,that decide to hold IPOs, are particularly interested in holders of large capital, for whom shares can be a much more efficient investment instrument than venture participation in capital, and provide investors with more room for manoeuvre. Despite the lower returns compared to venture capital investments, holders of shares can sell them at any time and not miss out on other investment opportunities, and the money of venture capitalists can sit for years in projects without the possibility of exit."That is the reason for an IPO. In fact it shows that even if you enter the scene via cryptos you can have normal traditional exits too. More options for investors and founders will bring more people into their vision,” - concludes Nithin EAPEN.

Realizing the investment attractiveness of shares, which will allow large investors to enter the new and interesting market in the traditional way, crypto companies set big plans for funds to be raised. If in 2015 the mining company Bitcoin Group Ltd collected only $5.9 mln, in 2018 Canaan Creative and Ebang Communication announced plans to attract $1 bln while Bitmain will attempt to raise $18 bln. But not all companies are in a hurry to start selling their shares.

It has long been rumored that the leading American exchange Coinbase would hold an IPO. However, on October 30, the President and Operational Director of the exchange Asiff HIRJI announced that the company would not offer shares anytime soon, however he added that one day in the future Coinbase should become public. Now, the heating of the rumour by the CNBC host seems to have been done intentionally to maintain the relevance of Coinbase, which is necessary in the fast changing environment of the “centralized crypto exchanges”, says the consultant of institutional hedge funds and bitcoin enthusiast Michael GRAUB.

Despite the 70% market drop and the 80% decline in trading volumes by American users since the beginning of the year, the company expects the revenue in the amount of $1.3 bln and $456 mln of the net profits, which is $76 mln more than the last year figure. The President of Coinbase points out that the main income source of the company is still commissions from the trading platform, but this type of revenue streams is closely correlated with trading volumes and, thus, cryptocurrency rates.

To make inflows more predictable, the company is going for its business diversification. This year Coinbase has launched the custodial service for institutional investors, Coinbase Custody, whose clients can hold large volumes of digital currencies in cold storage. Broker-dealer service of the custodian offers clients advanced trading opportunities, such as risk management and margin trading, which allow them to use borrowed capital as well. The product has not yet gained momentum, but during the recent series E round, which resulted in investments worth of $300 mln, the company informed investors that in the coming weeks the custodial service would expect 40 clients with assets worth of more than $1 bln. Moreover, on October 31, the New York investment company Wilshire Phoenix reported that it would launch a $500 mln bitcoin-fund for institutional investors together with Coinbase Custody.  

On top of that, Coinbase is one of the most regulated crypto companies. Two weeks ago, it received a license from the New York state regulators allowing it to operate as an independent qualified custodian for six cryptocurrencies including Bitcoin and Ethereum. Now the Coinbase Custody Trust Company will be accountable to the New York Department of Financial Services, and its activities will be regulated by the state banking law.

The leading investor of the last series E round was the hedge fund Tiger Global. It seems that even without an IPO, the company is of interest to institutional investors, who welcome attempts to diversify the business and improve compliance with legislation and build a dialogue with regulators. The total capitalization of Coinbase has reached the mark of $8 bln. "Coinbase wants onboard close to another 200 to 300 tokens, which can make the company one of the most valuable in the world,” - believes our expert Michael GRAUB.

If the company is doing quite well, then why should Coinbase hold an IPO at some point in the future? The thing is that any startup that attracts venture capital must sooner or later pay out returns on investment. During its six-year history Coinbase managed to attract more than $500 mln from venture investors. “Venture capital investment needs an eventual exit. That’s usually either an acquisition by a much larger company or going public. That’s how the VC makes its return on their investment, so it is the logical future of a company with strong venture capital backing, which is the Coinbase case, to eventually hold an IPO”, - concludes the venture specialist Ethan PIERSE.

“Coinbase will, like most developing companies, soon seek an IPO to reward its investors and provide an exit strategy for the VCs, that have taken a stake. Most VCs exit their investments with IPOs, because they can take their profit in a lump sum. Crypto companies with VC investors will almost certainly go IPO at some point. But for now, cryptos are unlikely to go to the stock exchange, because of all the uncertainty in the market”, - assumes the ICO consultant Andrew ROSENBAUM.

At this stage, Coinbase is able to develop at the expense of venture capital, and our experts see the potential in the company, which, in their opinion, can create a real competition against traditional financial institutions. Public offering now would mean allowing the financial giants to gain an access to the company management, which could result in the takeover and theoretically dismissal of the existing team and the brand change. As Coinbase seeks to go on expanding its business, which should cause the increase in the company’s value, the organisation is likely to wait till the last minute when it will need to make returns on investments. Then the top management will be able to put a higher price tag for the shares, and for the company as a whole in the case of acquisition.