Coinbase (COIN) is undisputedly the hottest IPO since Snowflake (SNOW) and the timing of its debut on the NASDAQ could not be better. Bitcoin recorded all-time highs today, and digital assets such as NFTs have been in the spotlight for the past month, with even the New York Stock Exchange announcing that it will be releasing a series of NFTs to commemorate the first trades of popular recent IPOs.
Coinbase makes money on fees and commissions paid by customers when they buy and sell Bitcoin and other crypto currencies through their wallets hosted by Coinbase – typically in the range of 0.5% per transaction. It ranks as the second largest crypto trading platform in terms of crypto trading volume, following behind Binance.
Details of the Listing
Technically, COIN will debut as a direct listing, meaning that it is not issuing new shares, and is not raising any funds as part of going public, and there is no lockup period that will prevent existing shareholders from selling their shares tomorrow when it begins trading. It also means that Coinbase won’t be paying tons of money to underwriters to handle the IPO, and indicates that it is financially stable enough to forgo any fundraising or dilution as part of the process of entering the public markets.
This is particularly important when considering whether to play the debut of COIN right off the debut, as it means that institutional investors will not get to buy into their positions before retail traders. With typical IPOs, underwriters (Goldman, Merrill, etc) sell IPO shares to institutional investors (Pensions, Investment Banks, Hedge Funds, High Net-Worth Individuals) the night before the IPO is offered to the public. But retail traders are not able to buy the stock until market makers determine the sell-side and buy-side demand, through a process that tests increasingly higher prices against retail demand until the stock debuts: typically, at a sharp premium. Snowflake, for example, had an IPO price of $120, but debuted on the market for retail trading at $245.
The debut is expected to issue 114.85M shares with a reference price given by the NASDAQ of $250 per share. However, estimates for where the stock will actually debut range from $350-450 or even higher.
Estimated valuations of Coinbase hover around $100B – but that could radically change if the hype surrounding its direct listing play out to their full potential, which seems likely given the frothy amount of hype this even is garnering in social media and in the news.
Last week, Coinbase reported revenue of $1.8B for the last quarter (Q1): up 900% from the previous quarter, and net income increased $32M to $730M-800M from Q1 last year. For 2020, revenue increased 100% to $1.28B, and the company generated its first profitable year on record with $322M.
Coinbase claims over 56M customers, up 30% in the last 3 months, supports over 7,000 institutions, and is partnered with over 115,000 companies in over 100 countries. It accounted for roughly 0.57% of the trading in cryptocurrencies in 2020.
Interestingly, Coinbase employees have worked exclusively from a remote working environment since the start of Covid, a move which management has indicated maintaining in an apparent bid to reduce overhead.
Risks and Pitfalls
Risks associated with Coinbase include the following:
- Bitcoin itself is not a practical transactional currency, and has no real intrinsic value. It could be worth nothing just as easily as it could be worth millions. If the price of Bitcoin substantially drops, it would pummel the share price of Coinbase along with all other players in the crypto sector.
- Bitcoin is in the full throes of a bull-run, with Coinbase poised to debut at the height of a frenzy in digital asset markets. A pull-back or consolidation in the general crypto market, combined with the state of the current hype could result in a drop in the share price of COIN.
- Governmental regulation or restrictions on the trading of crypto currencies could hamper or even eliminate demand and would have an adverse effect on COIN share price.
- Any sort of security breach in the Coinbase platform would have dramatically negative ramifications on the stock price.
This listing is quite easily the most hyped IPO of 2021, with significant coverage on every financial news outlet for weeks leading up to the direct listing date, and has been blowing up Twitter feeds and sending stock-trading live streamers into a frenzy. If you know anything about Bitcoin or the stock market, you know this event is coming, and are likely setting yourself up to buy the listing.
The only caveat here, is that most ‘financial expert’ types who are advising on this trade, and cautioning retail investors to consider waiting for the initial hype to die down a bit before taking a position in COIN.
That being said, when you look at the most recent direct listing with comparative hype – which was Roblox (RBLX) last March, you see that the debut price was close to the low since then: which ultimately happened only briefly on March 25th, when the entire market was in a slide, and immediately recovered and has run up to new all-time highs as of today.
Remember, with a direct listing, retail investors are on an even playing field with institutional money, and the debut price will likely act as benchmark for entering long trades.
Of course, there are an infinite number of trading strategies worth considering for any debut, but here are a few to game plan according to your risk tolerance and profit goals.
Entering the Trade
I’m not going to cover this in depth here, as I have reviewed this in great detail in the IPO Trading Guide available at IPOWarriors.com. But essentially, you’re going to set a Limit Order just above the indication price right, with the expectation that it will get filled the instant the stock begins trading and the hope that substantial immediate demand drives the price upwards from there.
Trailing Stop Loss
This strategy is based on the hypothesis that the stock will rise on the debut, and will continue rising up to a relative high peak before a retracement. With this strategy, as soon as the stock starts trading, you wait for the stock to go up a few dollars, and then set a Stop Loss order just above your entry price. As the stock climbs, you raise your Stop Loss price, until eventually a retracement stops you out of the trade at a profit. Upside is you have limited risk and you’re pretty much taking the decision of when to sell out of your own hands. The downside is that the stock could continue to reach higher peaks after a short retracement that stops you out of the trade.
Limit Order at a Target Profit
This is a great strategy for set-it-and-forget-it traders, and will reward those who are not greedy with a rather safe return on their trade. Once the stock starts trading, simply set a limit order for 10% or 20% above your entry point, and take profits when they come. If they don’t come, you’ll have to pivot to a new strategy, but your hypothesis is that this stock will run, and a 10% win on a highly publicized stock like COIN is relatively safe.
If you have familiarity with day trading, and know the terms “VWAP”, “Bollinger Bands”, “RSI”, or “Fibonacci Bands”, you can readily apply your day trading skills to attempt to identify and exit your trade at a peak.
Day 2 Run
Many of the most popular IPOs have peaked on Day 2 – including RBLX. Buy at the debut and wait until Day 2 to sell with a trailing stop, limit, or market order.
I personally like to employ a combination of the above strategies, and exit the trade in multiple sales. For example, exit 40% of your position on a trailing stop loss on the initial spike, trade 30% out on a run above VWAP that peaks above RSI 70, and sell the remaining shares on the Day 2 Run.
If you’re a trader who plays IPOs, you’re frothing at the mouth to play the Coinbase debut, and have likely been telling anyone who will listen that they should get in on this one. If you trade cryptos, you’re also probably eager to buy COIN stock on Day 1, as well as just about every other retailer investor who’s in the market. While there are no ‘sure things’ in the stock market, when an IPO comes along that has this much retail interest, combined with the fact that it’s a direct listing, and riding a fully loaded hype train, you don’t want to be late to the station.
NOTE: The contents of this article are for informational purposes only, and are not meant as financial advice. I am not a licensed financial advisor, nor am I a professional athlete, celebrity, famous actor, or anyone else upon whose advice you should make financial decisions. Play your own trade, and good luck in the markets.