Coinbase co-founder and CEO Brian Armstrong speaking at TechCrunch Disrupt SF 2018.
Steve Jennings | Getty Images for TechCrunch
The pending Coinbase direct listing, scheduled for Wednesday on the Nasdaq under the symbol COIN, is exciting a broad base of the investment community outside the usual cryptocurrency crowd.
“Coinbase is going to blow people’s minds,” said Matt Hougan, chief investment officer at Bitwise Asset Management, which pioneered the first cryptocurrency index fund. “I think it’s going to force traditional finance to wrestle with the phenomenal growth that is taking place in crypto.”
It’s not hard to understand why. Coinbase is likely the biggest beneficiary of the cryptocurrency revival. It had 56 million verified users, with $1.8 billion in revenues in the first quarter alone, and a value that could be anywhere from $50 billion to $100 billion.
That is an extraordinary valuation for an exchange of any type. By contrast, Intercontinental Exchange, which runs the New York Stock Exchange, has a market cap of $65 billion, while Nasdaq has a market cap of $25 billion.
That kind of valuation is getting the investment community — and particularly exchange-traded fund investors — very excited.
Biggest crypto pure play
Crypto assets have had the same problem that other hot commodities (like pot or space) have had in the past: a high degree of interest with a notable lack of investible assets. Coinbase, however, will go a long way toward solving that problem.
“Coinbase will be the biggest public pure-play cryptocurrency company, full stop,” said Matt Kennedy, senior IPO market strategist at Renaissance Capital, which runs the Renaissance Capital IPO ETF (IPO). “I expect every crypto ETF will want (or need) to own it at some point, and it is possible our ETF will be the first to own it.”
It’s the same story with Christian Magoon of Amplify, who runs the Transformational Data Sharing ETF (BLOK), which focuses on blockchain technology.
“Being actively managed, we can buy it the moment it goes public, and we fully expect it will be in our portfolio,” Magoon told me.
Other tech ETFs, particularly Cathie Wood’s ARK Fintech Innovation ETF (ARKF), as well as the Global X FinTech ETF (FINX), will also likely be buyers, and that is just the beginning. “You will see many more ETF firms filing for crypto-type funds,” Magoon said.
Because ownership of crypto by individuals and institutions is still fairly low, many believe the valuation of Coinbase will encourage more private entities to go public.
“I think we’re going to see a gold rush for crypto equities as investors realize just how fast the ‘picks and shovels’ companies of the crypto ecosystem are growing,” Hougan said.
Michelle Bond, a former senior counsel at the SEC who is now CEO of the Association for Digital Asset Markets, an association of firms in the digital marketplace, said the Coinbase listing “will break down headline barriers because this will have to be approved by a traditional financial regulator, ensuring transparency, integrity and disclosure.”
Of course, this means more players are coming, including high-profile competitors. For example, Bakkt Holdings, a digital asset marketplace owned by Intercontinental Exchange, has entered into an agreement to combine with a SPAC, VPC Impact Acquisition Holdings.
Will the SEC finally approve a bitcoin ETF?
While bitcoin ETFs exist in the U.S., they do not directly own bitcoin. They own portfolios of stocks deemed to have exposure to blockchain technology.
A bitcoin ETF that owns bitcoin is a long-awaited dream of crypto investors because it will greatly expand the class of potential owners.
“A bitcoin ETF will provide an easy, simple and efficient way to own bitcoin,” said Som Seif, who runs the Purpose Bitcoin ETF, which trades in Canada. “Just like gold, the storage and custody of bitcoin is unique. An ETF solves that problem. Also it’s like a stamp of approval: There’s institutional backing. The GLD [Gold ETF] changed the world when it came out in 2004. It made it easy to own gold as an asset class.”
He anticipates a bitcoin ETF will do the same for bitcoin.
Several weeks ago, the SEC acknowledged the receipt of Van Eck’s bitcoin ETF application, which set in motion a 45-day regulatory review period. At the end of that period, the SEC must either approve, deny or extend the review period. Several other firms, including Fidelity, have also applied for a bitcoin ETF.
Most observers believe the SEC will punt and seek to extend the review period. The maximum period is 240 days.
“The commission doesn’t like doing new things, and when something falls into that category, it gives the commission agita, so the attitude is, ‘let’s take the maximum amount of time,'” one longtime SEC observer, who asked to be anonymous, told me.
However, most bitcoin watchers believe late 2021 could finally be the year a bitcoin ETF is approved.
“The biggest potential change is [SEC Chair nominee] Gary Gensler,” Magoon said, noting that Gensler has taught cryptocurrencies and appears more receptive to a bitcoin filing. He also noted that SEC Commissioner Hester Peirce, a Republican, has also been a supporter of a bitcoin ETF.
The biggest difference, however, may be improvements in the security of the bitcoin universe.
The SEC, in a 3-1 decision in 2018, declined for the second time an application by the Winklevoss brothers for a bitcoin ETF. The SEC specifically said it was worried about extreme price volatility and fraud in cryptocurrencies. It also noted that 75% of bitcoin trading occurs overseas on unregulated foreign exchanges that could be manipulated.
All bitcoin watchers agree that the SEC must be satisfied that fraud and manipulation issues have been addressed.
Hougan believes the crypto market has gone a long way to address those concerns.
“A few years ago there was no regulated futures market, now there is, and the volumes are much bigger,” Hougan said. “There were also no regulated custodians with insurance, now there is. We have made a huge amount of progress, whether we have made it over the goal line is not clear, but we are getting close.”
Matt Hougan, chief investment officer of Bitwise Asset Management, and Christian Magoon, who runs the Amplify Transformational Data Sharing ETF (BLOK), an actively managed portfolio focusing on blockchain technology, will be our guests on CNBC’s “ETF Edge” at 1 p.m. ET on Monday and on “Halftime Report” at 12:35 p.m.
