Coinbase’s IPO is Exciting But Might Bring Consolidation, Higher Fees

Great Success Now = Staggering Success Later?

Not only did Coinbase exceed its 2020 revenue and profits in Q1 2021, but it also reported 56 million users. Given that its filing with the SEC — submitted on February 25 — declared ‘only’ 43 million customers, this would represent a rise of 30% in a single quarter (or less).

Its IPO filing also listed 2.8 million monthly transacting users (i.e. regular, active users), yet its Q1 2021 report now has such users at 6.1 million. This is a surge of 117.9%.

Basically, Coinbase has expanded spectacular in recent months, and has rode the bitcoin rally wave more than any other crypto-exchange in the world. You’d almost argue that it doesn’t even need to become a listed company and sell its shares to the public, such are its recent fortunes.

Yet it is becoming a public company, and it plans to sell 115 million shares, with Axios estimating a price of $373 per share (derived from a February private sale of 127,000 shares). This would work out at $42.9 billion, assuming that all 115 million shares are sold at $373.

This would be a massive injection of capital for Coinbase, far surpassing its 2020 revenues of $1.27 billion. And the question is: what would Coinbase do with such an outsized influx of money?

Well, aside from funding its own development and expansion, it’s likely to increase its M&A (mergers and acquisitions) activity, buying up other companies in the crypto sector. Research conducted over the course of numerous years (here, here) has shown that acquiring other companies is the primary motive of going public.

For example, after its $8.1 billion IPO in 2019, Uber went on an acquisition spree, buying up Postmates (for $2.65 billion), Autocab (undisclosed amount), Routematch (undisclosed), Drizly (for $1.1 billion), and Cornershop (undisclosed). What’s important to note here is that these were acquisitions of companies operating in a similar area to Uber, with the UK’s competition watchdog, the Competition and Markets Authority, investigating its merger with minicab software firm Autocab (before clearing it in March of this year).

Acquisitions = Consolidation = Higher Fees

Such behavior is common for a firm that has recently gone public, and it’s very likely to be something Coinbase engages in after its listing. It’s already no stranger to acquisitions, yet the receipt of serious amounts of funding may enable it to make some very big deals.

Needless to say, acquisitions inevitably lead to some degree of market consolidation, something which is already happening in the exchange sector. This is potentially bad for consumers/retail investors, since research again suggests that market consolidation often results in higher fees and prices. This is particularly the case in the medical/hospital sector (e.g. hospital consolidation in the 1990s raised prices by at least five percent), social/nursing care, banking, manufacturing, and the water industry, among other sectors.

Coinbase already has a reputation for charging some of the highest fees in the industry (it has a base rate of 4% for cryptocurrency buy and sell transactions in the US), so the possibility of fee hikes isn’t a particularly exciting one. With bitcoin passing $60,000, you would need to pay $2,400 to purchase 1 BTC at 4%, yet obviously such a transaction would be expensive under a scenario in which Coinbase raises its fees.

To be fair, acquisitions and consolidation can increase a firm’s efficiency (i.e. lowers its operating costs), which creates the potential for price reductions. But in many cases reductions in costs aren’t passed onto customers, so likely consolidation creates a worry for Coinbase users.

Single Point of Failure?

There’s one more remote concern raised by Coinbase’s IPO, although it’s worth some consideration. Assuming that it acquires rival and related platforms, and assuming that it invests in its own internal growth, we’ll almost certainly witness its customer base expand even further than it already has. This will be great for the exchange and its shareholders, but it may put crypto at serious systemic risk.

For example, if Coinbase suffers a hack or cybersecurity breach, its customers (and those on other exchanges) may end up selling bitcoin and other coins. This happened following Binance’s two hacks (in 2018 and 2019), with bitcoin dropping by around 10% and just over 1% on each occasion, respectively. In a scenario where Coinbase has significantly increased its (already large) market share, the impact of a breach could be highly significant.

While Coinbase is one of the safest exchanges around in terms of cybersecurity, the fact that an exchange as large as Binance was hacked as recently as 2019 teaches us that we shouldn’t be too complacent. So while it will generally be good for crypto for it to have a successful direct listing, we might perhaps hope that it isn’t too successful, or at least that other exchanges manage to keep up.