Your Next Crypto Opportunity … Is in the Traditional Market?

Initial public offerings (IPOs) are the traditional events that take place when a new company is listed on the stock market. In our most recent Weiss Crypto Sunday Special, Chris Coney examined the intersection of IPOs and the crypto world.

Why discuss IPOs in a crypto-focused outlet?

Because the truth is, many traditional investors want to invest in the growth of crypto ... just without jumping through hoops. 

Investors unfamiliar with decentralized exchanges and hard wallets are looking for access points to the market without the hassle of figuring out an entirely new set of investing tools. Or they’re looking for exposure within an established account. 

And investing in IPOs with crypto exposure allows investors to do just that.

You can watch the Sunday Special here, or read on for the full transcript ...

Chris Coney:

Hi there, guys. welcome to this week’s Weiss Crypto Sunday Special with me, Chris Coney.

Today, I want to discuss the macroeconomic topic of investing in crypto companies via IPOs. That would be traditional, initial, public offerings on the traditional stock markets. The truth is many traditional investors want to invest in the growth of crypto without the hassle of figuring out an entirely new set of investing tools.

Ideally, you might want to buy assets or get exposure to assets that participate in the growth of crypto through your existing brokerage account, and so on.

One of the most famous of these, I would say, is when Coinbase (Nasdaq: COIN) did their IPO.

Coinbase is a crypto exchange people use to convert their fiat currency into any one of a number of cryptocurrencies or crypto assets listed on the platform. So, it is a traditional exchange in that way.

Now, I use Coinbase as an example, because they were one of the biggest brands in the crypto industry, even prior to their IPO. That’s why there was a lot of hype around their IPO when it actually went live in 2021.

But I don’t call it an IPO. I’d call that an infrastructure play. Because having an exchange is like an on-ramp or an off-ramp — a way of getting your government currency into crypto via an on-ramp, and then off ramp to get it out of the crypto economy and back into your government currency when you wish to do that.

And that’s the current main business model and revenue model for Coinbase. So that’s why I call it infrastructure. You need that, and you need it in every country that has a different currency. Once you get into Bitcoin (BTC, Tech/Adoption Grade “A-”) and Ethereum (ETH, Tech/Adoption Grade “A”), then of course decentralized finance (DeFi) is the same. But to get your national currency into Bitcoin or Ethereum, that differs based on jurisdiction, and the national currency and banking system of your locale.

The other thing to know about Coinbase, is that its profitability isn’t based on the performance of the market. So it doesn’t really matter whether Bitcoin or Ethereum is going up or down in price, because Coinbase’s revenue is based on a percentage of the volume that goes through their platform.

There’s Coinbase, and then there’s Coinbase Pro. So, regular Coinbase is like the retail customer’s interface; it’s kind of built like PayPal (Nasdaq: PYPL) in terms of the interface. Very simple to use, very user-friendly, dead simple. And then Coinbase Pro is essentially the same platform, except with some more advanced charting and investing tools.

Coinbase does get a bit of heat for their fees. I use Coinbase Pro. When I buy some Bitcoin every week, the fee from Coinbase is 0.5%. That might not sound like a lot, but Coinbase is criticized for having some of the highest fees in the business in that regard, since, as a public company, investors can look up their revenues, which were pretty impressive to say the least.

So, Coinbase has grown so far by capturing retail volume, meaning the average investor who’s just using Coinbase as a self-service platform to buy whatever crypto asset that they wish.

Longer term, however, Coinbase cannot rely purely on taking a fee, a commission, on trading volume, right? Because it will just become commoditized. And due to competition, there’ll be a race to the bottom in terms of fees. Eventually, you’ll get exchanges promoting themselves on the basis that they have zero fees.

Some of them have already tried that. There was one called Cobinhood a couple of years ago that came to the market with that kind of a slogan — 0% trading fees, etc. — and it ended up folding.

So Coinbase is expanding its other offerings, like institutional level custody and their OTC market, in addition to expanding their portfolio. And who knows where else they’ll take the platform in the future.

In terms of the performance of the Coinbase stock itself, the first piece of price data I could find on my TradingView account was $240 a share. And this was first traded on Dec. 21, 2020. That was actually prior to the public IPO. I believe it went live public in April of 2021.

So, when I looked up how on earth there’s trading data from December 2020, it’s because there was a speculative derivative traded on the crypto exchange FTX. So some people were already speculating on the price of Coinbase stock prior to it going live. Which is the kind of thing you can do in crypto.

The all-time high at time of recording for Coinbase stock was $643, and there was a 41% sell off soon after the open, which may well have been on the FTX platform. Now, 41% is obviously a huge move in any stock. And it’s the kind of volatility that traditional investors kind of want to stay away from. Bear in mind though, it was like the very first opening of the stock. So, if ever a stock was going to be volatile, probably would be on the opening day.

What I personally don’t really like about stocks is that the volatility is there, but it tends to be concentrated all around quarterly earnings reports, right? And of course, those reports are kept quiet until the official release dates. And at that point, you get the expectation vs. reality effect, and the price either moves up or down based on whether the earnings have met expectations or not.

Whereas in crypto, it doesn’t work like that because their networks are autonomous.

There are some attempts by a number of analysts in the crypto space to treat blockchains like organizations and consider the fees on the network as revenues, since we’re having trouble right now figuring out how to value these networks. So this is an attempt to use an existing value paradigm, which is almost like company earnings, and move that over to crypto. The Polygon (MATIC) network, for example, is one that has been studied by some analysts looking at how many transactions are done every week and the total amount of U.S. dollar value in transaction fees.

But the framework doesn’t really move over well because the income doesn’t go to the network.

So, that’s a bit of a dive into the Coinbase stock lists. But now, let’s zoom back out a bit here. Coinbase — which I saw as more of an infrastructure play — is just one example of investing in a crypto IPO. But there are other sectors that investors should look out for.

While this idea of IPO-ing crypto companies is still quite new, there’s a lot of talk about which company is going to be next, and which companies are preparing to IPO, which ones might, which ones might not.

Some Bitcoin mining companies already have gone public, like Riot Blockchain (Nasdaq: RIOT). And there are a few of mining companies listed on the Toronto stock exchange. And there’re also a number of Bitcoin mining companies that have gone public via special purpose acquisition companies (SPACs). So that’s another play that you could use for getting some exposure to Bitcoin mining through stock market investing.

A couple of other companies that are considering IPOs to look out for, one is the Kraken Exchange, a Coinbase competitor. One of the unique selling propositions that Kraken has, is that I think they’ve got a U.S. banking license. This is happening in the U.K. right now, as well.

And why does that matter? There are a lot of banks who are either refusing or restricting the amount of money you can transfer from traditional banks to crypto exchanges. They all have their own excuses as to why they’re doing this. And I think this is what Kraken saw coming.

So, the fact that Kraken is a chartered bank in the U.S. means that they can sidestep that problem entirely. If they’re a bank and an exchange, they can bank their customers and make sure that any money can get through to the exchange and into the crypto sphere.

The CEO, Jesse Powell, has alluded to the fact that they’re considering an IPO. So that’s one to look into.

Other types of companies that may consider IPOs include Taxbit, a piece of software that automates tax calculation of crypto transactions and investments. So Taxbit is a system that you set up, connect to your Coinbase or Kraken account — or any number of other brokers you might use in crypto — and it will calculate the taxes for your transactions. It’ll also will look up transactions from the blockchain.

So, you could give it the Ethereum address that you’ve been using for your decentralized finance activity, and it will pull in all the transaction history from the public network, and then look at the exchange rates at the time of the transaction, the transaction fees that you paid, write off those transaction fees against your gains, work out how much the transaction fee was worth at the time of the spend, and so on. So you can imagine that’s quite useful, because tax reporting is necessary for all crypto investors. So everybody needs it.

Let’s put some hard numbers on this. In March, of 2021, Taxbit secured $100 million in Series A funding round. Fair enough.

But then, just a few months later in August Taxbit raised another $130 million in a Series B round of funding.

$130 million, five months after they got $100 million. In less than six months, they’ve attracted $230 million worth of investments from I assume, venture capital. And that puts their company valuation now, at like $1.33 billion. And it’s still private company. It’s just mind boggling, isn’t it? Certainly mind-boggling.

So that’s the kind of company that could quite rapidly see itself doing an IPO, if they choose to go down that path. But either way, keep an eye on them.

Other companies that might consider it. FTX, another crypto exchange I previously mentioned that does derivatives, margin trading and so on, recently raised $900 million, putting their company valuation at $18 billion.

Another one is OpenSea, a marketplace for digital collectibles and non-fungible tokens (NFTs). They recently raised $100 million, and their valuation as a private company is currently $1.5 billion.

And that the last one I looked up was Zed Run, a digital horse racing platform that blockchain technology to make the races provably fair, and then users place bets with crypto

So, they’ve got the betting aspect and t the provable fairness using cryptography and blockchain technology.

But they’ve got something else, too. Each of the racehorses are NFTs, digital collectibles. These crystalline horses, if you look them up, are works of art and playable NFTs, because you can race them. And then they’ll have a track record, and of course, the better the track record of your horse, the more it’s going to be worth on the secondary market.

And further than that, if you want to go really bananas, you can actually breed these digital horses. If you’ve got a thoroughbred that’s winning loads of races, there’s going to be lots of other people that want to breed with that horse to create race winners.

With that said, the developers of the Zed Run game, let’s call it, recently raised $20 million. To get that figure, I’m just going to the website. Google it, go to the website, look at the live stream on the homepage. You can see the race, without signing in or betting, or anything. So just check that one out. That would be one to watch as well.

There are those potential IPOs that I just mentioned: Kraken, Taxbit, FDX, OpenSea and Zed Run.

This isn’t financial advice, but if I were personally going to put my money into any one of those, it would be OpenSea, the NFT marketplace. Because the NFT thing, that’s going to last and OpenSea is currently the leading marketplace for listing and selling NFTs on the secondary market.

I think they’re pretty well-placed to be the eBay (Nasdaq: EBAY) of NFTs. That’s probably the best way to think about them. They’re the eBay of the NFT space.

So, the final thing I want to talk about is how these crypto company IPOs compare to IDOs.

But first, a little explanation. If you’ve not been around crypto long, then you may never have heard of an ICO, or an initial coin offering. This was something that came along in 2016 and 2017, in the crypto bull run. And that is where you create a brand-new cryptocurrency and sell it for the first time in exchange for other cryptocurrencies, just like listing a stock.

So, I can create the Coney coin, for example, and I could create a token supply of 1 million Coney coins. Then, of course, I mint them all so they’re all in my wallet. And then I do an initial coin offering where I say, on this date, you can buy a Coney coin for 0.001 Bitcoin. So you’d send me that amount in BTC and you get one Coney coin back.

So that was the ICO, the initial coin offering. But now we are back in a crypto bull market in 2021. And [the rollout of new crypto] has evolved into the IDO, an initial decentralized offering. I suppose it should really be called an initial decentralized coin offering. Because what people do with these, is again, the same thing, you create your Coney coin with a million tokens. And then people use permissionless decentralized exchanges, like Uniswap (UNI), to just list those tokens for sale in a completely permissionless and unstoppable way.

So I looked into some of these IDOs via platforms that are called Launchpads that specialize in doing these IDOs. So Polkastarter is one of them.

So I was looking at a couple of their upcoming projects and their fundraising targets are like $200,000, $500,000. So when I saw that, I thought, well, that’s much more akin to a seed round of investing, rather than an IPO. Because if the public is going to invest in a stock, it needs to have a pretty strong track record. It’s also not likely to get through the regulatory scrutiny in order to get to an IPO stage anyway, especially without a high track record, pardon the pun, to show the regulators before they let you do an IPO.

So maybe [seed investing is] where these IDOs would fit.

We can do a lot of these $200 grand fundraisers, so large numbers of startups can test their ideas, separate the wheat from the chaff and see which ones stick. Maybe that’s a sweet spot for IDOs, the seed capital thing, because it crowdsources the funding. And, like I always say about crowd funding, I think it’s much safer for a million people to invest $1 each than for one person to invest $1 million, because that’s all the risk in one place.

So, even as individual investors, we can invest $100 in one hundred IDOs, and just scatter the seed all over the place. Some of them are going to stick, some of them are going to die, but fair enough. If you want to get one of those unicorn investments, that’s the only way to do it, isn’t it?

Those IDOs that do stick and manage to find a use case in a product market fit, then they might attract some venture capital, and maybe then go on to IPO. Maybe, maybe not.

The biggest obstacle I can see there, though, is securities regulation. The goal of securities regulation is to protect consumers from harm. The regulators in the U.S. especially may see the tokens sold as part of an IDO as securities.

So, there’s the Howey test, which basically says that if you buy say a token, or an asset, with the expectation of it going up in capital appreciation, then that can be considered a security. So while I don’t want this to be true, the way I see it, all the IDOs that I’ve seen fall foul of the Howey test.

But fundamentally, if someone buys a token IDO with the expectation of it going up in value based on someone else’s efforts, then still, no matter what programmable features it’s got, the regulators are going to see that as a security, aren’t they? So I suppose that’s a plus, for someone who wants to invest in IPOs — you’ve got the assurance that the business has been established for a little while, it’s made it through all the scrutiny of the securities agencies and then gone public on an exchange like the Nasdaq Composite or New York Stock Exchange (NYSE), which will have done its own due diligence.

That’s my quick whistle-stop tour through the topic of investing in crypto companies via IPOs. So that is all for this week for the Weiss Crypto Sunday Special.

Keep your eye on your inbox for next week’s episode. But, until then, it’s me Chris Coney saying bye for now.