Bankless - SotN #43 Coinbase Goes Direct | CIO of Arca Jeff Dorman

Starting point is 00:00:00 Hey, Bankless Nation. Welcome to another State of the Nation episode. Coinbase went direct last Wednesday. We're going to go over what you need to know on today's conversation with Jeff Dorman from Arka Invest. David, how are you doing today? Absolutely fantastic. It's been a week since crypto's biggest company is now a public company. And so now that there's almost a week, it's the week's on Wednesday. And now that we have time, and data to reflect upon, we are going to do that. What lessons can we learn from Coinbase, now being a public company? Guys, this broadcast of State of the Nation, as usual, is coming at you live streamed over YouTube. We're doing it a day early,

Starting point is 00:00:56 but you're still going to get this on the podcast stream on Wednesday. So this is coming at you on Monday at 2 p.m. Eastern, usually on 2 p.m. Eastern on Tuesday, but we're giving this to you a day early. So we are talking about the listing of coins, of Coinbase. Coin is on the market, on the NASDAQ. What does traditional finance think about it? The banks, FinTech Wall Street. What do crypto natives think about it? Like Binance, Gemini and Uniswap, we're going to cover all of that. Before we get into it, we want to talk about some things that are

Starting point is 00:01:25 going on in the bankless nation. The first is this, David, it is bankless badge week, a two-week bankless badge week. It's starting today. So what's happening? What is bankless badge week? Yeah, so the bankless badge is a POAP in NFT that you can get if you are a paid bankless subscriber. And so you become a paid bankless subscriber and then you go and claim your badge. If you are not yet a paid bankless subscriber, you will get that email to claim your badge at the start of the month in May, roughly at 10 days. That's why we're doing this for two weeks. And so then you get to enter raffles. And we are giving away really cool stuff. The BAPs, the Eatscape shirts, which there are only 50 of. We are giving away the rematch.

Starting point is 00:02:09 remaining six, so you can be one of 50 lucky people to get a BAP. And then there's also even cooler stuff as well, including PL die, pool together die, and ether. We are actually giving away ether to a lucky bankless badge holder who wins the raffle. You have eight hours left. If you currently hold a bankless badge, you have eight hours and 52 minutes left to enter the first raffle that goes out on Monday. That's today. And then there will be one for tomorrow and the day after and the day after. And so make sure you get your badge and make sure you enter the raffle. Of course, join the raffle by connecting your Metamask wallet, having the Poet badge in there that you can join. And the raffle begins today, as David mentioned. We're doing this because we really

Starting point is 00:02:53 want you to get a badge. Really, really. Many of you guys are bankless premium members, have not picked up your badge. Check your email address. Check your email account for an email from Lucas at Banklesshq.com to see if you have that in the archive. and pick up your badge. David, another thing that's going on, we just dropped kind of an audiobook. It's like a very unique bankless podcast. Just dropped that today, actually. So this is Monday. On all of the history of crypto before Bitcoin actually starts in the 1970s. Right. Super interesting conversation and episode. Can you describe that for folks? Yeah, whereas Coinbase and Coinbase going public is really pushing the frontier into the modern realm.

Starting point is 00:03:36 and really we are at the bleeding edge of what crypto is, this is going all the way back before Bitcoin. And so Peter Pan, he's part of the MetaCartel team there, and he wrote this really fantastic four-part long series called Before Bitcoin. And it was all about these cypherpunks and the people that really led and stewarded the just domain of cryptography into the public realm

Starting point is 00:03:58 and really allowed Bitcoin and Ethereum to become what they are today. And so really, if you want to understand our industry from in totality, you can't start at Bitcoin, which is why Peter calls his series before Bitcoin. You have to go all the way back into the 70s where the fight for public information and public cryptography really began. And so we are telling that story on the Banquist podcast and that episode came out today. Guys, if you want to understand crypto, there's two things you need to understand. One is the history of money. The second is the history of cryptography. This is the second.

Starting point is 00:04:30 This is the history of cryptography. This is embedded in crypto culture. As David says so often, and crypto culture is tight. This is why. Go check out that podcast. Also, David, we should mention, I feel like we're getting into retail season. What does retail season mean? And how can folks get their friends onboarded to Defi?

Starting point is 00:04:48 What's the best way to do that? Yeah, retail season is where everyone who wasn't in crypto before, all of a sudden is in crypto. And that comes with a lot of baggage, a lot of cool stuff and a lot of pain, because crypto is not yet the easiest thing to use. But Dharma is actually, if you've ever used Dharma, it is the easiest thing to get into Defi. And the best part about Dharma is that all of the defy assets, which Ryan and I beat the drum on as being like crypto's first real non-L1 assets that are tokens that are legitimate tokens rather than just some stupid ICOs.

Starting point is 00:05:22 Like all of the good assets you can get on Dharma. And so when you are a friend, I know you as the crypto person because you probably talk about it ceaselessly because that's what crypto people do. and they come to you and they ask for advice, send them to Dharma because it will make sure that they only buy legitimate, viable assets and not stuff like Doge. I don't recommend Doge, but I do generally recommend this stuff that you find on the Dharma app. Yeah, absolutely, guys. So this is a way to just connect your bank account and then you can immediately just in one tap of the app, get assets into a DeFi protocol like YFI, start earning 14% in just the tap of an app. That's where we are sending our friends today who are interested in defy. David, I've got to ask you the question I ask at the outset of every single state of the nation.

Starting point is 00:06:12 And that is this. What is the state of the nation today, my friend? The state of the nation is public. We are a public nation. Coinbase, our as a crypto industry, our biggest company ever with over 1,000 employees. I think there's only one company in crypto that has 1,000 employees, and that's Coinbase, is now a public company. And really, the Coinbase going public was a monumental landmark event for all of our entire industry, because it's very legitimizing.

Starting point is 00:06:41 Like, the people that just, like, throw away Bitcoin and Ethereum and all these, all other crypto assets as, like, non-legitimate, really just have fewer and fewer and smaller and smaller foundations to stand on because something like Coinbase is now public. And it's really, it feels like there's many events like this where there's like before and after, and this definitely feels like one, where there's. There's the before Coinbase was public, and there's going to be the after Coinbase was public. And now we are in the after part of the world of crypto. So the Bankless Nation is public. We went public, absolutely.

Starting point is 00:07:13 And I feel like the narrative is going public along with the Coinbase listing on the NASDAQ. We are going to talk about what Wall Street thinks, what traditional finance thinks about the Coinbase listing as well with Jeff Dorman from ARCA investments when we come back. But before we do, we want to thank the. sponsors that made this episode possible. Bankless is proud to be supported by Uniswap. Uniswap is a new paradigm in asset exchange infrastructure. Instead of a cumbersome order book system where trades are matched with other humans, Uniswap is an autonomous piece of software on Ethereum, which is what Ryan and I call a money robot. No human counterparties or centralized intermediaries, just autonomous code on Ethereum. Input the token you want to sell and receive the token you want to buy. Something

Starting point is 00:08:00 brand new in the Uniswap ecosystem is the Uniswap grants program is now accepting applications for grants. We have been saying this for a while and we'll say it again. Dow's have money and they are in need of labor. If you think that you have something to contribute to the Uniswop Dow, apply for a grant to Uniswap. Just look at the size of the Uniswap treasury. It's almost $3 billion. This mountain of capital is looking for labor. Do you have something of value to contribute to the Uniswap Dow?

Starting point is 00:08:28 No matter how big or small your idea is, you can apply for a UniGrant at Unigrant.org and help steer Uniswap in the direction that you think it should go. That's exactly what we did to get Uniswap to be a sponsor for Bankless, and you can do the same for your project. Thank you, Uniswap, for sponsoring bankless. Gemini is the world's most trusted cryptocurrency exchange. I've been a customer of Gemini since I first got into crypto in 2017, and it's been my main exchange of choice to make my crypto buys and sells. Gemini is available in all 50 states and in over 50 countries worldwide, and on Gemini there are markets for over 30 various crypto assets, including many of the hot defy tokens, and it's one of the few exchanges that has liquid dye markets. Gemini just launched their Earn program where you can earn up to 7.4% interest on 26 various crypto assets.

Starting point is 00:09:18 If you're tired of paying fees in Defi, or you don't want to worry about defy exploits, but you still want to earn interest on your crypto assets, Gemini Earn is the product for you. Another product I'm stoked to get my hands on is the Gemini crypto-back credit card, which gives you 3% cash back on all of your purchases, but paid to you in your preferred crypto asset. When I get my Gemini credit card, I'm going to make sure that I get my cash back in ETH,

Starting point is 00:09:43 so whenever I buy something, I get a little bit of ETH bonus back to me at the same time. You can open up a free account in under three minutes at Gemini.com slash go bankless, and if you trade more than $100 within the first 30 days after sign up, you'll be gifted a free $15 Bitcoin bonus. Check them out at Gemini.com slash go bankless. All right, guys, we are back with Jeff Dorman, who is chief investment officer at ARCO,

Starting point is 00:10:09 which is a digital asset management firm. Jeff leads the investment committee. He's responsible for portfolio sizing and risk management of crypto and defy assets, which has got to be a fun job. Jeff has a ton of experience in traditional finance. So he's, he's, He's been in the space over 17 years, close to 20 years, and he has served at world-renowned firms like Merrill Lynch and Citadel. He's now joined the crypto industry. So I feel like Jeff is a fantastic bridge from the traditional world to this new, exciting world of crypto.

Starting point is 00:10:41 And we are here to talk all about Coinbase, which is also a bridge of sorts. Jeff, how are you doing today? I am great. Thanks for the intro and thanks for having me. Oh, man. We're super excited to talk about this because this is really, as David and I were talking in the intro, this is really a pretty marquee event for crypto, right? One of our biggest publicly traded companies, like a crypto exchange, a crypto bank goes public. Can we start by talking about how big this is?

Starting point is 00:11:09 So, like, how big is this from your perspective? Is this sort of like shaking up traditional markets, or are they like not noticing? Is this, you know, what's been the effect of the Coinbase listing? Well, they're definitely noticing. I mean, it's hard to, it's hard not to notice the biggest company in the hottest industry with the only direct listing in the last, what, year and a half. So everybody is noticing. There is no question. That being said, it is a little bit under the radar more so than maybe people think, right? The traditional IPO, right, when you are issuing new shares and you have an underwriter like Goldman or J.P. Morgan or whoever, there's a huge roadshow. There's a long marketing process. Every financial advisor, every hedge fund, every mutual fund, every mutual. Fund knows about it. When you slip a direct listing in, even though everyone has heard about it, it knows it's coming. It's just not sold to you in the same way. I mean, I talk to many financial advisor friends and hedge fund friends and mutual friends who it wasn't even on their radar until after it priced because you just don't have that same sell pressure that's coming into it. So it is absolutely on the radar, but I think not at all surprising that it's going to take

Starting point is 00:12:11 some time here, maybe even months before this really ends up in most investors' portfolios. That's super cool. We got to talk about that. Actually, let's start there because I think a lot of crypto natives who are listening to bank lists aren't actually sure what the difference is between an IPO and a direct listing. What are the differences? How is a direct listing different? Sure. Well, the biggest thing with the direct listing is that the company is not actually issuing more shares and therefore is not making any money from the sale of stock. When you do an IPO, generally you are issuing some percentage of the float to new investors and you are then raising money on behalf of the company. So you are actually generating cash. That didn't happen. And that didn't

Starting point is 00:12:48 happen for a lot of reasons, right? One is because Coinbase doesn't need the money. They are just printing cash right now. They don't need to dilute themselves further by selling more shares. Two is, you know, they definitely have this mantra of more access to everyone rather than access to a select few. When you do an IPO process and you hire an underwriter, not only are you paying egregious fees for that underwriting process, but you're also then, you know, targeting a very small handful of large funds who are going to get the majority of those shares, right? The underwriter actually goes through an allocation process with the company and says, we're going to give shares to this fund, we're going to give shares to this fund, we're going to give shares to this company.

Starting point is 00:13:25 And that is a privileged process, right? I mean, all the company, all the funds who do the most business with the banks are the ones who are the most likely to get those high allocations. So there is definitely a democratization aspect. There's definitely a we don't need the money aspect. On the negative side, though, is it's complete price discovery, right? In an underwritten process, the research firm that is underwriting it will come up with a fair value for that price and they will market that price.

Starting point is 00:13:51 They will say, we are going to sell X percent of the company's shares at this price, you know, take it or leave it. And maybe they adjust the price higher or lower based on demand, but generally it's being a guided process. When you do a direct listing, you're just basically teasing the market makers, right? The knights, the citadels of the world, all the equity market makers and saying, go ahead and figure it out where this is going to trade. And, you know, they have some tools, right?

Starting point is 00:14:12 They can look at where it was trading in the NASDAQ secondary private market beforehand or they can talk to, you know, a handful of investors on where they might care. But basically, it's a blind process. You're just starting the process, making markets on the exchange and hoping that that equilibrium gets you to that right level. So there's definitely pros and cons. But most people who thought this was like going to shoot up 100% on day one, like a typical IPO, that doesn't happen.

Starting point is 00:14:36 It doesn't happen for a variety of reasons. One is because there's less shares in an IPO. You're only selling 5% of the 5% or 10% of the company shares. So the float is low and there's less. to buy. And two is because they intentionally often price that at a low level to make sure that it does trade up. Again, in a direct listing, it's just market equilibrium. There is no process. There is no, you know, selling it cheaply. So you've got a lot of market forces at risk. And it takes, you know, it'll take a couple of months for big funds to accumulate positions rather than doing it

Starting point is 00:15:07 all in one slug through the underwritten process. So Jeff, if Coinbase didn't mint new shares to do an IPO, Oh, where did those shares actually come from to get onto the market? Did Brian Armstrong and all the other early founders, they just decided, it's like, I want to sell this percentage and that's the shares that we see being traded? How did shares actually come onto the market in a direct listing? Yeah, exactly. It's from existing shareholders. So existing shareholders are employees.

Starting point is 00:15:35 There are the early venture funds. It might be a couple of funds who bought it in the six-week auctions of the NASDAQ private secondary market. But yeah, it's other firms and individuals who are. already own the shares. So again, in a typical IPO, they might only offer five or 10% of the float to new investors. Here, you know, it could be 50%, it could be 80%, it could be 20%. It just depends on how many early investors want to monetize. And I think a lot of crypto Twitter specifically has been just way off in terms of what this process was, but more so they kept focusing on, oh, well, why are these guys dumping on the market? Why are they selling? Right? Because

Starting point is 00:16:12 it's such a mantra in digital assets that you don't want the company to dump their tokens. But this is natural, right? If you're an early venture investor and have been in this for seven or eight years, you almost always sell when a company goes public. Like you've done your job. You funded the company. Now it's time for you to move on and give it to the mutual funds and the other hedge funds who want to own liquid stock.

Starting point is 00:16:30 You know, if you're an early employee, you have been underpaid, most likely for the last seven or eight years. And this was how you got paid. And now it's your turn to monetize that. So you can go buy a house or go buy a car or do something with that money. So this is how it should work, in my opinion. You should be transferring the ownership of this company from the early insiders and investors to a more democratized investor base of professional investors and retail investors alike.

Starting point is 00:16:56 It's kind of funny to me, Jeff, that like crypto Twitter didn't really understand this because this is a bit more like the crypto-native approach. This is really what happens with tokens. I mean, they're not in a lot of cases, they're not IPOing. they're owned by existing holders and they're resold on the secondary market. I want to take a look at this chart. So this is performance, price performance for the first few days. This is, of course, coin was listed on Wednesday of last week.

Starting point is 00:17:26 And right now we're trading at about a $66 billion market cap. I got to confess, I thought this would pump a little harder myself. And I want to get back to what you think about that in a minute. But let's maybe dispel the myth. that you saw circulating. So there was this myth that Brian Armstrong and all of the coin base insiders were essentially like dumping all of their shares, right? And you can understand why this sort of a narrative took steam because, you know, crypto is also used to dumping by insider whales in all sorts of its other asset classes. But this is really not the case, right? Like this is Frank

Starting point is 00:18:07 from the block, I believe, reporting that actually the insiders didn't. sell very much. Is this kind of what you're seeing as well? Yeah, the irony, of course, is that in the digital asset world, you almost never get full disclosure and transparency, so you're always guessing. Here, you get full transparency, and people just interpreted it incorrectly. We created rumors. Yeah, like, you have to file these documents with the SEC, and they did, and everyone just misinterpreted it. So what happened is a lot of the insiders and early employees were given a lot of options in addition to the early shares of founding the company. And those options exercise at various times. And the report that came out was suggesting that all of the options that were

Starting point is 00:18:47 exercised were then sold. But they weren't selling all of their share. I think the rumor was that Brian Armstrong sold 70% of his shares. He sold 1% of his shares, actually. He sold 70% of a small amount of options that he exercised. And same with the other executives, right? So it's like, again, it's ironic because everyone's desperate for more information and less secrecy. And here you have full transparency and just complete inability to interpret it, correct? Is this just crypto natives not understanding aspects of traditional finance? I mean, we kind of introduced you, Jeff, as sort of the bridge. Is this just what's happening?

Starting point is 00:19:21 They're not understanding how to read, like, public documents? Yeah, I think so. I think it's an experience. I mean, I used to joke with people that, you know, you can learn to trade in two months. You can learn to analyze companies in maybe two years, but it takes, you know, 20 years in counting to get experience and understand markets and risk and things like that. And unfortunately, as smart as most of the people are in this space, there's just no shortcut for experience. You know, if you've never seen a direct listing before, if you've never, you know, gone through a 10K or a 10Q or an S1 or a, you know, 13G filing, you just don't really know what to look for.

Starting point is 00:19:51 So, you know, in this environment of the first, as soon as I see something, I want to post it on Twitter immediately, maybe you got to slow down a little bit and actually understand it before you throw that information out there. All right, Jeff. Well, this is why we're having you on. You've got 20 years in this. So what were your expectations for the performance? of coin like prior to listing. And did they hit your expectations? Are they below? Are they above? Or is this basically what you thought would happen? Sure. So I didn't actually have a view on what the price would be. I did have a view that it would take a while for the price to go higher. And there's a few reasons for that.

Starting point is 00:20:23 One is the media has been just completely wrong on the share count since, you know, the first coverage of the Coinbase listing three months ago. They continue to point to this 266 million share number, which is the fully diluted share count of the company, but there's only actually 199 million shares outstanding. The other 60 million are, you know, options awards and other non-vested stock that may or may not ever come to the market. So first of all, they were reporting this $100 billion number based on the price it was trading in the NASDAQ secondary market before going public, but they were converting that price times a higher share count to get to $100 billion. It was never trading at $100 billion. It was trading at $50 to $60 billion the whole time. And the media

Starting point is 00:21:04 just kept saying 100 billion, 100 billion, 100 billion. So when it actually came below 100 billion, everyone freaked out and said, oh, it's a disappointment. You know, you could even look at the FTX pre-coin IPO markets that they had, where the price was, you know, 2x what it was actually probably going to come at, just because people were misinterpreting the media. So right there, you had expectations that failed largely because the expectations were wrong. Separately, and I think probably more importantly is one of the things that happens with an IPO is the underwriter actually sells more shares than they have available. They create a short on the desk, and then they use that short to then be the bid on day one and day two and day three of trading to make sure that it trades, you know, that it doesn't trade down, right?

Starting point is 00:21:44 They facilitate, they do their job. They become the market maker and they put support under it to make sure that it trades well. Well, again, without an underwriter and an indirect listing, that didn't exist. All you had was new buyers and existing sellers, and you're just trying to find a clearing price. So let's say your fidelity and you're trying to buy, you know, a billion, dollars of the stock. Well, you can't just call JPMorgan and say, hey, give me the highest allocation you can in the IPO. You have to go out there and buy a billion dollars on the open market. And you're not going to do it on day one. You're going to buy 20 million here, 30 million

Starting point is 00:22:13 there, 40 million here. And it takes, you know, weeks to get that accumulation for these new investors who have never touched it before. So not surprising at all that it didn't go higher right away. What I think will happen now is now you'll start to see the street coverage, right? You already saw a couple of, we'll call them Tier 3 or Tier 4 type banks come out with reports with $500 price targets, $600 price targets. Pretty soon the Tier 1 firms are going to start doing it. You're going to see a JP Morgan report, a Goldman report, a Bank of America report, a Morgan Stanley report. When the big banks come out there and they start putting their price targets out there, that's when I think you'll start to see a real acceleration of the price. And on top of it, you know, don't forget, Coinbase had a blowout first quarter earnings that surprised everybody.

Starting point is 00:22:58 And now, if you're a traditional financial analyst, you're saying to yourself, well, was that an anomaly or is that the norm? And if you're new to digital assets, you might be modeling this company for the first time, have no idea if first quarter was a flash in the pan or if that's sustainable. Whereas if you've been in the industry for a long time and you understand Coinbase's model and how it works and how they generate revenue, you know that it's largely driven by the price of Bitcoin and Eath and the volumes that are happening. So most people in the space are expecting second quarter to blow the doors off the first quarter. And this company is probably going to do close to 10 billion of revenue in 2021 compared to doing only like a billion of revenue all of 2020. Well, that's a big jump in revenues for someone who's in the outside traditional world and maybe not as well versed into how these companies work. So I think it's just a feeling out process. It's going to take some time.

Starting point is 00:23:47 But ultimately, you know, you're seeing it today, right? I mean, over the weekend, Bitcoin fell, what, almost 20% on three hours on Saturday night. And if you went on FTX and you looked at the coin price on FTX, which is mostly digital asset native traders, they assumed it was going to go down to $285 a share, even though we opened today at 333 when the stock actually hit. And that's again, that's just crypto traders are like, oh, Bitcoin down. This thing must be down too because it must have a two beta like everything else. And the reality is that's not how stocks work, right? People are accumulating the stock right now. They're going to buy it, regardless of what the price of Bitcoin is.

Starting point is 00:24:19 doing on a day-to-day basis. And they're going to accumulate it based on a two-year-out view. And the two-year-out view is that this company is going to be printing cash. And I think it's a very cheap stock. This very much strikes me as a process of like the crypto natives learning more about how traditional markets work, right? NASDAQ works. But also like the financial industry in Wall Street, learning how crypto works. And this is almost like a perfect case study for that. I mean, let's let's talk about the, the Coinbase fundamentals for a minute, Jeff, if we could. And, you know, look at it through the lens of maybe an analyst who's looking at this, right? So you were talking about kind of first quarter.

Starting point is 00:24:57 Here's some info from the block, which I believe they pulled this info from some of the public reporting from Coinbase. But we've got 56 million verified users on Coinbase now in Q1. We've got about six million of those transacting on a monthly basis. Coinbase as a company has 223 billion assets in its custody. that'd be, I guess, assets under management. Total volumes going up. Like Q1, as you said, was sort of a blowout quarter, and here's revenue, 1.8 billion. And you were thinking like, you're projecting like a $10 billion year.

Starting point is 00:25:35 Is this how an analyst is going to look at these fundamentals? Are they going to kind of go through and try to just extrapolate all of these things? Yeah, for sure. I mean, you know, staying in the crypto world for a second, go ask half your crypto investors what their Bitcoin model looks like or what their Ethereum model looks like. Most of them don't have one, right? We have models for the companies that we're investing in because we're investing in tokens that are accruing economic value, whether it's defy or something like Chili's that's doing sports.

Starting point is 00:26:02 But most cryptocurrency, you can't model and therefore you don't have that skill. A traditional financial analyst, the first thing they're doing is they're ripping through the S1 and the 10Q and they're putting a model together. And they're going to be pretty fast at doing it. They're going to look at the revenue growth. They're going to look at the MTEU growth. They're going to try to figure out what inputs, affect the model, right? So, you know, are you going to, are you going to have a base case of,

Starting point is 00:26:24 you know, 10% growth of users and maybe a base case upper, and a bear case of, you know, MTF? So when you, so here's the hilarious thing, though, Jeff, and I just want to get this in there. So like, as they're modeling, though, they're going to have to try to predict the price of Bitcoin and Eath, because that has such a bearing, a large bearing on the volume that Coinbase is going to do from a capital asset perspective. Yeah. So generally what an investment banker is taught and what a research analyst taught is you figure out the inputs to your model first. And you have a separate sheet in your spreadsheet that just has the inputs. And everything else is an output.

Starting point is 00:26:56 And then you just continue to toggle and mess around with those inputs to see how it changes your model. So you have your base case of Bitcoin, say, 57,000. And then you have a multiplier on that. What if Bitcoin falls, you know, 10% quarter over quarter. What if it rises 20% quarter over quarter? And you change these assumptions and you see what kind of sensitivity analysis there is to your revenue and to your EBITDA. In actuality, this is one of the easiest companies to model of any company that I've ever modeled and that my analysts have ever modeled because it really is a fairly simple formula. It's a function of the price of Bitcoin.

Starting point is 00:27:27 It's a function of those MTAUs and it's a function of the spread that they're earning, meaning the fees that they're earning on the transactions. 96% of revenue right now comes from trading. So it is a really easy company to model. And if you assume a baseline price of Bitcoin's call it somewhere between $4.5.5.5. 50 and 60,000 and you assume modest growth in terms of MTFs, you get to a $10 billion revenue number really easily. And that's what most analysts are going to come out to. And then you have to factor in other things like, well, what is their business mix? Are they going to, you know, Brian Armstrong said that 50% of revenue over time is going to be subscription and not trading, right?

Starting point is 00:28:03 So then you start modeling in other factors. But every analyst on the street is going to have a pretty similar 2021 revenue model based on just the price of Bitcoin today and what this company should do in that case. So when you start getting those numbers out there, it's pretty easy to get to 100 to 150 billion market cap, right? When you look at the crypto stocks that exist today, like Riot blockchain or Marathon or some of the others, you know, they're trading at, you know, call it, you know, they're trading at 20 to 25 times revenue. You know, if you look at FTCS and Binance, if you combine the enterprise value of their token market cap and their equity market cap, they're trading at, you know, 30 to 50 times sales. So, you know, if you're talking about

Starting point is 00:28:48 Coinbase right now at 60 billion market cap on 10 billion of expected revenue, that's six times revenue. That is cheap by any financial analyst's measure. And they're just going to keep buying it. They're not going to stop. They don't care if Bitcoin's up or down 5% in a day or if it falls 10% on a Saturday night because of a leverage flush out. They're just going to keep buying it. And I think you're going to start seeing overwhelming, bullish calls from the analyst community over the next two to three months. So, Jeff, when you say that Coinbase is cheap and we also have these analysts who are trying to put models together, what are they comparing to? Are they comparing them to banks? Are they comparing them to tech stocks? Are they comparing them to FinTech

Starting point is 00:29:25 companies? What is our baseline that you find that you or other financial modelers or people in that cohort? What are they comparing Coinbase 2? Like where do they think that Coinbase as an asset fits into what niche? Yeah, I think it's all of the above, right? And that's the uniqueness of when you do analysis like this, is you have to think about what those comps are. You know, is the appropriate comp something in the crypto space like a miner? Or is the appropriate comp something like a Goldman Sachs?

Starting point is 00:29:55 Or is it a tech company like, you know, PayPal or square? And I think you're going to see analysis all over the map in that regard. If you're bullish, you're going to spin your model to, you know, take the industries that have the highest multiples. So you're going to look towards the finessex. tech world and the crypto world where you're getting those 20 and 30 times revenues. If you are a little bit bearish, you might look at Goldman Sachs or Jeffries, which trade closer to like, you know, three times revenue. You know, the difference, of course,

Starting point is 00:30:21 is Goldman Sachs, who does 45 billion of revenue and has 40,000 employees to get to a $100 market cap, 40,000 employees is a lot more than Coinbase's 1700 employees, right? Their costs are much higher. They have a 25% in an income margin, whereas Coinbase is going to have probably closer to 60% margins. So, you know, there's a lot of different inputs that you think about when you're comping this. For me personally, I think I think first and foremost you have to assume that the market is, the equity market in particular is very under exposed to the growth in digital assets, right? There hasn't been a lot of ways to get exposure.

Starting point is 00:30:56 You could have bought like the gray scale product and obviously that is, you know, having its own problems right now. You could have bought, you know, a galaxy stock or one of the mining stock, but those are all fairly small market caps. there hasn't been a real easy way to get exposure to this space in a pure play way. So right away, you have to put a higher multiple on this because of just the demand for access to this space. And then you have to look at this as, you know, is this a mature company that's going to have slower margins? Or is this a growth company that's more like a tech company that's going to continue to fly? And that's the, you know, that's where every analyst is probably going to differ, right?

Starting point is 00:31:31 Some people are going to say, you know, it's not sustainable to be this high margin as a trading company because there's, competition and because fees are going to get reduced. Others might say, you know, these guys are the biggest for the reason. They have levers in custody and in staking and in banking and all these other things that they can do. And, you know, we haven't even scratched the surfaces to, you know, the revenue and profits that Coinbase can produce. So I think it'll be all over the map. But I personally would look at this more in the FinTech, you know, crypto comparisons, which is high multiple fast growth. Yeah, absolutely. You know, we're going to get back to that line of conversation around sort of the moats to do coin basis business model and how that evolves in

Starting point is 00:32:13 in the future but before we do that i want to actually move from our investor analyst persona that we've been talking about so far so what if in your opinion jeff if we put our self in the shoes of a banking executive say uh wells fargo executive jp morgan executive right are they are they looking through coin basis filings as well and like what What are they thinking? I mean, here's a company that, you know, didn't exist nine years ago, and it came from nothing, to a fairly large market cap-sized financial institution. Is this a shot across the bow for them?

Starting point is 00:32:50 Are they beginning to look at this industry and see some competitive threat, or is that not registered yet? Well, I think you have to, right? I mean, the executives at the big financial institutions, they're well aware of everything that can cut into their business model. right? They have been getting squeezed for well over a decade now, both from the regulatory side as well as from the fees and margin side. So they're always looking for new business lines. But then you have that tug-of-war, which is, you know, generally they want to compete with you and be in the space. In this case, they physically can't. So now they're going to pretend it doesn't exist and, you know, talk about it not being there. I mean, Coinbase alone, just snubbing all these

Starting point is 00:33:30 investment banks by not giving them a chance to be the underwriter by doing the direct listing, you know, all of a sudden you got the bankers who are negatively free-disposed. to these companies while the quote unquote independent, you know, walled off research analysts were probably would be bullish if it wasn't for the fact that their banks are telling them not to be. So it's it's hard to know exactly how that will play out. But you, the reality is you'd have to be foolish not to take this seriously, right? This is a real growth. These are real revenues. I mean, you know, again, I said Goldman did 40, what I said? I think Goldman did 40 billion of revenue last year. And this company is going to do 10 billion this year. I mean, you, you can't ignore that.

Starting point is 00:34:06 That's a real number. And that is profits and revenues that historically would have gone to your firm. It feels like, Jeff, they have been ignoring it thus far. Just a news headline from HSBC. They were banning some of their customers from actually purchasing micro strategy stock because micro strategy held crypto. So some of them might be ignoring. It's your point.

Starting point is 00:34:27 They can't ignore it for long. Just curious, how do you think this plays out? Do the big banks start acquiring? Do they start getting active in digital assets? Do they start knocking? on the doors of regulators and, you know, asking for help. How do you think this plays out? Yeah, I hadn't thought about the last one, but it's probably true. Yeah, I mean, I think they are going to certainly be acquisitive to the extent that they can. The biggest problem right now is that

Starting point is 00:34:53 the pipes or the workflows for digital asset native companies are completely different than the pipes and the workflows for traditional companies, right? Not only just physically how these things trade and how you custody of them, but the rules around it. I mean, you know, you, you physically, a lot of them physically can't custody, you know, at, uh, by themselves, right? They have to have a third party custodian. They have to have all these different intermediaries that, that, that, you know, are not existing in the fintech world. So when you think about like even how, you know, how did square and PayPal, you know, grow as fast as they did without the banks getting involved, a lot of it is because they just can't move that fast. They, you know, they can't get into this, you know,

Starting point is 00:35:34 unregulated world when they're sitting there with regulation, you know, in every corner that they are. So I think they will be acquisitive to the extent they can, but it's going to take some time because these are really two different worlds with completely different rules and workflows. And it's just not that easy to tuck that in. I think you're more likely to see acquisitions of maybe some infrastructure companies or maybe some, you know, research companies or even some asset managers before you see, you know, acquisitions of the actual, you know, quote-unquote broker dealers or the traders in the space. Not to mention, if you are a Coinbase or, you know, a Cracken or whoever else, you're not looking to be acquired right now because you're printing cash, right? They feel they can go at it alone and that they're well capitalized enough to compete.

Starting point is 00:36:17 So, you know, I think you will definitely continue to see consolidation. But the banks are in trouble. I mean, they, you know, you can see it in, you know, whether you look at the KBW bank ETF or XLF, like, you know, bank stocks have not gone nowhere, basically, for a decade, while all this growth has happened around them from the fintech, the payment companies, and now crypto. So, you know, good luck to them. I wouldn't envy them, certainly.

Starting point is 00:36:41 Jeff, one of the mental model I have is for, at least with the long-term risks of Coinbase, is something that I'm calling the Coinbase squeeze, where we have a centralized competition coming from the left and Defy competition coming from the right, where just legacy, like, we already know that PayPal is already introducing crypto. And we already know that DeFi can do things that Coinbase can never really do. And so one of the risks that I think that Coinbase can get is like their moat just gets eaten, eaten from both Defi and already instantiated brokerages that already have all the customer base. But before we get to that conversation, I think we need to touch on where Coinbase gets all of its money from

Starting point is 00:37:19 and talk about the actual Coinbase business. And one of the risks that I see is that I think something like 97%, if I got the numbers right, of Coinbase revenue in the last quarter came from a trading volume. And so do you see this as a risk? And if you were on the Coinbase side of things, what would you want to see Coinbase do to help diversify some of that revenue stream? Sure. I mean, definitely a risk when you're concentrated. At the same time, I still think we're early enough where that's a positive risk for the time being and that the trading volumes are only going up. They're not going down. Now, you can see it in Robin Hood, right? I think in the first quarter, Robin Hood, in nine million crypto traders on their platform and they only have a total of I think 20 million so half of their users are an outtrading crypto.

Starting point is 00:38:08 Oh, by the do you know. Yeah, exactly. It's a, yeah, I think they only have seven assets that are tradable. So it's not a it's not a laundry list for sure. But they, you know, I think there's no question that transaction revenue is still going to be strong, at least for the time being, right? The numbers are going up. That being said, from a business standpoint, there's a reason Brian Armstrong of little guidance that they gave, the one thing he did say is that we think subscription revenue is going to be 50% of our revenue at some point because he understands or he's being guided by someone who understands that you do need to diversify that business to get analysts to give you full credit for what you're doing.

Starting point is 00:38:46 So how do they do that? Well, subscription, part of that is custody, right? If they can really go further instead of just micro strategy and Tesla buying through them, now they buy and they hold through them and they do staking and they do other services. So there's a lot of subscription revenue that can be done there. There's also the idea of in some way, shape, or form getting into banking in some way, consulting and advising these companies who are going to ultimately be bringing their own tokens to market. We're probably only two or three years away from every company in the world having a token in their capital.

Starting point is 00:39:21 structure, from the airlines to Netflix to Twitter, anybody with a customer base, you're going to realize that it makes sense to have a digital asset in your capital structure and incentivize your customers to become quasi-equity owners. So there's banking opportunities there. There's a variety of different business models that you can get into once you have the brand and the audience that they have. So I think it definitely remains to be seen how fast they can diversify and where that competition comes from. But, you know, that is definitely going to be the push over the next few quarters earnings calls. You're going to constantly hear them talking about their business mix and that revenue mix and try to get that down from 96%. And on the flip side, I don't think the

Starting point is 00:40:03 competition from other centralized players is the issue. I think you're right. I think it does come from defy and these other services. So the onus again would be on Coinbase to, you know, can they figure out how to participate in that? Can they offer some sort of, you know, quasi or hybrid CFI, Defi type alternative, kind of like what Binance did with the launch of Binance smart chain. So, you know, they're going to have to be innovative. They're going to have to, you know, be proactive. But at the same time, again, they're the hottest company and the hottest industry. You don't have to do everything all at once.

Starting point is 00:40:35 Right now the revenues speak for themselves. And where do you think Coinbase goes from here? Because me, as a young person who is extremely frustrated with Wells Fargo and any other bank, I would much prefer my direct deposit to go straight into Coinbase, and it would be even nicer if Coinbase did stuff like debit and credit cards. And in my mind, perhaps the future of Coinbase is just eating some of the more traditional services and just capturing customers and just keeping them in-house so that they never even have to touch a legacy bank.

Starting point is 00:41:07 That's my mental model for what Coinbase could evolve into, at least on the centralized side. What do you see as the future of Coinbase and future revenue streams? Yeah, I definitely agree with you on that one on the wallet side, right? I mean, eventually you're going to see more and more companies paying their employees in, you know, either Bitcoin or other digital assets. And that's going to have to, you know, flow through your payment provider to somewhere. And where is that somewhere? That's a wallet. So Coinbase, you know, given the brand, given the balance, you given all the things they've done, like that is a definite place where they can, you know, start to have partnerships, you know, with the gustos of the world and the companies that are providing payroll.

Starting point is 00:41:44 So that is a huge windfall because like you said, right now, you still kind of have to start in the banking world by putting your money in a bank and then, you know, sending it to Coinbase. Well, if all of a sudden you don't even have to touch the bank and it comes directly into your account, that's a home run, right? Your AUM just explodes and all these other ancillary services go higher. One of the things that my analyst, Alex Woodard, did a really nice job of when we were going through our Coinbase analysis was looking at the one plus customer mix. What that means is the amount of customers of Coinbase that are using more than one product, right? And the margins on those were way higher than the margins on single users. So that is evidence of what you're suggesting, right? If you can get more money in there and get them access to more product offerings,

Starting point is 00:42:36 they're going to become better, stickier, higher margin customers. And that's going to be the goal for Coinbase right now is get not only get more users, but get them to use more tools when they're in there. Guys, Coinbase eating the traditional banks, traditional banking system, not being able to move fast enough. These are themes we've talked about so often on bankless. We're going to come back with Jeff and talk a little bit about something he hinted at we want to get into is the potential for a coin token as well.

Starting point is 00:43:05 We'll get into that and more. But before we do so, we want to thank the sponsors that made this bankless episode possible. Balancer is Defi's most powerful automated market maker. Typical AMMs just have two tokens inside of one liquidity pool, which can lead to fractured liquidity across the many pairs in Defi. With Balancer, you can access the full power of multiple tokens inside of one single AMM, which unlocks an entirely new playing field of possibility. This makes Balancer an awesome building block for so many different use cases. Balancer pools can make asset indexes, but instead of paying fees to portfolio managers, Balancer lets you collect fees from traders who use your portfolio for liquidity.

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Starting point is 00:45:02 It compares Dexas, aggregators, and market makers to find you the best price. with the lowest network fees and the least slippage. This means you can swap a wider range of tokens, and swaps can even automatically split up your trade to give you access to better liquidity. You don't even have to think about it. Try it out, download Metamask for desktop or mobile now at Metamask.io and start swapping. Hey guys, we are back with Jeff Dorman from ARCA. We are talking all about the Coinbase Direct listing.

Starting point is 00:45:36 This is really the bridge from the traditional financial world to the crypto world. Jeff said something super interesting that we caught in the first part of this, which is he said that he thinks in the future every company will have a token on its balance sheet. And I think he was talking more about a crypto-native token rather than sort of a tokenized equity or something like that. We'll get him to explain it. But I want to start with this question. Jeff, it seems like Coinbase has even, opened this up as a possibility on page 68 of their risk assessment section. They talked about

Starting point is 00:46:14 the potential to issue in the future a customer of reward or loyalty program in the form of a blockchain token. Sort of interesting. Can you talk about the potential for Coinbase to maybe issue a token in the future, what that might look like? And then talk more about your thesis that every company is going to have some sort of token in their balance sheet as well. Sure. Well, first of all, obviously the S-1, the prospectus, that is a huge document for a reason, right? It's not just about what the company wants to do. It's about what their lawyers tell them they have to disclose to, you know, for CYA policy. But that being said, like, there is a reason to put that in there. It makes all the business sense in the world. So the way we've always thought

Starting point is 00:46:57 about digital assets at ARCA is that these are the greatest capital formation and customer bootstrapping mechanism we've ever seen. And what we mean by that is, you know, typically when you raise assets at a company, you're either issuing equity, which is a claim on your future profits, or you're issuing debt, which is a claim on your assets, we think issuing a token is basically a claim on network or customer growth. And you can see how impactful that has been, right? Binance was the fastest growing unicorn in history and, you know, went from nothing three or four years ago to now probably worth $250 billion. But that $250 billion is, you know, a split. They probably have about $100 to $150 billion of equity value, and then they have a

Starting point is 00:47:38 token that has a market cap close to $100 billion. When you add that together, that's your enterprise value. Now, how did finance grow as fast as they did? Well, it was because of the B&B token. They issued the token to all of their customers, and their customers not only are getting services like discounts and rewards for trading on the platform, but they're also getting some form of a quasi-equity or what we call a pass-through token where the revenues or the profits of the company are being passed through to token holders. So what you're doing is you're coordinating and incentivizing your customers to also be evangelist because they're being financially rewarded for being so. So Binance is a great example of a Venn diagram where their customers and

Starting point is 00:48:18 their quasi-equity holders are one group of people. The opposite of that would be something like McDonald's, right? McDonald's customers are probably not their shareholders and vice versa. The shareholders are probably not dining at McDonald's all that often. There's no coordination between the people who are giving McDonald's the money and the people who are actually spending and using the service. If you can start combining that into one holistic group where your customers are also financially rewarded in addition to the utility, then you can see much faster growth. And in my opinion, outside of your decentralized projects like Bitcoin and money and some even like some of the protocols like Ethereum, the pass-through tokens and asset back tokens who have

Starting point is 00:48:56 figured out this incentive model where you can basically bootstrap your own growth by incentivizing your customers to use your product more and to evangelize on behalf of you, that's how you get the hockey stick growth. So going back to Coinbase, it makes all the sense in the world. Not only is it, you know, obvious from a copycat standpoint when you look at things like finance and FTX and how fast they've grown, but also why wouldn't you as a Coinbase employee want to own, you know, some piece of the financial upside? If they can issue a token that's, you know, maybe 10% of all revenues get passed through directly to token holders, either in the form of a, you know, coin buyback or some sort of a dividend, and if you own that token, you also get better rates on lending or staking or more leverage

Starting point is 00:49:36 or something like that, all of a sudden you turn every one of your customers into a loyal evangelist. And that's where we're headed. I think every company inside and outside of the digital asset world will figure this out over the next three to five years and we'll have a token in their capital structure. So, Jeff, that's definitely something that we are definitely aligned with with the bankless world where we see tokens as coordination vehicles for communities and companies. But I want to get your interpretation of what we saw in the S-1 because I'm not I want to know I want to know if you actually think that that is coin basis strategy or if they are simply just talking about issuing equity tokens or security tokens on a blockchain because what they say what they say in the

Starting point is 00:50:17 f1 is that if we issue additional shares of capital stock including in the form of blockchain tokens in connection with customer rewards or loyalty programs I actually think that's kind of not totally clear. Like, are you convinced that it is what you were talking about, or could they actually be talking about issuing literally a security token on Ethereum? I think it's intentionally ambiguous because they are doing, they're exploring this. Now, the issues with what I said earlier about companies doing this in their capital structure is that there's no real legal precedent, at least here in the U.S., right? Most of the tokens that have been issued have been from non-U.S. companies to non-U.S. users and investors. We haven't really

Starting point is 00:50:56 broken that regulatory, you know, gray area yet in terms of how, you know, you issued this. In fact, the two companies that have tried to issue tokens, Blockstack, and I think INX, it's actually really weird, right? If you actually, you know, they're doing a full road show and a marketed process with an S1 and a prospectus that makes it look like you're raising debt or equity. But then if you actually look in the filings, it's being booked as revenue, right? That's not when you issue equity and you issue debt. It's not being booked as revenue. But when you issue a token, the, you know, the accountants were like, this is like pre-selling a product. So you have to book it as revenue. So there's all these like, inconcuretion.

Starting point is 00:51:30 congruencies that just don't line up yet with regard to how accounting treats it, with regard to how the SEC treats it. So there's going to be some work to be done before we get there. But that's also why in some ways I was a little disappointed that Coinbase just issued straight equity on the NASDAQ rather than trying this. You know, you need some pioneers to do this. And what better company to do it than Coinbase. Meaning if coin, you know, when I and X and Blockstack tried to issue tokens, nobody really had heard of them outside of the crypto world and probably didn't care about. But every. everyone had heard of Coinbase. And if you were ever going to push the envelope and be like, we are issuing our stock as a security token and you have no choice but to figure out how to get a wallet and buy this as a token or else you're not going to get access to the stock of one of the fastest growing companies and largest companies in this industry, a lot of traditional mutual funds and hedge funds would figure out how to do it.

Starting point is 00:52:22 They would be forced to be like, okay, I got to figure it out. No different than when Google IPOed in 2004. They didn't use an underwriter. They did a Dutch auction. People were pissed. They're like, I don't want to do that. Like, just do the traditional route. And they're like, we're Google.

Starting point is 00:52:35 If you want to own our stock, this is how we're going to do it. So figure it out. And I think Coinbase had an opportunity to do the same thing where they could have said, we're Coinbase. If you want to own it, you need to own it in the form of a token and figure it out. Now, again, they didn't do it for a variety of reasons, probably some regulatory and legal, some because the pipes aren't set up yet to really trade these things. You know, T0 is not a very active platform yet.

Starting point is 00:52:56 So it's not like you can really trade these things yet. But in the future, that will all be solved for. You will have, you know, ATSs that are actively trading, digitized versions of stock. And, you know, one day you might see two versions of a token for Coinbase. You might see the actual tokenized stock. And then you might see the, you know, the pass-through token, which is kind of quasi-equity, quasi-utility. And I think, you know, all these things are on the table. And I would expect Coinbase amongst other large companies in this industry to explore all of these options.

Starting point is 00:53:25 Well, what's going to be interesting is when some of the other exchange, exchanges do list or do go public as I think they may in the future if they take a shot at this. I as well was a little bit disappointed that we didn't see a coin in some form, airdrop to existing coin-based users, right? That would have been a very crypto-native play. But I want to ask you a question about these categories of assets because I just want to make sure it's kind of lining up because it is the case that something like BNB, the finance token, sort of straddles the world of capital asset.

Starting point is 00:53:57 and also like loyalty asset or loyalty coin, right? And that seems to be almost like a regulatory barrier in the U.S. that companies like Coinbase can't get across. So let me know if this square. So on a company's balance sheet, you have debt, and then you have some sort of equity instrument, right? If that company is public, that equity instrument is a security, essentially. Or even if they're not public, it's still a security,

Starting point is 00:54:23 which, of course, U.S. regulators have a defined, perspective on what the security is. But we're also talking about potentially this, like you call it a utility token, almost like a loyalty token that might do something else. It might give you precedent within the platform. It might give you a discount on fees. It could give you exclusive access to something. This is a bit more like an airline mile or a hotel point in the traditional system, right? So you've got these maybe these three categories of asset. What we can't seem to do in the U.S. is combine, you know, category two, which is the capital asset, and category three, which is the loyalty token. Because as soon as we do that, we run a foul of securities laws, right? Whereas B&B,

Starting point is 00:55:09 Binance does not have that problem. They're very happy to create this ambiguous pseudo equity, loyalty asset that can be used within the Binance ecosystem in a variety of ways. But Coinbase doesn't have that luxury. So in the U.S., is it possible that they could, could release some sort of loyalty token. Do you see that path is maybe playing out that's not that's separate and distinct from the coin capital asset and stock or just talk about that for a bit? Sure. Well, first of all, I don't have a lot to add a lot to add because you actually nailed it.

Starting point is 00:55:40 You hit all the focus points on the head there. Like that that is the issue right now. Is that in the U.S., the laws do not allow for what everyone else in the world is doing. And, you know, so you can understand why there's frustration here in the U.S. At the same time, the U.S. also has the best protections and customer protections and investor protections of anywhere in the world. So, you know, there's a school of thought that it's good that they're taking their time to get this right rather than rushing through regulation that will be obsolete three months later. So you definitely have a little bit of that tug of war here that it is impossible to do what makes the most sense to do, which is those hybrid, you know, quasi-equity, quasi-utility type vehicles. I think we'll get there, though.

Starting point is 00:56:19 You know, as much as it is fun to poke holes at the government and the SEC and how slow moving they are, you know, the reality is they're not trying to crush innovation. They're trying to understand it and, you know, protect investors. Now, they don't always get everything right. You could argue like accredited investor laws, for example, are pretty archaic and don't make a lot of sense. But I do think that we will eventually have regulation that allows companies to do this. You know, ultimately, digital assets are still new. They are bridging the gap between investment vehicles and payment vehicles. That's never been done before, right?

Starting point is 00:56:50 Traditionally, you have your investment vehicle through a brokerage account and you have your payment vehicle through a bank. Now we're trying to combine that into one entity with a token, where it is your investment vehicle, it's your utility, it's your payment vehicle all at once. That's pretty complex. So I would like to see the laws losing. I would like to see, you know, this get done. But ultimately, you know, this is again why I was sort of putting the onus on Coinbase

Starting point is 00:57:13 to have been the ones to try it because you need a well-capitalized large company with visibility to be the pioneer willing to, you know, go down that road and set legal precedent. Until you have legal precedent, it's not illegal, it's just not legal, right? You're in that gray area and, you know, somebody has to try it. Somebody has to work with the SEC to get it right. And to your point, yeah, like there's no reason to have separate loyalty points anymore. That is now archaic relative to this new technology and this new structure. We're going to get there.

Starting point is 00:57:43 I just don't know how long it will take. And that's definitely why I think so many people like make me and included are so excited about having Coinbase go public just because now we do finally have that entity to really bear that banner for our industry. Jeff, as we get further into this conversation, we kind of want to go through a number of just short little conversations to really tie a bow on this. And one of those conversations is who's buying coin? We talked about who's selling it. A lot of the early founders are just selling a small portion of their equity. Who's buying Coinbase. We know Arc Invest has, I think, put in hundreds and hundreds of millions of dollars

Starting point is 00:58:22 into buying coin. Do you have any insights or information there about who is the interested parties behind coin the equity? Yeah, it's going to be largely the investors who thus far can't get exposure. So I'll give you an example. Before I even answer your question, I'll go back. Micro Strategy issued a convert not too long ago, convertible bond, right? The sole purpose of that was obviously to go buy Bitcoin from micro strategy standpoint, but the reason they are using a convertible bond is because that opens up the door to a whole new type of investor that has no access, which is fixed income investors. If you have a fixed income mandate, you cannot buy anything other than bonds. Well, convertible bonds are a form of a bond. You are getting basically equity upside in

Starting point is 00:59:02 micro strategy, which is very tied to Bitcoin's balance sheet, but you're doing it in the form of a bond. That was opening up a whole new audience. Well, at the same time, what is Coinbase doing? They're opening up to the audience that doesn't have access. And who is that? That's financial advisors traditionally at the big wirehouses, right? The Merrill Lynch's, the Morgan Stanley's, you know, the TD Ameritrades, et cetera, the, you know, the LPLs. These are, this is the group of investors that thus far has been largely shut out other than buying GBTC or, you know, the gray scale EF product, right? That's been the only thing that they've been able to buy.

Starting point is 00:59:33 So that's going to be your first big buyer base is all of these, you know, equity investors who have money at, you know, these wirehouses and brokerages who physically can't buy Bitcoin directly. they can't buy, you know, maybe they can't buy, you know, the equity of these Asian and European companies in the mining community. Like this may be the only chance for them to get exposure to the space, and that's going to be the first buyer. As a result, you know, they're going to end up in these mutual funds of the big companies as well. Eventually they'll probably end up in, you know, one of the indices, probably the S&P 500 at some point, if not the NASDAQ. And as a result, then you'll also have index funds that have to buy it because they're indexed to those, to those, to those benchmarks. So, you know, there is a natural buyer base out there, you know, as much as we

Starting point is 01:00:19 focus on the digital asset world, don't forget that low rates and a low dollar are also incredibly bullish for equities. And we just saw the greatest, you know, largest inflow to U.S. equities that we've ever seen in the last quarter. That money has to go somewhere to. And that money is not going directly into Bitcoin or directly into Ethereum or directly into, you know, uniswap tokens. That's going into equities. And this is now the best equity vehicle to express a bullish view. It's so cool. It's definitely well stated the bull case for coin for institutional investors. Also, bankless listeners, if you were listening to what Jeff was saying, notice how siloed institutional capital actually is. Certain things you can buy, certain things you can't. When we talk about crypto-nate as being able to right now front-run the institutions, this is what we're talking about. There's a massive amount of opportunity there for us. Jeff, I want to ask you the question of who's next. So we've got a number of other U.S.-based entities, you know, Krakens on that list, maybe Gemini's on that list. There are some crypto custodians as well. Do you think they all follow in the track of

Starting point is 01:01:24 Coinbase go the publicly traded route? Do you think we'll see a slew of crypto-native companies starting to be listed on the NASDAQ or do you see a different path playing out? I think they're certainly going to try, right? I mean, this is a finance has always been a copycat industry. As soon as you see one successful story, you're going to see five more right behind it. You know, equity investors in, you know, Gemini and Cracken and any other company that's similar to Coinbase, you know, they've been sitting on private equity now for five plus years. And if they can monetize it, they're going to try to do it. So, you know, we've already heard the rumors that Cracken is trying. I think you'll see a lot more of public

Starting point is 01:02:06 companies in the next, you know, a couple of years here, whether they, whether because of spas or because of IPOs or direct listings, but you know, you're going to see it, especially if, you know, these revenues continue to be as high as they are. There's no reason why you won't see more listings soon. I have one more question, and this is maybe we've talked so much about the traditional investor lens on coin, but I also know you're very plugged into the defy world, too. So there are these crypto-native assets like Unitoken from Uniswap and sushi. How do their valuation stack up now to publicly traded Coinbase? If you're to look at kind of like price to sales ratios and that sort of thing, which I know some of your reports have, are they looking like

Starting point is 01:02:52 interesting buys or just like interesting compared to coin or not? How do you see that plane? Yeah. I mean, you know, when we talk about sales versus earnings, right, what is the difference between sales and earnings? The difference is your expenses. And what are your expenses? It's largely, you know, the legal, the regulatory, the employees, the rent, you know, all those things that go into your expense line. Well, these decentralized entities like Uniswap and Sushi, they don't have that. It's, you know, your sales are your earnings. So when you look at something like sushi, which is, you know, or sorry, look at Uniswold, you're trading at $17 billion market cap right now and their run rating, you know, well over a billion dollars of revenue. That's pretty

Starting point is 01:03:33 cheap, right? 17 times priced earnings for a growth asset that's growing, you know, basically 100% quarter over quarter. 20 employees? Yeah, right, exactly. I think sushi is even below 10 times. I think sushi is, the market cap right now is only a billion and a half. And I think their run rating,

Starting point is 01:03:52 off the top of my head, I think it's closer to like 300 or 400 million or something like that. You're looking at like a four or five times price to sales, price to earnings right there. I mean, that's incredibly, incredibly cheap if you are looking at this through the lens of financial analysis. So, you know, I think the biggest winner from all of, of this in the digital asset world is that these dexes should all be repriced. You know, they are super cheap. You know, the difference, of course, is that you're relying on cash flow, right? There is no underlying equity value where you can get if there's a sale of the company.

Starting point is 01:04:21 But the cash flow is there, right? These are these revenues accrue, you know, largely to the LPs, but, you know, some sliver of it with sushi already accrues to token holders. You know, eventually, I think you will see the fee switch go on at Uniswap where those cash flows will accrue to token holders as well. So, you know, there's reasons to be very bullish on the deck. as we wrap up here Jeff I've got a one last question for you which is what do you think coin base looks like in five years and I think this actually blends very nicely with what we were

Starting point is 01:04:48 just talking about with just the protocols in defy just being so slim and lean and offering so much surface area for other people to tap into Vance Spencer who we had on the bankless podcast a very long time ago said gave this tweet that I think provides really good context here's coinbase in five years probably no order book trades routed to open source liquidity where they LP Coinbase LPs coinbase focuses on the front end the regulatory the staking in the custody they earn most of their income from LPing and staking the native tokens of Dex's and primarily serve as a wallet for users and they are asset light how does this take about Coinbase in five years land with you and do you have any other opinions about what

Starting point is 01:05:30 Coinbase looks like into the future I think that's interesting and it would be that would be faster than I would expect it to happen. As much as I love defy and I'm bullish on defy, it's going to be a long time before people are trusting putting billions and trillions of assets in these smart contract protocols. I think I would be pleasantly surprised if it happens that fast. I think more likely, as much as we like to joke about the traditional banking system and how archaic it is and how slow it is, like probably Coinbase starts to look like a bank. They probably look like a Goldman Sachs where they have pretty steady earnings across four or five different business lines where they're, you know, doing everything from, you know, wallets,

Starting point is 01:06:05 which is basically like a deposit. They're doing some lending and borrowing. They're doing some staking. They're doing, you know, the traditional exchange and market making. They probably have consulting and advisory services as well for other companies. So I think, you know, again, we joke about Goldman and all these banks going downhill, but they're still, you know, producing tens of billions or even in some cases like JP Morgan, hundreds of billions of revenue and have multiple hundred billion dollar market caps. I think Coinbase probably looks and feels more like that in the early days before eventually, you know, becoming more of this kind of decentralized entity. Now, the flip side is we've never really seen a traditional bank and a fintech company be one, right? The fintech

Starting point is 01:06:46 companies are over here, the banks are over here. Coinbase may be the perfect, you know, company to be both, right? They might offer these same kind of fintech payment, you know, credit card type opportunities while also having your traditional banking opportunities as well. And if that comes, if that happens, you know, this might be one of the largest fintech and banking companies in the world. Jeff Dorman, thank you so much for coming on bankless and talking all about Coinbase. Thanks also for serving as this bridge from traditional finance to this new crypto frontier. We greatly appreciate your insight. Let's do this again sometime soon.

Starting point is 01:07:21 Absolutely, guys. Thanks for having me. And Jeff, if people want to learn more about what you've written about and more about ARCA, where should they go to find out? sure yeah you can go to our website at ar.ca we have a blog on there with a lot of educational content including that's our two satoshes which is our weekly crypto market update and then also follow me on twitter at jdorman 81 guys definitely sign up for the arca blog publication it is fantastic lots of great analyst insights and items there this also this conversation with jeff i think for for me self's part of the the the defy paradox that we've talked about so often on bankless, which is why aren't more people talking in

Starting point is 01:08:03 mainstream about defy? Like the growth of uniswap alone has been absolutely phenomenal. I think the answer to that is it's happening too fast. It's too fast for everyone to keep up. You look at Wells Fargo. It's taken 160 years for it to get over 100 billion in market cap, 45,000 employees. Now, Coinbase, nine years. It's about to reach 100 billion market cap. If what we talked about remains true with 2,000 employees. Now you've got Uniswold. swap two years, the volume of Coinbase already with 20 employees. That is how fast this is happening. So this is what the bankless journey is all about is trying to keep up with this and front run it. Thank you so much for joining us. But lastly, got to say, risks and disclaimers, crypto assets are risky.

Starting point is 01:08:46 So are assets on the stock exchange. Of course, all of crypto is risky. So is DFI. You could lose what you put in. But we are headed west. This is the frontier. It's not for every. everyone, but thanks so much for joining us on the bankless journey.

Bankless - SotN #43 Coinbase Goes Direct | CIO of Arca Jeff Dorman

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