The Breakdown - Coinbase Going Public Is the Bitcoin Bull Market's First Big Test

Episode Date: April 13, 2021

Coinbase is set to go public via direct listing on Wednesday. In today’s episode, NLW breaks down why this is the current bull market’s first big test, looking at: Mainstream narratives  Institutional liquidity  Retail participation  Spillover effects  The direction in which we head next  What’s clear is that this bull run does not equal 2017 and will be shaped by a largely different set of forces.  Byzantine General’s overview thread: https://twitter.com/ByzGeneral/status/1381095621017354240

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by Nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Monday, April 12th, and this is a big week. This week on Wednesday, April 14th, Coinbase will go public via direct listing on NASDAQ, under the ticker, coin. The public listing is incredibly highly anticipated by the crypto industry, of course, but also by Wall Street. Coinbase's Q1 numbers were absolutely monster and saw some analysts revised their price predictions for shares anywhere from 195 to 440 a share. Even before the Q1 numbers came out,

some were anticipating a $100 billion valuation. Now that number has crept up. FTX has listed pre-IPO contracts and say the current trading implies a valuation of around 140 billion. To be fair, the range has been insane, as low as 19 billion to as high as over 200 billion. I think, however, in many ways, this event is taking on an even greater significance than just a high number, and it's certainly a bigger deal than just for shareholders of Coinbase. In my estimation, the Coinbase Direct listing is this bull market's first big test. There are a few dimensions of that. First, mainstream narratives, Next, institutional liquidity. Third, retail participation. Fourth, spillover effects. And fifth, the direction we head next. Let's start with mainstream narratives. This is an undeniable mainstream

moment. Coinbase trading on NASDAQ is the simplest easy access normie investors have ever had to the crypto industry. So what they're saying about it matters. Are they framing it like another meme stock, like another GME? Are they looking at it as something more significant? Let's listen to to Amy Butte, former CFO of the New York Stock Exchange on Squawk Box this morning. This is real innovation and financial services. I used to joke that we haven't seen true innovation and financial services, meaning people act differently. They do things differently.

It's not just efficiency, probably since the money market account in the early 70s. And I think Coinbase has added to that innovation in a few ways. First, the settlement process, the fact that they're using blockchain means that we don't have to worry about T plus X settlement, which has been such an issue in our markets. Second, it's really new use cases. Personally, I'm not sure if crypto is an asset or a currency, but I am sure that people are using it differently. So, for example, NFTs, for example, people trading it separately. And then third, I think institutions, even in the last three or four months, have really come in and corporates have come in and said, hey, I need to have crypto as a part of my treasury planning. So the use cases plus blockchain means that people are adding this to kind of their general look within their portfolio and their activities.

Those are some pretty big words. true innovation and financial services, the likes of which hadn't been seen since the money market account in the 70s. Just as important, I think, as that high-level banner statement, however, is what she said about it actually being used. Bute said basically that it didn't matter that she wasn't sure if it was an asset or a currency. It was being used in these clear and interesting ways. I think from a more financial perspective, it also matters that people like Butte are recognizing this is a full-cycle earner. Now, that's a pretty good source, but it's obviously just one person. So what else are we seeing in the media? Here's a key line from a CNBC piece this

morning. Quote, the pending Coinbase Direct listing is exciting a broad base of the investment community outside the usual cryptocurrency crowd. That piece from CNBC goes on to articulate the problem the Coinbase listing solves. Crypto assets have had the same problem that other hot commodities like pot or space have had in the past, a high degree of interest with a notable lack of investment assets. Coinbase, however, will go a long way towards solving that problem. Matt Kennedy, the senior IPO market strategist at Renaissance Capital, which runs the Renaissance Capital IPO ETF, says, Coinbase will be the biggest public pureplay cryptocurrency company full stop. I expect to every crypto ETF will want or need to own it at some point, and it is possible our ETF will

be the first to own it. Now, that same piece from CNBC also spends a bunch of time talking about the momentum the Coinbase listing could give to a Bitcoin ETF proposal. Now, of course, there is some skepticism, and much of it is largely comparative. If Coinbase is valued at $100 billion, it would be worth more than the New York Stock Exchange and NASDAQ combined. The mental picture of that alone has some having a hard time with it. Ultimately, however, down to numbers. In the clip I previously played, Amy Bukes goes on to explain that the 15 to 20x multiple on a brokerage business is common right now and points back to the annualized revenue of about $7 billion that Coinbase's Q1 numbers point to. There are also other buzzy fintech

firms which are trading higher as well. The top 12 fintech firms to go public over the last six months have had price to sales ratios of 36x. Now, there's also a middle ground I'm seeing that was exemplified by the Motley Fool, which wrote a piece called Two Reasons the Coinbase IPO is a risky buy, subtitle, while its prospects are good, this cryptocurrency company does not belong in the portfolios of conservative investors. Now, the two reasons they list as riskiness are, one, over-reliance on trading to drive profits. They point to other exchanges and say they have more diversified products that could help weather market cycles. And second, the Motley Fool says they're priced for perfection. In effect, what they're saying is not that the valuation is absurd

given the current market dynamics, but that it could be hit really hard if Coinbase fails to meet expectations or in the context of a general tech stock crash. In other words, it's sort of a, the bigger they are, the harder they fall argument. Now, importantly, they're not saying that people shouldn't buy Coinbase. They're just saying that more conservative investors might not want to jump in on the hype. Of course, one other dimension that I'm seeing in the analysis of Coinbase's valuation relates to another big number from its quarter one earnings. The 122 billion of about $2,000,000, 30 billion total in assets that Coinbase holds that come from institutions. Many analysts see this number as an even stronger full cycle force, given that those institutions are much more holders

than traders. Speaking of institutions, let's talk liquidity in institutions. Another dimension of why this is the bull cycle's first big test has to do with something of a double-edged sword. Last week, Nick Carter tweeted, Coinbase is the gateway drug. It will be the first Bitcoin-related investment for so many firms that have stayed away thus far. Career risk of buying Coinbase is nil. Sexy Silicon Valley Company, Blue Chip, backed by top VC's abundant cash flows. First, true, public proxy. But is there another side of Coinbase being a public proxy? Might it be that instead of being a gateway drug, Coinbase simply stays the drug of choice? Dan McArdle tweeted a poll last night about exactly this and had about 2,000 votes when I looked. Do you think coin will cannibalize institutional flows that

otherwise would have gone to actual Bitcoin. 9.9% said yes, a lot. 23% said somewhat. 26.9% said maybe a little. That's about 60% of people think that Coinbase will cannibalize institutional flows that would have gone to Bitcoin at least a little bit. 40.2% said no. Now, I've talked about this before, and I think it's a completely reasonable question. It is likely to me that there will be some incitations who will take it

it's good enough view of Coinbase when it comes to crypto market exposure. Ultimately, however, I just don't think there's that large a group who believe that crypto is important enough that they feel they have to have some exposure, but who would have bought Bitcoin if Coinbase wasn't available and won't buy Bitcoin now. On the other hand, I think there are a lot of institutions who wouldn't even really walk down the Bitcoin path, who might now, down the line, do that because they get some exposure in the interim via Coinbase. I think what would validate my point of view on this question would be Bitcoin performing better

than Coinbase over a certain time horizon, call it over the next year. That will make some number of institutions who hold only Coinbase really question their policies. If, on the other hand, after a year, Coinbase is outperforming Bitcoin, we may have to come back to this question of how much it might suck up institutional liquidity. Whatever the case, this is obviously part of this idea of this being the first big test for this bull market. People have a huge sense of anticipation that. that Bitcoin and the rest of the crypto markets will pop. If it goes the other direction, there might be some quick narrative shuffling. All of that said, don't also discount the fact

that there are likely more institutional holders of Bitcoin than we've even heard about. The Coinbase listing could create a context for some of those to be revealed. Last week, for example, we learned that billionaire Dan Loeb's third point, which manages about $17 billion, has five of its funds holding crypto under custody with Coinbase. This was revealed in an SEC filing, but it was confirmed by... by Dan Loeb himself, who tweeted, outed as a hodler and added laser eyes to his profile. Looking for the best way to unlock your crypto's liquidity? Nexo.io is exactly what you need.

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Michael Saylor connected the dots between institutions and retail, tweeting, simple arithmetic implies that Coinbase is gaining one million users and 10 billion in digital assets each week. This direct listing is going to be a wake-up call for institutional investors, financial advisors, and investment banks worldwide. Bitcoin rises. One of the theories about the Coinbase listing is that it will spark the next leg of this bull market.

The logic is that it will capture retail interest in a way that really hasn't come yet this time. Van Spencer tweeted, if I had to guess, I would say the dot-com analog of the Coinbase IPO is Google's IPO. Both launched after a punishing bare market, had unbelievable growth and margins, solid core businesses to expand from, great call options on adjacent businesses, and re-legitimize their industry. Now, interestingly, when it comes to retail, it doesn't really seem like they're fully in this rally yet. Google's search volume is high, but still ranks under a 50 on Google's all-time scale out of 100. Web traffic to exchanges, likewise, isn't at all-time highs yet. When it comes to this

notion of Coinbase's listing being the first big test of the bull market, part of that is how retail responds. Does it bring more retail to the underlying assets? Moreover, are retail required for this rally? Being driven by institutions rather than by retail mania, frankly, feels a bit healthier. In 2017, part of what boofed everything is that people were aping into these non-real projects and getting dumped on by the early investors who had no lockups. We don't really have those dynamics right now. NFTs are the closest thing to a white-hot crypto asset with questionable valuations, but it's not super clear that NFTs are really linked to broader market activity in Bitcoin and crypto. If anything is dubious around retail right now,

it's things like XRP doubling its price in the last seven days. But while that might be retail technically, at least so far, it seems like it's a 2017-2018 vintage of bagholder, more or less, versus new people getting all hot and bothered and coming in because of something they saw on TikTok. This is what we have to watch and see in the wake of the Coinbase IPO, is whether we shift to some of those more questionable dynamics. Fourth and how this is the bull market's first big test has to do, I think, with spillover effects. Another way to put what I was just saying about retail is to ask what sort of price spillover into other assets there will be. Now, many are thinking about that price spillover in the context of

Bitcoin and other top 10 coins, but the most obvious spillover so far has been to Binance's coin BNB. Hasehcounter's tweeted, when a narrative surfaces, i.e. Coinbase IPO equals exchange token go up, usually the most favorable play is to load the truck up on the flagship asset most representative of that instead of looking to play underdogs. Being a native token of a growing network sure helps too. B&B is currently number three by market. cap in crypto. It's up 15% in the last 24 hours, 29% in the last three days, 51% in the last week, and 106% in the last month. It's just too big brain to trade to say if Coinbase is highlighting crypto exchanges, what are other crypto exchanges that I can trade? I think in some ways the test part of

this is how much B&B will follow Coinbase going forward. If Coinbase pops and then drops as BNB follow, what will the correlation be? Ultimately, however, all of this is incidental to the big question around Coinbase, which is the direction we head next. There is a growing debate over whether Coinbase kicks off the next leg up in a bull market or whether it signifies some sort of top. Chow Wang noted a rise in froth, tweeting, mental state over the last three months, fatigue, tons of new projects trying to compete with incumbents with minor improvements, mental state now, slowly transitioning into disgust, tons of laughable ideas, obvious pump and dumps, and shady deals. Some others are bringing up the super cycle theory, cedera's

Peribus writes, Supercycle isn't just nice to have, it's a necessity at this point. Another drawdown of 80% plus bear market probably cancels true long-term adoption. James Wang, formerly of Arc, tweets, Am I the only one who's a bit nervous about this crypto market because the setup is so obvious and everyone is talking about the imminent bull run? On this point of the direction we head next, I actually want to take a page out of my own long-read Sunday and read a very extensive Twitter thread by Byzantine General, at Biz, B-Y-Z General on Twitter.

It is so comprehensive that I think it gives a ton of food for thought, and that's probably why it's been liked over 10,000 times at the time of this recording. I'll share a link in the show notes as well, but I think that it's worth going and engaging with. Byzantine General tweets, My current thoughts on Bitcoin. Very long thread, forgive me.

Bitcoin has been ranging for a while, and volatility has dropped remarkably low. In fact, it hasn't been this low since December last year. This is an important fact I'll come back to this later. So what's up? We still bullish or what? Let's talk about the bad stuff first. It's important to stay rational and neutral and look at both sides of the argument. Here are some bearish arguments. Cycle tops usually happen when the majority of the market cap is held by short-term hodlers instead of long-term hodlers. We're currently making such a shift, but it's not yet at previous levels of extremity. Funding has been consistently

pretty damn high in the past couple of months, and it still is to this day. This is bad for two reasons. One, it's expensive to be long. Two, it shows that being long is the overcrowded trade. However, high funding is only dangerous when the market is driven purely by derivatives' greed. But there is also a pretty damn strong spot bid, so maybe it's not that problematic. More on this later. Kimchi Premium. This shows that Koreans are buying Bitcoin at a premium. During the cycle top in 17, there was also a big kimchi premium. Apparently, because of regulations arbitrage, this has become even more difficult, so maybe we don't need to put too much emphasis on this.

Mempool weight is kind of high again and obviously so are fees. High transaction fees are bad for business. Grayscale. A lot of demand comes from the Grayscale Bitcoin Trust, so let's talk about it for a moment. Holdings have plateaued the past couple of months and even declined a bit in March. The trust is currently closed. So no buying right now from one of the main drivers of demand in this space. On top of that, the premium has gone negative. For reasons I won't get into now, this could have a negative impact. Grayscale is still optimistic, though, and they're looking to turn the trust into an ETF, which would solve this negative premium problem. It's just a matter of when the SEC allows it. By the way, GPTC would be the second largest commodity ETF right after gold. Pretty cool. Speaking about ETF, side note, the Canadian Bitcoin

ETF now has 17,000 Bitcoin in holdings and it keeps going up pretty much nonstop. Sure, it's not nearly as big as gray scale, but it's pretty exciting. It's a given that more ETFs will come in the next couple of years. Some on-chain metrics suggest that we're nearing overbought or euphoria levels. One of my favorites is reverse risk, which basically shows long-term holders confidence. It's getting pretty high, but doesn't scream top just yet. Since I'm talking about on-chain stuff now, let's take a quick look at the fundamentals. Hash rate and difficulty keep casually going up. The network seems to be doing well. Minor revenue is up a lot. Remember the minor death spiral fud for the millionth time during last year's

having? Absolute clowns. Try again for the million and one time during the next having. Transaction value in USD is at all-time highs. It really grinds my gears that not Normies say Bitcoin is useless when it's literally one of the biggest payments networks in the world. Doesn't matter if a lot of it is trading. Bitcoin is clearly being used. The lightning network is still steadily growing. Nodes are now at 10K. So fundamentals look fine. Granted, there's not that much exciting stuff happening, but that's okay. Bitcoin is boring, reliable, safe, and it's the most decentralized and robust network in the space. Since Bitcoin is money slash store of value, it doesn't need to be more than that. Now let's talk about some cool stuff. Spot volume has

exploded. In recent weeks, it had gone down a bit, but that's normal during consolidation. For yesterday, though, yesterday's volume was still higher than during the Black Swan in March 2020. Tether market cap is still increasing, which shows that there's still demand. And with tether settling the legal dispute, there's no uncertainty anymore either. Minors don't seem to be selling anything at all. Pretty much no minor to spot exchange flow. In fact, minor outflow in general is very low. This one is important. Spot exchange reserves keep going down. This shows that there is very real and consistent demand. Based on the spot net flow, you can get further confirmation. Except for those two inflowers, most significant flows have been outflows.

This massive consolidation range that we're in sure looks a lot like reacumulation. So has this massive rally been driven by retail? Google search volume suggests it's not. Searches are high, but not back at all-time high levels. Maybe most people already know about Bitcoin, though, and they're not Googling that word anymore. This is stronger evidence, though, that retail Mailmania isn't here yet. Web traffic to exchanges has been increasing a lot, but not at all-time high levels yet. Same thing for Coinbase Google searches, up but not at all-time highs. Their user base has been steadily going up, which is good, but where does most of the volume come from? Here's our answer. Coinbase's volume has skyrocketed, but the ratio of retail volume is

incredibly low. Last bull run, we were talking about institutions coming, but now they're actually here and they're buying. A quick glance at BTC Treasury shows how much Bitcoin institutions that we know of have been stacking sats. Even insurance companies are now investing in Bitcoin. The game is changing. But the whole space is growing. In 2017, pretty much every project that existed was pure Fugazi. This time around, there's actually something of value being built. D5, for example, has a constantly increasing total value locked, now at a net value of $45 billion. NFTs have exploded recently. I don't care what you think about it. NFTs have caught worldwide attention. You can't learn about NFTs without learning about crypto. It's another form of adoption. These things are more related

ETH, of course, but it's good for crypto as a whole. Don't even get me started on how good Eth looks. I'm getting to the most important stuff now. Liquidity is still good. During the peak of 2017, this usually happens during peaks and troughs, liquidity was a major problem, but spreads are still good, so is slippage. And like I mentioned at the beginning, volatility is incredibly low. Bitcoin has literally never printed a cycle top on low volatility. So if the top is in, it would be a first, unlikely. Last but not least, the Coinbase IPO April 14th. Coinbase Google searches suggest that Normies haven't caught on yet. It seems to be only the crypto nerds that are even aware, and even among us, there's disagreement

on what this event entails. Some consider this an obvious sell-the-news type of deal. That would imply, though, that price has gone up significantly because of this fairly recent news. Just look at the chart. We've been ranging here for like two months. This doesn't look pricing at all. For the first time, we'll be able to buy shares of a massive crypto company that has been doing incredibly well.

So now I'm back to the first chart. This event could trigger volatility again. So the million dollar question is, of course, volatility to the upside? I'm sure that by my tone, you can tell that I think yes. One reasonable bit of skepticism that I've heard is how much more bullish can it get? But dot, dot, dot, dot, dot, dot. Between all these institutions buying, Visa testing stable coins, PayPal integrating crypto, Tesla accepting Bitcoin as a payment option, maybe it's time to admit that this time things actually could be different. That doesn't mean that there won't be any corrections anymore. Of course not. I mean, we've seen three massive

liquidations and corrections this year alone. But this bull run could be different. Maybe the four-year cycle structure that we're used to from Bitcoin could break. I could say a lot more, but this thread is already so long. Summary. Derivatives are a bit overheated. Constant strong spot bid, institutional driven flow, no peak retail euphoria yet, mainstream adoption getting very real. Coinbase IPO could be volatility catalyst. Dumb down summary. Number four go up. Probably. Back to NLW now. And ultimately, what I can tell you is that right now the energy in this space is charged. There is simply no denying that this is an inflection point moment. And while exactly what happens next is impossible to predict, the great thing about this industry is that you can bet with your wallet on what you think.

Anyways, guys, I'm sure we'll be talking about this a lot more this week and we'll be seeing what happens and whose theories are right. But for now, I appreciate you listening. And until tomorrow, be safe and take care of each other. Peace. We're witnessing the greatest paradigm shift in finance in modern history. Join thousands of newsmakers and influencers talking the future of money at Consensus by CoinDesk. A live virtual experience of leaders, change makers, virtual reality meetups, keynotes from Ray Dalio, Gary Vaynerchuk, and much more. Get an up-close look at the boom in crypto, the surge in institutional investment in Bitcoin,

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