The Breakdown - How Will the Coinbase IPO Affect Bitcoin's Price?

Episode Date: April 6, 2021

Today on the Brief: The 88th anniversary of Executive Order 6102 Former SEC Jay Clayton on bitcoin regulations  GBTC intends to become an ETF Our main discussion:  NLW breaks down the potential implications of the Coinbase IPO. He looks at the bullish arguments of mainstream presence, the potential to send people down a bitcoin rabbit hole and the provisioning of easy on-ramps versus the argument that it will give people a chance to get crypto industry exposure without actually holding bitcoin or other crypto assets.  -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

Coinbase is not only a great way to start, but it could start your journey down the path to more learning. You watch the numbers go up. You start paying attention to Bitcoin in general a bit more. You notice days where Bitcoin is making a lot more than Coinbase, and in a few months, you notice that you would have just been better putting your money into Bitcoin than putting that money into Coinbase. Boom, welcome to your new financial rabbit hole. 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 nexus.combe.

And produced and distributed by CoinDes. What's going on, guys? It is Monday, April 5th. And today we are talking about how the Coinbase IPO might affect Bitcoin's price. First up, however, let's do the brief. First on the brief, on this day, 88 years ago, exactly. FDR signed Executive Order 6102. It started, all persons are required to deliver on or before May 133, all gold coin, gold bullion, and gold certificates now owned by them to a Federal Reserve

Bank, branch, or agency. This was the famous seizure of gold, and the argument was kind of two different parts. The first, the more public argument, was that hoarding gold was stifling growth and worsening the depression. The real rationale behind it, was to remove constraint on the Federal Reserve for increasing the money supply. Whatever the rationale, private ownership of gold coins, bars, and certificates remained illegal for about four decades. So why do Bitcoiners care? Why do they notice this day?

In short, there is historical precedent for forceful state seizure in the United States of an asset that is perceived to be interfering with monetary policy. For some, there is a longer-term concern that something like this might be visited upon Bitcoin should it grow too powerful. So what's my take? I do subscribe to the ignore history at your peril point of view in general. However, I think that this is a massively different time with a dramatically different set of circumstances. From the Fed side, there are no self-imposed constraints at all on the monetary policy they can run. So even if they don't like Bitcoin ownership, it's not imperiling how they run the dollar as gold was in the early 1930s. From the standpoint of perception of state power as well,

This would face an absolutely vicious response from many, many legislators. It would be a very strange battle to pick, although presumably the circumstances that would have someone pick this battle or more extreme than anything we're experiencing now. Then there is, of course, the practical consideration. How would you actually seize Bitcoin from everyone who holds it? This is why centralized exchanges represent to many choke points that could be very dangerous places to store your coins. And finally, there is the growing lobby of holders that is a growing lobby of holders that is increasing in power. Right now, it strikes me as pretty unlikely that many of the big institutions that have gotten themselves Bitcoin exposure would go to the mat to fight something like this,

although I could be wrong if only from the standpoint of them being scared of the precedent of the state feeling comfortable seizing specific categories of financial assets. By the time Bitcoin is big enough for this even to be on the table, that lobby will have grown enormously. So all in all, I think that regulation we don't like is a much bigger concern, but it's still worth noting this day. Which brings us to part two of this brief. The former SEC chair Jay Clayton was on CNBC last week and had this to say, quote, where digital assets land at the end of the day will be driven in part by regulation, both domestic and international. And I expect that regulation will come in this area both directly and indirectly. This idea of government banning's

government regulation and, on the other hand, environment, are the main fud floating around this time and this Bitcoin cycle. The question for me is, what does this theoretical regulation look like? A lot of the people who are sharing this don't seem to want to get into that sort of detail. Now, one interesting note on that front, the Financial Crimes Enforcement Network, FinCent, has hired Michael Mazier, the former CTO of Chainalysis, as their new acting director. The previous director, Kenneth Blanco, took the stance that crypto doesn't need its own legal framework because it's just subject to existing regulations. So is this good or bad for the industry? On the one hand, In hand, chain alice has few friends among Bitcoiners, especially the more privacy inclined.

It is seen as a tool for the government. And given how much of chain alice revenue comes from federal agencies, it's understandable why. On the other hand, at least chain alice actually understands what crime and crypto looks like and doesn't look like. It is their reports and analyses that are routinely used to debunk the crime fud, because they show just what a tiny percentage of overall crypto transactions are actually used for any sort of crime. So perhaps having an extremely well-versed person in this role is a good thing. Time, I guess, will tell. Last up on the brief today, GBTC to ETF.

For a very long time, Grayscale was the only public market way to get exposure to Bitcoin. When that was the case, GBT traded at a premium to Bitcoin. That premium got as high as 35% in mid-December. That premium, however, has been collapsing, and for more than a month, GBT has actually been trading at a discount compared to Bitcoin's spot. Why? The most likely answer is competition. There is an alternative similar fund in Osprey's Bitcoin fund. There's also now a slew of Canadian actual Bitcoin ETFs. Canada's Bitcoin ETF's lifetime inflow streak has now actually hit 25 days, which Bloomberg ETF guy Eric Balcunis called, quote, an unprecedented feat. Many have

speculated then that the only path forward for Grayscale is to convert the Bitcoin trust into an ETF, and today they confirmed that that is indeed the plan. Their blog post starts. First and foremost, we wish to make clear we are 100% committed to converting GBTC into an ETF. They applied for ETFs in 2016 and 2017. Obviously, no one has gotten a Bitcoin ETF approved in the U.S. yet, but the battle continues, and this is just more evidence that 2021 may be the year where we finally have a U.S. Bitcoin ETF. Looking for the best way to unlock your crypto's liquidity, nexo.io is exactly what you need. Borrow against your digital assets at just 5.9% APR.

Earn passive income with yields of up to 12% and swap between more than 75 market pairs with the instant nexo exchange. Try the nexo wallet app to get the whole 360 degrees of crypto banking. Get started at nexo.io. Hey guys, I'm excited to share that this week we have a special, product launch sponsor. Exodus is simplifying how we interact with crypto applications so that we can all reap the benefits of decentralized finance and take ownership of our financial future. With the Exodus Digital Wallet, there's no need to download separate apps or visit multiple

websites. Through beautifully designed desktop and mobile applications, Exodus users can secure, manage, and exchange their cryptocurrency in one easy-to-use wallet. With Exodus's non-custodial nature, nothing stands between you and your assets. Take control of your crypto and download Exodus today. Visit the App Store or Google Play to download, or visit exodus.com for more information. With that, let's shift to our main discussion, the Coinbase IPO and its potential impact on the markets. On Thursday, April 1st, Coinbase announced that it would begin trading on NASDAQ on April 14th under the symbol coin. By the way, I have no idea how coin was still available, but that is a cherry, cherry ticker.

Anyways, the interpretation. There is actually a historic precedent to this question of Coinbase and markets. Specifically, people have long debated or looked at whether it would have been better to hold Bitcoin at various points or invest in Coinbase in early rounds. To me, it actually gets at the heart of one of the lesser discussed disruptions of Bitcoin in the crypto space that followed, which is the disruption of venture capital itself. One of the great Twitter tropes that will always be successful is to remind people that Bitcoin is the biggest startup in the last decade, and it had no CEO, no marketing, and no venture capital. This is also one of the reasons that many have skepticism around VC-backed coins. There are questions of where incentives and power lie.

What's for sure is that early investors in Coinbase are going to make out like Kings and Queens. There was a story a week or two ago about how Duke is poised to make something like $500 million from their investment, and they weren't even as early as some. Speaking of who was early, Coinbase went through Wycombinator in the summer of 2012. Y Combinator currently ranks Coinbase as number seven on their list of top companies by evaluation and exits, below Airbnb, DoorDash, Stripe, Cruise, Instacart, and Dropbox in that order. Airbnb is currently trading around a $112 billion market cap or so, and Coinbase is anticipated to be right on their tail. But now, let's talk about what Coinbase might do for Bitcoin and the

crypto markets. So there are two main schools of thought, the bullish and the bearish. So let's talk bullish first. Three potentially bullish impacts, mainstreaming, whistle-wetting exposure, and on-ramps. So in terms of mainstreaming, there is absolutely no denying that the simple fact of this company being a high flyer on the biggest economic stage of the world will have a legitimizing impact on the space as a whole. People will be able to get exposure to crypto through stocks in a very traditional way. Sure, they can buy GBTC right now or a variety of mining-related stocks, but there's some reason that that's suboptimal. GPDC requires that you learn about the underlying asset. It only gives you exposure to Bitcoin, which

I suppose for some could theoretically be a net negative or at least limit the appeal. And once you do learn about GBTC, you learn that historically there's been a premium than you pay. There is, of course, micro strategy, but again, that still requires an understanding of the underlying asset. Coinbase doesn't take any of that. It is a growth technology company in the crypto space, the picks and shovels of this modern gold rush. It's been building for nine years, is backed by some of the best-known investors in the world. This is a mainstream investing opportunity. for crypto in the stock market. But let's take that idea a step further. Let's say that you get curious about the crypto industry but haven't really spent that much time learning. Coinbase is not only

a great way to start, but it could start your journey down the path to more learning. You watch the numbers go up. You start paying attention to Bitcoin in general a bit more. You notice days where Bitcoin is making a lot more than Coinbase. And in a few months, you notice that you would have just been better putting your money into Bitcoin than putting that money into Coinbase. Boom. Welcome to your new financial rabbit hole. A third bullish aspect of this is just the idea of on-ramps, right? There are many who are looking to the fact that the big, juicy stock in the space is one where you can download the company behind it on your phone and buy into the market in just a few clicks. Indeed, part of what has made Coinbase such a juggernaut in the space is the simple ease of

use, especially compared to many other exchanges. If people do start paying attention to the stock, it doesn't take a big skip leap and jump to see people actually starting to put that thing on their phone and getting exposure to the market directly. But now let's talk about how Coinbase's IPO could actually be bearish. I think this is actually a much more interesting story. It's easy enough to write the bullish version, but what about the bearish? The most obvious concern that people have is that maybe Coinbase provides sufficient exposure to the crypto market without having to hold underlying assets. There is conceivably a category of people who want Bitcoin and crypto market exposure who feel it's important, but who don't actually want to deal with the volatility of the space itself, at least not

directly. GBT is more directly tied. Mining is more directly tied. An exchange stock could be just the ticket they want. This is especially true, the argument goes, for investment committees of big risk-averse-type institutions who feel like they have to do something but are, again, worried about volatility. In this way, Coinbase could suck liquidity away from Bitcoin. What do I think about this thesis?

First, I do think that there is a flippening happening where it's more dangerous to have no exposure to Bitcoin than to have some exposure. So to the extent that the setup required for this scenario of Coinbase sucking liquidity from actual spot Bitcoin, I buy that there is a pressure to have some type of exposure to this space. However, that's about as far as I agree with the concern. I just don't think that there is a huge category of people or institutions that fall into the space of Bitcoin is too risky, but I have to do something in the industry. If you accept that you have to do something in this industry, it's likely because you've been looking at historic returns of Bitcoin over a long enough period of time that you can't stay on the sidelines anymore.

Volatility, remember, is a highly short-term phenomenon. Especially for the big funds that have been driving this rally, it seems very unlikely to me that short-term volatility is going to be so big an issue that it keeps them away, but interested enough to buy into Coinbase. For individual retail investors who are on the bubble, but still too nervous about actual crypto asset volatility, frankly, I don't hate them being in an adjacent asset instead. Those sort of weak hands in crypto are actually huge contributors to volatility. They're the people who buy at the top

and sell as soon as things start to get jittery at all. So to me, having them incubate their rabbit hole journey somewhere else could be a net positive. It's also worth noting that for people who want to play in the space without actually having underlying exposure, there have been cash-settled Bitcoin futures for years. So all in all, I think the bullish scenarios are far more likely. That said, it's almost inevitable that will overstate the likely impact of these bullish scenarios in the short term. Speaking of which, one of the other areas that people are wondering about Coinbase's market impact

is with other assets related to crypto exchanges. We've heard reports that Cracken has been out fundraising at an extremely high valuation, clearly trying to take advantage of that Coinbase momentum. I wouldn't be surprised if you see some amount of pump of exchange tokens in the lead-up as well. I also think you're going to see a lot more attention around the Defi Dex AMM space. Icebergi on Twitter tweeted, Coinbase IPO in two weeks around $50 to $100 billion valuation. How is every single AMM Dex exchange token not undervalued? Larry Sirmak from the block responded, Coinbase has 1K-plus employees, has been around for 5 plus years, is going to have a record-breaking Q1 in terms of users and revenue,

is servicing the largest corporate treasury Bitcoin buys, etc. Defy is still in its infancy, and Uniswap is already at one-third of Coinbase's valuation. The point being is that these things are perhaps not undervalued, even given Coinbase's big potential valuation post-listing. For those paying attention to this AMM-Dex exchange token correlation, I would only caution that it goes two ways. Coinbase is looking like they're going to be sitting at a juicy valuation trading above $100 billion. If the market decides that that's nuts, however, and too high,

and people are correct in thinking there will be a correlation between how Coinbase is valued and other exchange assets are valued, the inevitable dump could become a new anchor on those valuations just as easily as it could become a pump on their valuations in the lead-up. We're going to have a lot more information about Coinbase's Q1 tomorrow. They're going to be reporting that, plus a lot of forward-looking guidance, and depending on the timing, I'll include that is part of the brief. Overall, there is a lot of press, a lot of attention. Wall Street Journal had a story today as well about how two of Coinbase's supposedly independent board members, Fred Ersum and Fred Wilson, aren't really that independent, owning 8.9% and 8.1% of voting power

respectively, which is below but just barely the rule on 10% for an independent board member. And either way, like I said, there is just a lot of attention on this space. It's going to be one of the seminal events one way or another in the Bitcoin and Crypto space this year. So get your popcorn and settle back into your seats because the historically bullish April has this big, huge event right in the middle of it. Anyways, guys, I hope your week is off to a great start. I appreciate you listening, and I hope you had a wonderful Easter-slash-spring weekend. Until tomorrow, be safe and take care of each other. Peace.