Markets sell off on bond rout + Coinbase IPO

IPO filings used to be less interesting. It’s been rather fun to record how some (not so fast-growing, it turns out) tech unicorns have explained their businesses (it’s about people), the risks to growth (we have never made a profit and may never do so), and how they plan to structure voting rights (you don’t get any). So imagine just how much fun various analysts and reporters have had poring over the S-1 filing from Coinbase, the crypto exchange which is about to list on the Nasdaq.  

 

It’s fair to say the listing document is not short on eyebrow-raising information. We have for instance a Borrow & Lend scheme that lets US retail customers borrow against and lend their crypto asset portfolios. “Our first product is a portfolio-backed loan: a flexible, non-purpose 12-month term loan that allows retail users to borrow US dollars using their crypto assets as collateral. Secured by their investment portfolio, customers can use the line of credit to access U.S. dollars while maintaining a “hodl” investing strategy. Over time, we plan to offer our retail users the ability to opt into lending their crypto assets to earn a passive return on their long term investments,” the statement explains. Now this is where it gets really interesting from an institutional point of view as you can harvest yield on crypto assets as a basis trade. The filing also shows that Coinbase earns interest on customer deposits.

 

The company has no address – nowhere to forward strongly-worded letters when the coins are lost or hacked – for Coinbase is a “remote-first company”. Nice touch for the new normal, post-pandemic work from home world. Less good if you are say, an underwriter for the listing. Maybe one reason why it’s gone the direct route. There are several legal proceedings on the go, including a CFTC investigation commenced in July 2017 that has covered topics including a 2017 Ethereum market event, trades made in 2017 by one of Coinbase’s then-current employees, the listing of Bitcoin Cash on its platform, and the design and operation of certain algorithmic functions related to liquidity management on the platform. “During the course of its investigation, the CFTC has issued subpoenas to us and certain of our directors, executive officers, and former employees, including testimony subpoenas, and other requests for information. We are cooperating fully with the investigation,” Coinbase explains.  

 

Then you have the various risks, one of which is the CEO taking his eye off the ball with other ‘cryptoeconomy’ projects. George Osborne would approve. In a nice little dig at the established financial system (Coinbase let’s not forget sees itself as being at the vanguard of creating an ‘open financial system’), it even called out the Federal Reserve as a potential risk to its business, citing the 2-hour outage to the central bank’s payment network this week. Trolling the Fed will appeal to its customers – who will of course want to be shareholders.

 

Hacks – customers losing all their Bitcoins – are in there, naturellement. But they are not so high up as the volatility of crypto prices. In fact earnings are inextricably tied to crypto prices, the filing makes plain. This is not the case with listed exchanges trading equities. The price of Unilever shares doesn’t really matter to the LSE. This link to pricing, rather than just volume, may be obvious in this case since prices and volumes are correlated in cryptos, but it interesting to see in black and white: “Our total revenue is substantially dependent on the prices of crypto assets and volume of transactions conducted on our platform. If such price or volume declines, our business, operating results, and financial condition would be adversely affected.” 

 

More than anything it’s highly dependent on Bitcoin. A majority of Coinbase’s net revenue is from transactions in just two crypto assets: Bitcoin and Ethereum. For year ended December 31, 2020, Bitcoin, Ethereum, and other crypto assets represented 70%, 13%, and 13% of assets on platform respectively. “If demand for these crypto assets declines and is not replaced by new demand for crypto assets, our business, operating results, and financial condition could be adversely affected” says the filing. 

 

Institutional interest is rising. Whilst we know this is the direction of travel – we have seen Square, Tesla and MicroStrategy invest in Bitcoin and the likes of PayPal and Mastercard announce plans to support crypto payments, the filing further underscores growing institutional interest. “More recently, we have experienced significant growth in the number of institutions on our platform, increasing from over 1,000 as of December 31, 2017 to 7,000 as of December 31, 2020,” the filing says. 

 

Finally – what’s the scoop on its outlook? Let’s not stress about valuations for now. I’d say the margins look handsome with revenues of more than $1.1bn from $193bn in transaction volumes, which puts in a nice place to take advantage of soaring interest in cryptocurrencies. A listing gives it Wall Street status in a world that is only starting to see the first railroads and barbed wire fences erected. And despite any investigation (or rather, let’s park those for now as we don’t know enough about their material impact and I can’t believe they are anything scarier than other exchanges), a Nasdaq listing will make Coinbase appear like its sheets are the cleanest. It also has 46m users, many of whom will want to own stock.

Stocks slide as bond yields surge

Stock markets are in retreat as bond yields advance. Yields are rising across the globe, prompting investors to ditch stocks, especially richly valued growth names. The tech-heavy Nasdaq fell 3.5%, with the broader S&P 500 down 2.5%. Tesla declined another 8%, while Apple and Amazon tracked about 3% lower. Asian markets sold off by the most in 11 months with shares in Tokyo down 4%, while the Hong Kong market dipped over 3.5%. European stocks followed suit with broad-based selling in early trade on Friday, but early losses of more than 1% were pared as the buy-the-dip mentality lives on. The FTSE 100 should be more insulated to rising rates since it’s a) nowhere near all-time highs and b) is well exposed to global cyclical growth. 

 

The yield on the 10-year US Treasury note briefly spiked above 1.6% for the first time in over a year yesterday, as markets bet on higher inflation, before retreating back under 1.5%. This despite Fed speakers offering soothing words about inflation to the market this week. You could argue there is a communication problem, or you could simply call it tantrum. Actually, it’s a global phenomenon as investors across the world sell rates in the expectation of a strong economic rebound and higher inflation. Markets are now starting to price for rate hikes far sooner than the Fed is indicating it will act. It’s not that rates are particularly high, it’s more the pace of the move taking frothy equity markets off guard. Valuations are stretched, so richly valued stocks are easily moved by these kinds of gyrations in the bond market. Whilst investors had been reasonably comfortable with a rising tide for rates, this sudden lurch higher requires repricing. Gold broke down at the key Nov low at $1763 as real rates continue to climb. Three days after the 30-year TIPS yield turned positive, the 20-year is close to flipping positive too. 

 

The dollar has risen as yields go up and stocks sold off. The risk-on pound fell amid the risk-off mood. GBPUSD, which had maybe exhausted itself, has retreated back under 1.40 after running out of steam at 1.42, the 3-year high. EURGBP rallied back above 0.87, having tested 0.8540 on Wednesday. 

 

Airbnb earnings held up better than expected and much better than peers. Q4 revenues declined 22% to $859m. Expedia reported a drop in revenues of 67% over the same period. Losses for Airbnb swelled to $3.9bn, with management saying this was impacted by charges related to IPO, including and included $2.8bn of stock-based compensation expenses.