Digital currency recently reached something of a milestone.
It is the first digital currency exchange to go public, and the offering could lend more credibility to the fledgling cryptocurrency market, while possibly encouraging more IPOs in the industry, according to experts.
Here are some highlights:
- Coinbase was founded in 2012 in San Francisco, by Brian Armstrong, currently the company’s chief executive officer.
- Coinbase is the first cryptocurrency exchange to go public. It helps users buy, sell, and store cryptocurrency.
- It is the largest digital currency exchange in the U.S. and globally by trading volume, offering access to about 50 different currencies. It reportedly has 56 million users, and 6 million active monthly users.
- The company went public through a direct listing, which means it sold its shares to the public without the usual middlemen, such as investment banks and other underwriters, that typically help with a traditional IPO. Coinbase, which is listed on the Nasdaq, is reportedly the largest company to use a direct listing. Other companies that have recently gone public through direct listings include Slack Technologies, Palantir Technologies, and Roblox Corp.
- Digital currencies Bitcoin and Ethereum reportedly make up more than half of Coinbase’s trading volume.
- In addition to Coinbase, other popular cryptocurrency exchanges include Binance, Bitfinex, Huobi Global, Kraken, and Gemini, founded by the Winklevoss twins in 2015.
- The IPO has made Armstrong a multibillionaire, worth approximately $16 billion.
Cryptocurrency is an open-source form of currency that allows users to exchange value without depending on a pre-existing physical currency, often referred to as fiat currency. While Bitcoin is the most widely held cryptocurrency, since its introduction in 2009, more than 2,000 types of cryptocurrency have emerged, including Ethereum (Ether), Litecoin, ZCoin, and Ripple.
Cryptocurrency typically uses something called blockchain, or distributed ledger, technology. That means the code produces an encrypted record of the value of each virtual coin and the transactions it’s involved in, distributing that record across numerous networks on the Internet.
While the value of many cryptocurrencies is tied mostly to demand, which can make their value fluctuate widely, another type, called a stablecoin, is tied to an underlying asset such as gold or the U.S. dollar.
Bitcoin, the largest cryptocurrency by market capitalization, reportedly reached a record high of $61,000 in March, 2021. The total value of the cryptocurrency market is currently about $2 trillion.
Dangers and risks of cryptocurrency
Initially, a lack of oversight and regulation led to a number of scandals centered around transactions made with cryptocurrency and the exchanges where cryptocurrency is bought and sold. For example, bitcoin was the currency used in many of the transactions on the now shut down Silk Road, a marketplace for drugs and other illegal items on the “dark web.”
Good to know: In the U.S., cryptocurrency is not considered an official currency, and regulators have taken a hands-off approach to regulating it, providing oversight while allowing it to be bought and sold on specialized exchanges, used in financial transactions, and offered to the public through something called an initial coin offering, or ICO. Some of the regulators include the Securities and Exchange Commission, the U.S. Department of the Treasury, and the Commodity Futures Trading Commission. Unlike bank deposits, cryptocurrency deposits are not insured by the U.S. Federal Deposit Insurance Corporation (FDIC).
Until recently, big banks have been wary of cryptocurrencies due to the potential risks and regulatory concerns that could accompany them. Keep in mind that cryptocurrencies can be volatile, meaning they’re subject to big swings up and down.
More about direct listings
A direct listing—sometimes called a direct offering—is a way for a company to sell its shares to the public without involving any middle men, or intermediaries.
It’s different from an initial public offering (IPO), where the company relies on an investment bank to take it public. Such a bank is called an “underwriter,” because it assumes much of the risk associated with the IPO.
With a direct listing, company executives, early investors, and employees who own equity, or shares, are given the option to convert them into a public stock and then sell it to the public through a stock exchange such as the New York Stock Exchange or the Nasdaq. (These stakeholders are not obligated to sell their shares, however.)
With a direct listing, the stock exchange sets the starting trading price. It’s called an “initial reference price,” and it’s based on new investor demand for the shares. In contrast, the underwriters set what’s known as an “opening price” in a traditional IPO, through a process called a roadshow.
Lock-up periods and the Stash Way
Companies usually have a lock-up period following an IPO. A lockup period is when company insiders, such as employees granted stock options or executives who own shares, sign an agreement that prohibits them from selling shares for a specified period of time, often a period of six months. When lockup periods expire, insiders or other early investors may want to sell their stock in order to make a profit from their shares. When these insiders start to sell their shares, sometimes that can cause a company’s stock price to fall. Companies that go public through a direct listing typically do not have lock up periods.
Following an IPO, stock exchanges such as the New York Stock Exchange (NYSE) or the Nasdaq will list the stock so that investors can purchase shares of the newly listed stock. If you’re an investor, it’s important to know when companies are going public and the price at which they’re expected to trade if you’re interested in investing in those new companies.
Following an IPO, the price of the newly issued stock can move significantly, so it’s especially important to remember the Stash Way.
The Stash Way includes regular investing, investing for the long term and diversification. You can also check out Stash’s portfolio diversification analysis tool in the app to help you diversify. And remember, all investing involves risk, and you can lose money in the stock market.
Stash currently doesn’t offer the option to invest in cryptocurrencies. Stash does allow you to invest in companies that use or develop blockchain technology, through its ETFs.