In brief

  • Coinbase released its S-1 filing on Thursday in advance of its direct listing on the Nasdaq.
  • The filing has a lengthy Risk Factors section, including the volatility of crypto assets—but also some surprises, like negative social media chatter around crypto.
  • Coinbase also warns of its outsized reliance on trading fees from Bitcoin and Ethereum.

Coinbase, the biggest US cryptocurrency exchange, posted its S-1 filing on Thursday morning ahead of its upcoming milestone direct listing on the Nasdaq. The filing revealed $322 million in profit in 2020 compared to a loss of $30 million in 2019, stark proof of how well Coinbase has fared from the recent Bitcoin bull run, and numbers that are sure to strengthen the appeal of COIN shares when they debut.

The S-1 filing is also a chance for the public to get a look under the hood of a still-private, soon-to-be-public company and see not only its financials, but also how the company defines itself—as well as the risk factors it's legally bound to disclose in full to potential investors.

Casper, the online mattress company, declared itself in its S-1 "a pioneer of the sleep economy." It also warned that its heavy use of social media influencers could "materially and adversely affect our reputation or subject us to fines or other penalties." WeWork infamously boasted, "Our mission is to elevate the world's consciousness."


Coinbase's mission

Coinbase is a crypto exchange. It doesn't have side businesses in a totally different industry (a la Uber Eats at the time Uber went public). It's laser-focused on enabling the trading of crypto assets—and making money from it. CEO Brian Armstrong made that crystal clear in his controversial public memo in September about Coinbase's (lack of) politics: "We are a for-profit business,” he wrote. “We shouldn’t ever shy away from making profit, because with more resources we can have a great impact on the world.”

And so, unsurprisingly, Coinbase's S-1 prospectus summary doesn't have any weird surprise labels. It declares: "Coinbase powers the cryptoeconomy... a more fair, accessible, efficient, and transparent financial system for the internet age that leverages crypto assets: digital assets built using blockchain technology."

What the S-1 does have is an extremely long Risk Factors section, a laundry list of possible pitfalls in the cryptoeconomy that could hurt Coinbase shares once they are public traded. Most of the risks are about volatility in the market, and public perception of Bitcoin.

Potential pitfalls

"All of our sources of revenue are dependent on crypto assets and the broader cryptoeconomy," the filing warns. "Our operating results have and will significantly fluctuate due to the highly volatile nature of crypto."

Coinbase discloses that average Crypto Asset Volatility on its platform increased 73% from Q4 2019 to Q1 2020, then fell 36% from Q1 2020 to Q2 2020.


Crypto investors are used to these fluctuations, but traditional Wall Street investors are not. And the non-crypto macroeconomic factors that concern Wall Street also matter to Coinbase, such as "interest rates and inflation" and "monetary policies of governments, trade restrictions, and fiat currency devaluations."

Interruptions or outages to third parties that Coinbase uses can also adversely affect its business, and Coinbase points to one hyper-recent example from... yesterday. "On February 24, 2021, the U.S. Federal Reserve’s payments network experienced an outage, which had the potential to result in reduced functionality for certain of our products." Indeed, when the Fed's system went down on Wednesday, Bitcoin fans were quick to rush to social media to declare that the Bitcoin blockchain never "goes down"—but many crypto exchanges did go down because of the Fed outage.

The company also warns of its reliance on the largest two coins by market cap: BTC and ETH. "A majority of our net revenue is from transactions in Bitcoin and Ethereum. 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."

The threat of a crypto crash—and bad publicity

Most of all, another crash like the one in February 2018 that followed the 2017 surge, when Bitcoin fell back by 65%, would, obviously, be very bad for Coinbase. The company makes clear reference to that event: "In 2017, the value of certain crypto assets, including Bitcoin, experienced steep increases in value, and our customer base expanded worldwide. The increase in value of Bitcoin from 2016 to 2017 was followed by a steep decline in 2018, which adversely affected our net revenue and operating results."

And there are other risks Coinbase discloses that aren't about the price of coins or the broader economy. One big area is regulation. Coinbase stock could be affected by "changes in the legislative or regulatory environment, or actions by governments or regulators, including fines, orders, or consent decrees" and "regulatory changes that impact our ability to offer certain products or services."

Perhaps most interestingly, Coinbase warns possible investors of the changing perception of Bitcoin. It lists as risk factors: "negative publicity and events relating to the cryptoeconomy," "unpredictable social media coverage or 'trending' of crypto assets," and "unfavorable media coverage."

Indeed, despite so much recent buy-in from publicly traded companies like PayPal, Square, and Tesla, and despite a change in tone from many influential Wall Street hedge fund managers, Bitcoin still has a long way to go in its public reputation and image with Joe Main Street—and continued headlines about price volatility or cybercrime could hurt that image, and in turn, send Coinbase shares lower.

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