Crypto-Industry Prepares For Onslaught Of Public Listings

The IPO fever whipping up animal spirits in the stock market has spilled over into the crypto-sphere. Crypto-Industry Prepares For Onslaught Of Public Listings

After watching investors pour millions into blank-check companies and seeing the likes of JFrog and Snowflake surge after market debuts, at least eight crypto firms are eyeing initial public offerings. Coinbase has filed. Other exchanges are laying out plans or looking to be acquired through special-acquisition vehicles. And two Bitcoin mining equipment firms in China are on IPO watch lists, according to Renaissance Capital.

While it’s somewhat surprising that an industry that prides itself on being an outsider to financial-market infrastructure has eyes for public listings, for some investors it is downright worrying. The IPO mania alone is enough to stoke bubble worries, but adding crypto to the mix after its record run is fueling concern that investors are setting themselves up for an especially painful comeuppance.

“Crypto is chronically frothy. IPOs are chronically frothy. We’re in the frothy phases for both right now,” said Aaron Brown, a crypto investor and Bloomberg Opinion writer. “So crypto IPOs this year? Frothy-squared.”

The IPO market has been red-hot since last fall as companies rushed to take advantage of the 70% surge in stocks since the March lows. Public debuts and blank-check companies have grown so popular that record after record fell. And first-day pops in share prices, a barometer of investor appetite for newly public firms, are among the biggest in decades.

It has all become too much to ignore for the crypto industry.

Coinbase and eToro, as well as MicroBT, a mining company, have spurred chatter of public offerings slated for this year, according to Renaissance, which provides IPO ETFs and institutional pre-IPO research. A handful of others — Gemini Trust Co., a crypto exchange, and Bitmain Technologies and Bitfury, two firms centered around mining — may also join the wave of new entrants.

“It’s clear a gap has opened between private and public market’s valuation for tech companies, inciting startups to fast track a potential IPO,” said Emmanuel Goh, co-founder and chief executive officer of Skew, a data analytics and trade execution platform focused on cryptocurrency derivatives. “Given current appetite for cryptocurrencies, I expect extremely strong demand for bellwether crypto companies that are already turning a profit.”

Coinbase, which was valued at more than $8 billion in 2018, has ignited some of the biggest excitement. The company filed last month to go public in what many are arguing amounts to be a breakthrough moment for the industry. The exchange has about 35 million verified users and more than $25 billion in assets on its platform, Bloomberg reported. Coinbase declined to comment for this story.

Crypto enthusiasts have long sought a warmer embrace from Wall Street, wagering that greater mainstream acceptance could help usher in a period of growth. It’s a prognostication that was borne out in part last year, when institutional entrants helped push Bitcoin to new highs.

“It’s a pure-play bet on the fastest growing industry in the world, crypto, and we’re in the loosest money regime in history,” said Nic Carter, co-founder of researcher Coin Metrics. Carter added that he expects others to follow Coinbase.

To Mati Greenspan, founder of Quantum Economics, it’s a good environment for crypto firms to consider public debuts. Institutional adoption means there are “deep pockets” that are willing to invest, especially while crypto prices are skyrocketing.

“If you’re going to raise capital, it’s good to do it while the wind is in your sails,” he said. He doesn’t think it’s a frothy indicator.

The latest coin price rally is also partly why crypto miners are seeing high demand, according to Christopher Bendiksen, head of research at asset manager CoinShares.

“There’s a bottleneck in supply,” he said, adding that most mining equipment makers have all their expected inventory prepaid for six months in advance. “At this point I don’t think they are even taking a call.”

But many have questioned how much hotter crypto prices can get following a blockbuster 2020, when Bitcoin notched record after record. About 60% of returns since October can be explained by market exuberance and momentum trading, according to an analysis from Bloomberg Economics.

Bitcoin has come off its highs after it crossed $40,000 this month, but is still up about 16% this year. A survey of more than 620 market professionals by Deutsche Bank showed that 50% of respondents gave Bitcoin the maximum 10 out of 10 bubble rating.

Whether it is will only be evident in hindsight. Investors with long memories, though, are taking note.

Matt Maley, chief market strategist at Miller Tabak + Co., says the wave of potential IPOs is something typically seen toward the end of a bullish run. While the trend might not be indicative of an imminent crash and he’s bullish on crypto, it’s still reminiscent of the type of exuberance seen at the height of the dotcom bubble in the early 2000s.

“When a bunch of companies in the same sector go public at the same time, it tells you that the people who run those companies realize that their valuations are very high,” and might be looking to capitalize on it, he said. “The smart guys are taking advantage of this parabolic move right now.”

Updated: 1-24-2021

Ripple Is One IPO That May May Never Happen

San Francisco company says its signature product, known as XRP, is a currency that shouldn’t be subject to securities laws.

Brad Garlinghouse, the chief executive of Ripple, was last year publicly contemplating at the World Economic Forum in Davos, Switzerland, an initial public offering for the San Francisco startup.

The company had just raised about $200 million in a round of venture funding led by Tetragon Financial Group, TFG 1.04% with a $10 billion valuation. The value of its signature product, a cryptocurrency called XRP, had fallen over the previous year. But Ripple was poised to rebuild the infrastructure for cross-border trades, Mr. Garlinghouse said, promising that its future was bright.

A year later, an IPO is off the table. Instead, Ripple’s future hinges on a judge’s ruling in a civil lawsuit filed in December by the Securities and Exchange Commission.

Regardless of the outcome, the case is expected to become a key precedent for how U.S. regulators craft rules and laws covering cryptocurrencies. It also highlights a broader truth about most digital currencies: Beyond the two largest, bitcoin and ether, most of the hundreds of others have struggled to find a utilitarian value beyond speculation.

At the heart of the SEC’s suit is a debate about XRP, a bitcoin-like digital asset created by Ripple’s founders that would grow to become the world’s third-largest cryptocurrency. It was designed to be part of a network that would help banks cut expenses in cross-border transfers. The related software, however, never gained traction, the SEC alleges, leaving XRP without a clear purpose, other than to funnel sales to Ripple.

Unlike bitcoin, which operates across an open network that isn’t controlled by any one party, XRP is an asset whose value and viability depends almost wholly on the efforts of Ripple, the SEC alleges in its complaint. That makes it a security, and it should have been registered as such by Ripple years ago, according to the SEC.

Ripple said XRP is a currency that shouldn’t be subject to securities laws. If the company is forced to register XRP as a security in the U.S., its potential value as a cross-border instrument would be diminished.

XRP doesn’t fit several of the criteria of what is called the “Howey Test,” which the SEC uses to determine whether an asset is a security, said Andrew Ceresney, a partner at Debevoise & Plimpton LLP, the law firm representing Ripple in the SEC case.

XRP trades in a wide market against a range of other currencies, none of which Ripple controls, he said. Moreover, Ripple makes no promises in the sale of XRP, and the sale isn’t an investment contract, he added.

“To us, this is the SEC trying to stretch Howey beyond its breaking point,” Mr. Ceresney said.

The agency sees it differently. Ripple has earned more than $700 million from selling XRP to the public since its founding in 2012, according to the SEC, which said the company had generated only $23 million in revenue from sales of software through 2019. Banks haven’t adopted it at any scale, and the few that have used it have been directly subsidized by Ripple, the SEC alleges.

If the SEC wins its case, it might bar Ripple from selling any securities, including XRP. That could be a crippling blow to the company and an asset whose market value was nearly $150 billion at its intraday peak.

Such an outcome would be the highest-profile failure ever for the cryptocurrency sector, which has been marked by numerous token projects that have failed to deliver returns for investors. Hundreds of startups raised billions of dollars in 2017 and 2018 by selling initial-coin-offering tokens; virtually all of those projects failed, and a number of companies were charged with fraud.

Even as investors have piled back into bitcoin and ether in recent months, some describe the cryptocurrency sector as an arena rife with manipulation on unregulated exchanges and solely a momentum trade. Even bitcoin, skeptics say, hasn’t delivered on its initial promise of becoming a digital version of cash.

Investors holding XRP have watched the price plummet since the SEC case became public. It was trading at about 51 cents on Dec. 21, when Ripple publicly revealed that the suit was imminent.

Since then, it has fallen about 45%, most recently trading at around 28 cents. The market value of the XRP in circulation has dropped to about $12 billion from an intraday peak of $148.8 billion in January 2018, according to CoinMarketCap.

Meanwhile, at least a half-dozen cryptocurrency exchanges—including Coinbase, one of the biggest—have delisted XRP since the SEC’s suit was filed. A number of market makers and asset managers have decided to stop handling XRP trades.

Tetragon, the firm that led Ripple’s 2019 capital-raising round, has sued the company, demanding its investment back. Tetragon couldn’t be reached for comment.

Prevailing against the SEC will be daunting for Ripple, outsiders said.

The complaint shows a pattern of Ripple managing XRP like a security, selling it based on proprietary information, said Stephen Palley, a partner at the law firm Anderson Kill, who has a background in securities laws and cryptocurrencies.

The complaint, he said, appears to “walk up close to the line of securities fraud.” Recent SEC cases against Kik Interactive Inc. and Telegram Group Inc. will create a headwind for Ripple, he said. Both companies were sued by the SEC for allegedly creating unregistered securities. Kik lost; Telegram settled.

Phil Liu, the chief legal officer at Arca, a crypto-focused asset-management firm that doesn’t hold XRP, said that the SEC’s case is compelling.

Ripple appears to have no stable revenue streams outside of selling XRP, he said, adding that the products the company has developed “are wholly inadequate to support the operation.”

“I think that this thing will be a remnant of history by the end of 2021,” he said, referring to XRP.

It isn’t clear whether a change in leadership at the SEC will change the case’s trajectory. Gary Gensler, the Biden administration’s pick to lead the agency, is familiar with the cryptocurrency sector from his time as chairman of the Commodity Futures Trading Commission and has also taught cryptocurrency-focused courses at the Massachusetts Institute of Technology.

“We’re hopeful he will want to engage with us on these issues,” Mr. Ceresney said.

Updated: 1-28-2021

Coinbase Unveils Plans For Direct Stock Listing

The San Francisco-based digital currency exchange plans to go public later this year.

Coinbase, one of the world’s largest digital currency exchanges, has been rumored for some time to be considering a direct listing.

In an official blog post, the cryptocurrency exchange disclosed plans to pursue a direct listing of its Class A common stock, pursuant to a registration statement with the United States Securities and Exchange Commission. The Form S-1 registration statement will become effective after the securities regulator completes its review.

The direct listing format would not offer new shares but instead sell existing shares directly to the public. Some advantages of the format for those holding stock in the company can include the ability to sell without lockups, a model recently employed by Palantir and that has the potential to create “instant billionaires.”

Unlike with an IPO, direct listings do not require the services of an underwriter to facilitate the sale. In addition to avoiding the lock-up period, direct listings are said to protect against share dilution.

“This announcement does not constitute an offer to sell or the solicitation of an offer to buy any securities,” Coinbase said. “This announcement is being issued in accordance with Rule 135 under the Securities Act.”

The exchange first disclosed its intent to go public on Dec. 17 by submitting a draft registration with the SEC. A report from Business Insider later claimed that Coinbase intends to work with Goldman Sachs on a public offering, but no confirmation was provided at the time.

Coinbase’s last valuation, in 2018, had the company pegged at $8 billion. Crypto analytics company Messari said the exchange could be worth $28 billion after a public offering. It arrived at that valuation by analyzing the company’s various business segments, including trading, custody and debit cards.

The sphere of influence surrounding Coinbase continues to grow following several high-profile acquisitions. As Cointelegraph reported, the exchange recently acquired Bison Trails, a fully managed blockchain infrastructure provider. Also in January, the company acquired Routefire platform, helping to significantly boost trade execution.

Coinbase has recorded over $320 billion in trade volumes and boasts of more than 35 million users.

Updated: 3-31-2021

CoinShares Q4 Profit More Than Doubled

Assets under management at the now Nasdaq-listed CoinShares grew by over 300% in 2020.

Profits at CoinShares, Europe’s largest digital asset investment firm, more than doubled in the company’s Q4, according to interim financial results announced Wednesday.

* CoinShares announced Q4 adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA) of £7.9 million (US$10.9 million), a 147% increase over the year-earlier period figure of £3.2 million ($4.4 million).

* Results were helped by management fees generated by exchange-traded products (ETPs), which increased 137% to £7.1 million (US$9.8 million) in Q4 compared to the year-ago period figure of £3 million ($4.1 million).

* The digital asset manager, which began trading on the Nasdaq First North Growth Market on March 11, saw its assets under management (AUM) grow to £1.74 billion in 2020, an increase of 336% compared to £0.4 billion ($0.55 billion) the year before.

* This has continued in 2021, with CoinShares’ AUM currently more than $4.5 billion.

* These surges can be attributed to the crypto bull market which gathered pace toward the end of 2020, which CEO Jean Marie Mognetti described as “a tipping point on the journey of bitcoin and digital assets.”

Crypto-Industry Prepares For Onslaught Of Public Listings

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