Cryptocurrencies and Coinbase: Between flying high, volatility and regulation

Last week was a heady one in the digital currency space. Coinbase, the largest crypto exchange/trading platform, listed on the Nasdaq. It was unusual in several aspects. For one, the exchange chose a direct listing, which unlike an initial public offering (IPO) does not entail issuance of new shares and often allows existing investors to trade immediately without a lock-up period customary in IPOs.

Secondly, Coinbase marks both the first direct listing on the Nasdaq, and the largest ever direct listing.

Thirdly, volatility was great, with the market cap of Coinbase shooting up to $121 billion in the first few moments after the listing, before settling back down to $86 billion at the end of trading. This represented a market cap roughly three times that of the Nasdaq, Coinbase’s host exchange. After a volatile weekend, Coinbase’s valuation slid further, but it still exceeded that of ICE, the parent company of the New York Stock Exchange.

The largest cryptocurrency, Bitcoin, soared ahead of Coinbase’s listing, reaching nearly $65,000. Over the weekend, it plummeted by roughly 15 percent on Sunday. While Bitcoin may have dropped over the weekend it is still up 130 percent since the beginning of the year, and 690 percent year-on-year. Compare the current price of the cryptocurrency to 2019, when it averaged between $5,000 — $6,000 after nearing $20,000 in December of 2017.

These developments tell us four things:

Firstly, digital currencies are highly volatile, and not for the faint hearted. While several of the larger financial institutions like Bank of New York Mellon give investors access to cryptocurrencies, and while PayPal have started to accept them as a method of payment, retail investors would be well advised to ensure their risk profile can accommodate the inherent volatility.

Secondly, cryptocurrencies bear a high regulatory risk, as central banks try to come to terms with how cryptocurrencies’ risk profile affects market participants and how they should compare them to their own currencies, which they issue and which they have control over.

Turkey banned the use of cryptocurrencies as of April 30 methods of payment, citing risks of “non-recoverable” losses due to the anonymity of crypto. It is only natural that central banks presiding over fast-depreciating currencies fear that citizens might use cryptocurrencies to circumvent the depreciation of their national currency.

Last weekend’s tumble of Bitcoin can in parts be attributed to fears of increased regulation. Here it is important not to confuse central banks like the People’s Bank of China’s initiatives to issue their own digital currencies with central bank attitudes toward borderless, anonymous counterparts, because the regulators will have total control over the former and very little over the latter.

Thirdly, there is an illicit dimension to cryptocurrencies, as their secret, unregulated, cross-border nature makes them a currency de rigour, facilitating criminal transactions on the dark net.

Fourthly, and most importantly, in the long run investors will need to assess how far cryptocurrencies are stores of value and how far they are purely speculative.

The listing of Coinbase has certainly been a big step toward mainstreaming of the assets, as have various major financial institutions of making them available to investors. Going forward, we are probably not going to use currencies like Bitcoin to buy our pizza or Coca-Cola, but see them as an investment asset — albeit as one with considerable associated risks and volatility. Fed Chairman Jerome Powell hit the nail on the head last week when he compared Bitcoin to gold, highlighting its speculative/investing dimension over that of making payments.

All in all, cryptocurrencies have come a long way over the last decade, and they have a lot further to go amidst regulatory concerns and volatility. In the meantime, fasten your seatbelts.

• Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources. Twitter: @MeyerResources