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Market Commentary
Market Commentary: Bitcoin Price Action & Coinbase Direct Listing
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April 21, 2021

Market Commentary

  • Coinbase successfully completed a direct listing of shares on NASDAQ, closing the week with a $68 billion market capitalization.
  • Bitcoin ($BTC) fell more than 10% over the weekend to a low of $53,797 on Sunday (-17% from an all-time high of $64,748 on Wednesday), before recovering and is currently trading above $55,000.
  • Commentators generally attributed the drop to concerns related to 3 things that happened over the weekend: 1) an unverified Tweet about possible U.S. regulatory actions against crypto firms, 2) a major blackout in China leading to many miners being offline and 3) general euphoria around the Coinbase listing.
  • We believe the drop was due in part to all 3 things, but mainly driven by selling & near-term profit-taking that led to an unprecedented amount of $5 billion worth of leveraged long positions being liquidated within a 24-hour period from exchanges such as Binance, BitMex and others.
  • Bitcoin is now up 367% over the past six months, and 703% YoY.
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Coinbase Listing: What It Means for Advisors

Coinbase listed its shares on NASDAQ on 14 April 2021 with the ticker “COIN”. The novel “direct listing” did not include an IPO. The shares opened at $381.00, peaked at $409.62 and finished the week at $342.00, with a total market capitalization of $68 billion.  The platform has 56 million users and over 115,000 partners in the digital asset ecosystem.

  • ‍‍Coinbase builds infrastructure that facilitates adoption of BTC by individuals and institutions.
  • Institutional share of Coinbase trading volume grew from 20% in March 2018 to 64% in 2021.
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Why It Matters: Building the Digital Asset Ecosystem

We will not opine here on whether Coinbase shares are currently a good investment, but we are very confident that its listing will ultimately be positive for the emerging digital asset ecosystem.  It will increase liquidity and bolster retail and institutional confidence. Financial advisors need to prepare for more frequent inquiries about Coinbase, Bitcoin and other digital assets from their clients, even those completely new to the space.

Coinbase has grown into a key provider of digital infrastructure. As the third largest global cryptocurrency exchange, the Company provides a transparent platform for buying and selling Bitcoin, Ethereum and other digital currencies, not unlike the NASDAQ for trading stocks.  Yet Coinbase is more than just an exchange, it also provides key custody solutions and an evolving set of products for retail and institutional customers.  For institutional investors and financial advisors to be comfortable owning Bitcoin, they need full confidence that their wallets cannot be hacked and private keys cannot be lost.
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Institutions are Gaining this Confidence

One of the most telling data sets from the Coinbase prospectus is disclosure of the growing share of institutional trading on the platform.  The increase has been remarkable, as institutional share of trading rose from 20% in March 2018 to 64% in December 2020. More institutional trading is a clear indicator of the development of adequate custody, compliance and risk management policies by institutions.

Financial advisors and their clients are key beneficiaries of institutional adoption of Bitcoin. As fiduciaries, institutional investors must meet important compliance standards before they can trade Bitcoin, including validation of acceptable custody and security policies with their counterparties and exchanges.  As such, institutional caution is forcing platforms like Coinbase to meet the same standards of care.

FIGURE 1: RETAIL VS. INSTITUTIONAL TRADING VOLUME ON COINBASE

Source: Coinbase S-1 Filing

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Strong Incentives for Effective Self-Regulation

With institutional confidence clearly in view, Coinbase has strong incentives to self-regulate as well.  For example, Coinbase does not currently list Dogecoin, which has recently been one of the “hottest” alternative coins available.  We think this is because Coinbase has determined that Dogecoin lacks a fundamental value foundation (development work ceased a few years ago), an overly concentrated owner base (the top ten holders control 41% of coins) and a weak governance structure.

Digital assets have unique infrastructure needs, especially regarding custody and security. Investors rarely have cause to worry about custody of equities or bonds, and similarly have very high confidence that the online networks of NASDAQ and other platforms are highly secure. This level of comfort, however, cannot be taken for granted for digital assets.  While the underlying blockchains are universally considered to be un-hackable, the exchange platforms are more vulnerable until establishing a significantly longer track record of security. To that end, Coinbase’s listing and access to capital are an important positive in this direction.
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Access to Capital Supports Liquidity, Security and Growth

Coinbase now has access to capital nearly on demand.  As a listed company, they can more easily raise fresh equity by issuing new shares, and can more easily borrow by using their shares, which now have a clear market price, as collateral.  They incur extra regulatory burdens of public disclosure and SEC reporting. This is very positive for Bitcoin and other digital assets.

As any financial advisor knows well, liquidity reduces risk.  Investors can exit more easily, at more transparent pricing and compressed spreads.  This helps support valuation and reduce volatility, which in turn enables greater institutional adoption.

FIGURE 2: $COIN REVENUE BY QUARTER

Source: Coinbase S-1 Filing

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About Eaglebrook Advisors

Eaglebrook Advisors provides independent financial advisors with streamlined, secure, and compliant access to bitcoin and digital assets. The firm has created the first bitcoin and digital asset separately managed accounts (SMAs), which are designed to seamlessly integrate with an advisor’s current portfolio management and reporting systems and workflows. Eaglebrook’s investment products allow advisors to directly add bitcoin and other digital assets to model portfolios and include this asset class in their overall asset allocation strategies and in clients’ financial plans.

For more information, please visit www.eaglebrookadvisors.com and follow us on LinkedIn.

About Eaglebrook Advisors
Eaglebrook is a tech-driven investment manager specializing in bitcoin and digital assets. The firm offers various Bitcoin and Digital Asset SMAs serving financial advisors, registered investment advisors (RIAs), family offices, and institutions. Eaglebrook is backed by wealth management executives and institutions.
For more information, please contact us at +1 (202) 798-1880 or send an email to contact@eaglebrookadvisors.com.
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Investment platform and investment advisory services are provided by Eaglebrook Advisors, Inc.

DIGITAL ASSET RISK DISCLOSURES
There are several risks associated with digital assets and digital asset trading.  By accessing and using the website www.eaglebrookadvisors.com, you as the investor hereby represent and warrant that you have read the following Digital Asset Risk Disclosure.

Investing in digital assets is speculative and investors need to be prepared to lose some or all of their investment in digital assets.  Digital asset prices are highly volatile, and the value of digital assets can rise or fall dramatically and quickly.   Investors should carefully consider their financial circumstances and risk tolerance before investing in digital assets and should not trade digital assets unless they have the financial capability to sustain significant losses.  The price of digital assets may be influenced by many factors, including the performance of the economy as a whole, liquidity, legislative and regulatory changes or actions at the state, federal, or international level which may adversely affect the use, transfer, exchange, and value of digital assets;  flash crashes, market manipulation, changing supply and demand for digital assets, social media environment, inflation, interest rates, national and international political and economic events, the presence of hacking or cybersecurity incidents, technological developments, and overall prevailing psychological sentiment toward digital assets.  

Importantly, markets and exchanges for digital assets are not regulated with the same controls or customer protections available in traditional equity, option, futures, or foreign exchange investing.  The features, functions, characteristics, operation, use and other properties of any specific digital asset is complex, technical, and may be difficult to understand or evaluate.  Information regarding any specific digital asset may be unclear or opaque.

Digital assets are not covered by FDIC or SIPC insurance.  Accounts at digital asset custodians and exchanges are not protected by the Securities Investor Protection Corporation (“SIPC”) and are not FDIC insured.  

Digital assets carry significant liquidity risk.  Investors may find it difficult or impossible to liquidate a position quickly at a reasonable price. This can occur, for example, when the market for a particular digital asset suddenly drops, or if trading is halted due to recent news events, unusual trading activity, or changes in the underlying digital asset system.  In the event an exchange venue has limited liquidity, there will also be limited liquidity to trade investor assets.  The greater the volatility of a particular digital asset, the greater the likelihood that problems may be encountered in executing a transaction.

Clients of Eaglebrook Advisors custody their assets with Gemini Custody, a New York Trust Company and qualified custodian licensed by the New York State Department of Financial Services.  At present, all trading of an investor’s digital assets will be executed by only one exchange venue, currently Gemini.  In the event that an investor’s digital asset custodian and exchange ceases operations, the investor will be required to transfer their digital assets to another custodian and doing so will cause delays in the ability to trade, liquidate or access their digital assets.

Digital assets are vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the digital asset’s blockchain or other underlying technology.   In addition to normal market risks, investors may experience losses due to one or more of the following: system failures, hardware failures, software failures, network connectivity disruptions, and data corruption. There is no guarantee for continuous availability of quotes or trading for digital assets.  

Eaglebrook Advisors and the exchange venues that trade digital assets also rely heavily on computer software, hardware and telecommunications infrastructure. These computer-based systems are vulnerable to disruption, delay or failure which can cause investors to lose access to the trading platform, delays or inability to receive quotes or may negatively impact all aspects of Eaglebrook Advisors service deliverables.  As such, Eaglebrook Advisors’ systems and services are offered “As-Is”.

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