📺 SotN #43: Coinbase Goes Direct | Jeff Dorman

hey bankless nation welcome to another state of the nation episode coinbase went direct last wednesday we're going to go over what you need to know on today's conversation with jeff dorman from arca invest david how are you doing today absolutely fantastic it's been a week since uh crypto's biggest company is now a public company uh and so now that there's almost a week it's all the week's on wednesday and now that we have time and data to reflect upon we are going to do that what lessons can we

learn from coinbase now being a public company guys uh this broadcast of state of the nation as usual um is coming at you live streamed over youtube we're doing it a day early but you're still going to get this on the podcast stream on wednesday so this coming at you on monday at 2 p.m eastern usually on 2 2 p.m eastern on tuesday but we're giving this to you a day early so we are talking about the listing of coinbase coin is on the market on the nasdaq what does traditional finance think about it the

banks fintech wall street what do crypto natives think about it like binance gemini and uniswap we're going to cover all of that before we get into it we want to talk about some things that are going on in the bankless nation the first is this david it is bankless badge week a two-week bankless badge week two weeks starting today so what's happening what is bankless badge week yeah so the bank list badge is a po app in nft that you can get if you are a paid bankless subscriber and so you you uh become a bank paid banquet

subscriber and then you go and claim your badge if you are not yet a paid bank list subscriber you will get that email to claim your badge at the start of the month in may in roughly 10 days that's why we're doing this for two weeks uh and so then you get to enter raffles and we are giving away really cool stuff uh the bank the the baps the escape shirts which there are only 50 of we are giving away the remaining six uh so you can be one of 50 lucky people to get a bap uh and then there's also even cooler stuff as well including uh pl dye pool together die

and ether we are actually giving away ether to a lucky bankless badge holder who wins the raffle you have eight hours left if you currently hold a bankless badge you have 8 hours and 52 minutes left to enter the first raffle that goes out on monday that's today and and then there will be one for tomorrow and the day after and the day after and so make sure you get your badge and make sure you enter the raffle of course join the raffle by connecting your metamask wallet having the poep badge in there and you can join and the

raffle begins today as david mentioned we're doing this because we really want you to get a badge really a badge many of you guys are bankless premium members have not picked up your badge um check your email address check your email account for an email from lucas to banklesshq.com to see if you have that in the archive and pick up your badge david another thing that's going on we just dropped kind of an audio book it's like a very unique bankless podcast uh just dropped that uh today actually so this is this

is monday on all of the history of crypto before bitcoin actually starts in the 1970s right super interesting conversation and episode can you describe that for folks yeah whereas coinbase and coinbase going public is really pushing the frontier into the modern realm and really we are at the bleeding edge of what crypto is this is going all the way back before bitcoin and so peter pan he's part of the meta cartel uh uh team there and he wrote this really fantastic four-part long series called before bitcoin and it was

all about the cypherpunks and the people that really led and stewarded the the just domain of cryptography into the public realm and really allowed bitcoin and ethereum to become what they are today uh and so really if you want to understand our industry from in totality you can't start at bitcoin which is why peter calls his series before bitcoin you have to go all the way back into the 70s where the fight for public information and public cryptography really began uh and so we are telling that story on the banquets podcast and that episode came out today

guys if you want to understand crypto there's two things you need to understand one is the history of money the second is the history of cryptography this is the second this is the history of cryptography this is embedded in cryptoculture as david says so often cryptoculture is tight this is why go check out that podcast also david we should mention i feel like we're getting into retail season what does retail season mean and uh how can folks get their friends onboarded to d5 what's the best way to do that yeah retail season is where everyone who wasn't in

crypto before all of a sudden is in crypto uh and that comes with a lot of baggage a lot of a lot of cool stuff and a lot of pain because crypto is not yet the easiest thing to use um but dharma is actually if you've ever used dharma it is the easiest thing to get into defy and the best part about dharma is that all of the defy assets which ryan and i beat the drum on as being like crypto's first real non uh non-l1 assets uh that are tokens that are legitimate tokens rather than just some stupid icos like

all of the good assets you can get on dharma and so when you are a friend i know you as the crypto person because you probably talk about it ceaselessly because that's what crypto people do and they come to you and they ask for advice send them to dharma because it will make sure that they only buy legitimate viable assets and not stuff like doge don't i don't recommend doge but i do generally recommend this stuff that you find on the dharma app yeah absolutely guys so this is a way to just connect your bank account and then uh you can immediately just in one tap

of the app get assets into a d5 protocol like wi-fi start earning 14 in just the top of an app that's where we are sending our friends uh today who are interested in defy david i've got to ask you the question i ask at the outset of every single state of the nation and that is this what is the state of the nation today my friend the state of the nation is public we are a public nation and coinbase our our as a crypto industry our biggest company ever with over a thousand employees i think

there's only one company in crypto that has a thousand employees and that's that's coinbase is now a public company and really the coinbase going public was a monumental landmark event for all of our our entire industry because it's very legitimizing like the people that just like uh throw away bitcoin and ethereum and all these all other crypto assets as like non-legitimate really just have fewer and fewer and smaller and smaller foundations to stand on because something like coinbase is now public uh and it's really

it feels like there's many events like this where there's like before and after and this definitely feels like one where there's the before coinbase was public and there's gonna be the after coinbase was public and now we are in the after part of the world of crypto so the bankless nation is public we went public absolutely and i feel like the narrative is going public along with the coinbase listing on the nasdaq we are going to talk about what wall street thinks what traditional finance thinks about the coinbase listing as well with jeff dorman from arca

investments when we come back but before we do we want to thank the sponsors that made this episode possible bank list is proud to be supported by uniswap uniswap is a new paradigm in asset exchange infrastructure instead of a cumbersome order book system where trades are matched with other humans unit swap is an autonomous piece of software on ethereum which is what ryan and i call a money robot no human counterparties or centralized intermediaries just autonomous code on ethereum input the token you want to

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dal no matter how big or small your idea is you can apply for a uni grant at unigrants.org and help steer unit swap in the direction that you think it should go that's exactly what we did to get uniswop to be a sponsor for bankless and you can do the same for your project thank you uniswap for sponsoring bankless gemini is the world's most trusted cryptocurrency exchange i've been a customer of gemiini since i first got into crypto in 2017 and it's been my main exchange of choice to make my crypto buys and sells gemini is

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gemiini.com go bankless all right guys we are back with jeff dorman who is chief investment officer at arca which is a digital asset management firm jeff leads the investment committee he's responsible for portfolio sizing and risk management of crypto and defy assets which has got to be a fun job jeff has a ton of experience in traditional finance so uh he's been in the space over 17 years close to 20 years and he has

served at world renowned firms like merrill lynch and citadel he's now joined the crypto industry so i feel like jeff is a fantastic bridge from the traditional world to this new exciting world of crypto and we are here to talk all about coinbase which is also a bridge of sorts jeff how are you doing today i am great thanks for the intro and thanks for having me oh man we're super excited to talk about this because this is really as as david and i were talking in the intro this is really a um a pretty marquee event for crypto right one of our biggest publicly traded uh

companies um like a crypto exchange a crypto bank goes public can we start by talking about um how big this is so like um how big is this from your perspective is this sort of like shaking up traditional markets or are they like not noticing is this you know what's been the effect of the coinbase listing well they're definitely noticing i mean it's hard to it's hard not to notice the biggest company in the hottest industry with the only direct listing in the last what

year and a half so everybody is noticing there is no question uh that being said it it is a little bit under the radar more so than maybe people think right the traditional ipo right when you are issuing new shares and you have an underwriter like goldman or jp morgan or whoever there's a huge road show there's a long marketing process every financial advisor every hedge fund every mutual fund knows about it when you slip a direct listing in even though everyone has heard about it it knows it's coming it's just not sold to you in the same way i mean i talked to many financial advisor friends and hedge fund friends and mutual friends who it wasn't even on their radar until

after it priced because you just don't have that same cell pressure that's coming into it so it is absolutely on the radar but i think not at all surprising that it's going to take some time here maybe even months before this is really ends up in most investors portfolios that's super cool we got to talk about that actually let's start there because i think a lot of crypto natives who are listening to bank lists aren't actually sure what the difference is between an ipo and a direct listing what are the differences how is the direct listing different sure well the the biggest thing with the direct listing is that the company is

not actually issuing more shares and therefore is not making any money from the sale of stock when you do an ipo generally you are issuing some percentage of the float to new investors and you are then raising money on behalf of the company so you are actually generating cash that didn't happen and that didn't happen for a lot of reasons right one is because coinbase doesn't need the money they are just printing cash right now they don't need to dilute themselves further by selling more shares two is you know they definitely have uh this this mantra of of more access to everyone rather than access to a select

few when you do an ipo process and you hire an underwriter not only are you paying egregious fees for that underwriting process but you're also then you know targeting a very small handful of large funds who are going to get the majority of those shares right the underwriter actually goes through an allocation process with the company and says we're going to give shares to this fund we're going to give shares to this phone we're going to give shares to this company and that is a you know a privileged process right i mean all the company all the funds who do the most business with the banks are the ones who are the most likely to get those high allocations so there is definitely a

democratization aspect there's definitely a we don't need the money aspect on the negative side though is it's complete price discovery right in an underwritten process the the research firm that is underwriting it will come up with a fair value for that price and they will market that price they will say we are going to sell x percent of the company's shares at this price you know take it or leave it and maybe they adjust the price higher or lower based on demand but generally it's being a guided process when you do a direct listing you're just basically teasing the market makers right the knights the

citadels of the world all the equity market makers and saying uh go ahead and figure it out where this is going to trade and you know they have some tools right they can look at whether it was trading in the nasdaq secondary private market beforehand or they can talk to you know a handful of investors on where they might care but basically it's a blind process you're just starting the process making markets on the exchange and hoping that that equilibrium uh gets you to that to that right level um so there's definitely pros and cons but most people who thought this was like going to shoot up 100 on day one like a typical ipo that doesn't happen

it doesn't happen for a variety of reasons one is because there's less shares in an ipo you're only selling five percent of the five or ten percent of the company shares so the float is low and there's less to buy and and two is um because they intentionally often price that at a low level to make sure that it does trade up again in a direct listing it's just market equilibrium there is no process there is no you know selling it cheaply so you've got a lot of market forces at risk and it takes you know it'll take a couple of months for big funds to accumulate positions rather than doing it all in one slug

through the underwritten process so jeff if coinbase didn't mint new shares to do an ipo where did those shares actually come from to get on to the market did like did uh brian armstrong and all the other like uh early founders they just decided like i want to sell this percentage and that's the shares that we see being traded how did how did shares actually come onto the market in a direct listing yeah exactly it's from existing shareholders so existing shareholders are employees they're the early venture funds it might be you know a couple of

funds who bought it in the six-week auctions of the nasdaq private secondary market but yeah it's it's other firms and individuals who already own the shares so again in a typical ipo they might only offer five or ten percent of the float uh to new investors here you know it could be up it could be fifty percent it could be eighty percent it could be twenty percent it just depends on how many early investors want to monetize and i think a lot of crypto twitter specifically uh has been just way off in terms of what this process was but but more so they kept uh

focusing on oh well why are these guys dumping on the market why are they selling right because it's such a mantra in digital assets that you don't want the company to dump their tokens but this is natural right if you're an early venture investor and have been in this for seven or eight years you almost always sell when a company goes public like you've done your job you funded the company now it's time for you to move on and give it to the mutual funds and the other hedge funds who want to own liquid stock you know if you're an early employee you have been underpaid most likely for the last seven or eight years and this was how you got paid and now it's your turn to monetize that so you can go buy a

house or go buy a car or do something with that money so this is how it should work in my opinion you should be you know transferring the ownership of this company from the early insiders and investors to a more democratized investor base of professional investors and retail investors like it's it's it's kind of funny to me uh jeff that like uh crypto twitter didn't really understand this because this is a bit more like the the crypto native approach this is really what happens with with tokens i mean um they're not in a lot of cases they're

not uh ipoint they're you know they're owned by existing holders and they're resold on on on the secondary market i want to take a look at this chart so this is um performance price performance uh for the first few days this is of course coin was listed uh on wednesday of last week and right now we're trading at about a 66 billion dollar market cap i got to confess i thought this would pump a little harder myself um you know and i want to get back to what you think about that in a minute but let's maybe dispel the the the myth

that you saw circulating so there was there was this myth that uh brian armstrong and all of the the coinbase insiders were essentially like um dumping all of their their shares right and you can understand why this sort of a narrative took steam because um you know crypto is also used to uh dumping by insider whales in in all sorts of its other asset classes but this is really not the case right like uh this is um frank from the block i believe reporting that actually the insiders didn't sell

very much um is is this kind of what you're seeing as well yeah the the irony of course is that in the digital asset world you almost never get full disclosure and transparency so you're always guessing here you get full transparency and people just interpreted it incorrectly created rumors yeah like you have to you have to file these documents with the sec and they did and everyone just misinterpreted it so what happened is a lot of the insiders and early and employees were given a lot of options in addition to the early shares of founding the company and those

options exercise at various times and the report that came out was suggesting that all of the options that were exercised were then sold but they weren't selling all of their shares i think the rumor was that like brian armstrong sold seventy percent of his shares he sold one percent of his shares actually he sold seventy percent of a small amount of options that he exercised and same with the other executives right so it's like again it's ironic because everyone's desperate for more information and less secrecy and here you have full transparency and just complete inability to interpret it correctly

is this just crypto natives not understanding aspects of traditional finance i mean we kind of introduced you jeff as sort of the the bridge is this just what's what's happening they're not understanding how to read um like public documents yeah i think so i think i think it's an experience i mean i used to joke with people that you know you can learn to trade in two months you can learn to analyze companies in maybe two years but it takes you know 20 years and counting to uh get experience and understand markets and risk and things like that and unfortunately as smart as most the people are in this space there's just no shortcut for experience you know if you've never seen a direct

listing before if you've never you know gone through a 10k or a 10q or an s1 or a you know 13g filing you just don't really know what to look for so you know in this environment of the first as soon as i see something i want to post it on twitter immediately maybe you gotta slow down a little bit and actually understand it before you throw that information out there all right jeff well this is why we're having you on you've got 20 years in this so um what were your expectations for the performance of coin like prior to listing and uh did they hit your expectations are they below are

they above or is this basically what you thought would happen sure so i didn't actually have a view on what the price would be i did have a view that it would take a while for the price to go higher and there's a few reasons for that um one is the media has been just completely wrong on the share count since you know the first coverage of the coinbase listing three months ago they continue to point to this 266 million share number which is the fully diluted share count of the company but there's only actually 199 million shares outstanding the other 60 million are you know options awards and and uh other

non-vested stock that may or may not ever come to the market so first of all they were reporting this hundred billion dollar number based on the price it was trading in the nasdaq secondary market before going public but they were converting that price times a higher share count to get to 100 billion it was never trading at 100 billion it was trading at 60 to you know 50 to 60 billion the whole time and the media just kept saying 100 billion hundred hundred billion hundred billion so when it actually came below 100 billion everyone freaked out and said oh it's a disappointment um you know you could even look at the the ftx pre-coin ipo uh

markets that they had where the price was you know 2x what it was actually probably going to come at just because people were misinterpreting the media so right there you had expectations that failed largely because the expectations were wrong um separately and i think probably more importantly is one of the things that happens with an ipo is the underwriter actually sells more shares than they have available they create a short on the desk and then they use that short to then be the bid on day one and day two and day three of trading to make sure that it trades you know it doesn't trade down right they facilitate uh uh they do their job they

become the market maker and they put support under it to make sure that it trades well well again without an underwriter and in direct listing that didn't exist all you had was new buyers and existing sellers and you're just trying to find a clearing price so let's say your fidelity and you're trying to buy you know a billion dollars of this stock well you can't just call jp morgan and say hey give me the highest allocation you can in the ipo you have to go out there and buy a billion dollars on the open market and you're not going to do it on day one you're going to buy 20 million here 30 million there 40 million here and it takes you know weeks to get that

accumulation for these new investors who have never touched it before so not surprising at all uh that it didn't go higher right away what i think will happen now is now you'll start to see the street coverage right you already saw a couple of you know we'll call them tier three or tier four type banks come out with reports uh with 500 price targets 600 price targets pretty soon the tier one firms are going to start doing it you're going to see a jp morgan report a goldman report a bank of america report a morgan stanley report when the big banks come out there and they start putting their price

targets out there that's when i think you'll start to see a real acceleration of the price and on top of it you know don't forget coinbase had a blowout first quarter earnings that surprised everybody and now if you're a traditional financial analyst you're saying yourself well was that an anomaly or is that the norm and if you're new to digital assets you might be modeling this company for the first time have no idea if first quarter was a flash in the pan or if that's sustainable whereas if you've been in the industry for a long time and you understand coinbase's model and how it works and how they generate revenue you know that it's largely driven by the price of

of bitcoin underneath and the and the volumes that are happening so most people in the space are expecting second quarter to blow the doors off the first quarter and you know this company's probably going to do close to 10 billion of revenue in 2021 compared to doing only like a billion of revenue uh all of 2020. well that's a big jump in revenues for someone who's in the outside traditional world and maybe not as well versed into you know how these companies work so i think it's just a feeling out process it's going to take some time but ultimately you know you're seeing it today right i mean over the weekend

bitcoin fell like almost 20 and three hours on saturday night and if you went on ftx and you looked at the coin price on ftx which is mostly digital asset native traders they assumed it was going to go down to 285 bucks a share even though we opened today at 333 when the stock actually opened and that's again that's just crypto traders are like oh bitcoin down this thing must be down too because it must have a two beta like everything else and the reality is that's not how stocks work right people are accumulating the stock right now they're going to buy it regardless of what the price of bitcoin is doing on a day-to-day basis and they're going to

accumulate it based on a two-year-out view and the two year out view is that this company is going to be printing cash and i think it's a very cheap stock this very much strikes me as a process of like the crypto natives learning more about how traditional markets work right nasdaq works and but also like the financial industry in wall street learning how crypto works this is almost like a perfect case study for that i mean let let's let's talk about the uh the coinbase fundamentals for a minute jeff if we could um and uh you know look at it through the lens of of maybe a an

analyst who's who's looking at this right so you were talking about kind of first quarter here's some info from the block which i believe they pulled this info from um some of the public reporting from coinbase but we've got 56 million verified users on coinbase now in q1 we've got about six million of those transacting on a monthly basis coinbase is a company has 223 billion assets in its custody that be i guess assets under management um total volumes

going up like q1 as you said was sort of a blowout uh quarter and here's revenue 1.8 billion and and you were thinking like you're projecting like a 10 billion dollar a year is this how an analyst is going to look at these fundamentals uh you know are they going to kind of go through and and try to just extrapolate all of these things yeah for sure i mean you know staying in the crypto world for something go ask half your uh crypto investors you know what their bitcoin model looks like or what their ethereum model looks like you know most of them don't have one right

you know we have models for the companies that we're invested in because we're investing in tokens that are accruing economic value whether it's defy or something like chili's that's doing sports but you know most cryptocurrency you can't model and therefore you don't have that skill a traditional financial analyst the first thing they're doing is they're ripping through the you know the s1 and the 10q and they're putting a model together and they're you know going to be pretty fast at doing it they're going to look at the revenue growth they're going to look at the mtu growth they're going to try to figure out what inputs affect the model right so you know are you going to you're going to have a base case of you

know 10 growth of users and maybe a base case upper and a bare case of you know mtus here's the hilarious thing though jeff and i just want to get this in there so like as they're modeling though they're going to have to try to predict the price of bitcoin and eat because that has such a bearing a large bearing on the volume that coinbase is going to do from a capital asset perspective yeah so generally what an investment bankers taught and what a research analyst taught is you figure out the inputs to your model first and you have a separate sheet in your spreadsheet that just has the inputs and everything

else is an output and then you just continue to toggle and mess around with those inputs to see how it changes your model so you have your base case of bitcoin say 57 000 and then you have a multiplier on that what if bitcoin falls you know 10 quarter over quarter what if it rises 20 quarter over quarter and you change these assumptions and you see what kind of sensitivity analysis there is to your revenue into your ebitda the the the in actuality this is one of the easiest companies to model of any company that i've ever modeled and that my analyst has ever modeled because it really is a fairly simple formula it's a price it's

a function of the price of bitcoin it's a function of those mtu's and it's a function of the spread that they're earning meaning the fees that they're earning on the transactions right 96 percent of revenue right now comes from uh uh trading so it is a really easy company to model and if you assume you know a baseline price of bitcoins call it you know somewhere between 50 and 60 000 and you assume modest growth uh in terms of mtus you get to a 10 billion revenue number really easily and that's what most analysts are going to come out to um and then you have to factor in other things

like well what is their business mix are they going to you know brian armstrong said that 50 of revenue over time is going to be subscription and not trading right so then you start modeling in other factors but every analyst on the street is going to have a pretty similar 2021 revenue model based on just the price of bitcoin today and what this company should do in that in that case so when you start getting those numbers out there it's pretty easy to get to 100 to 150 billion uh market cap right when you look at the crypto stocks that exist today like riot blockchain or marathon or some of the others you know they're trading at you

know call it uh uh look at it right now they're trading at 20 to 25 times uh revenue you know if you look at you know ftx and binance if you combine the enterprise value of their token market cap and their equity market cap they're trading at you know 30 to 50 times sales so you know if you're talking about coinbase right now at 60 billion market cap on 10 billion of expected revenue that's six times revenue that is cheap by any financial analysis measure and they're just gonna keep buying it they're not gonna stop they don't care

if bitcoins up or down five percent in a day or if it falls ten percent on a saturday night because of a leveraged flush out they're just going to keep buying it and i think you're going to start seeing overwhelming uh bullish calls from the analyst community over the next two to three months so jeff when you say that coinbase is cheap and we also have these analysts who are trying to put models together what are they comparing to are they comparing them to banks are they comparing them to tech stocks are they comparing them to fintech companies what is our baseline that you find that you

or other other financial uh modelers or people in in that cohort what are they comparing at coinbase two like where do they think that coinbase as a as an asset fits into what niche yeah i think it's all of the above right and that's the uniqueness of of when you do analysis like this is you have to think about what those comps are you know is the appropriate comp something in the crypto space like a minor or is the appropriate comp something like a goldman sachs or is it a tech company like you know paypal or or square and i think you're going to see analysis all

over the map in that regard if you're bullish you're going to spin your model to you know take the industries that have the highest multiple so you're going to look towards the fintech world in the crypto world where you're getting those 20 and 30 times revenue multiples if you are you know a little bit bearish you might look at goldman sachs or jefferies which trade closer to like you know three times revenue um you know the difference of course is goldman sachs who does 45 billion of revenue and has 40 000 employees to get to 100 billion market cap forty thousand employees is a lot more than coinbase's seventeen hundred

employees right their costs are much higher they have a twenty five percent net income margin whereas coinbase is going to have probably closer to sixty percent margins so you know there's a lot of different inputs that you think about when you're comping this for me personally i think i think first and foremost you have to assume that the market is the equity market in particular is very underexposed to the growth in digital assets right there hasn't been a lot of ways to get exposure you could have bought like the grayscale product and obviously that is you know having its own problems right now