Investors always want to find the ground-floor opportunity that will make them rich. Whenever a well-known, respected privately held company decides to go public, it creates a frenzy of buying interest that often ends up bringing huge first-day pops in the stock price. As we saw in 2020 from red-hot IPOs like Snowflake (SNOW 4.74%) and Airbnb (ABNB 5.26%), those who are able to get in on IPO shares directly from underwriters make a huge profit. Those left on the outside looking in, however, have to pay premium prices on the open market in order to get shares.
A host of companies are likely to go public in 2021, with many already having filed the necessary paperwork with the U.S. Securities and Exchange Commission. Companies like delivery logistics platform Instacart, pet retailer Petco, and mobile investing app pioneer Robinhood are getting a lot of attention coming into 2021.
But in my mind, there's one company that stands above the rest. With its unique position in one of the hottest investing areas on the planet right now -- cryptocurrency -- Coinbase will be the one true must-buy IPO stock for 2021.
How Coinbase is profiting from the cryptocurrency craze
Coinbase runs one of the most popular cryptocurrency exchanges in the U.S. market. It allows people to buy and sell bitcoin and a wide array of other tokens, with a simpler interface for casual investors and a higher-level Pro service for advanced traders.
In addition, Coinbase offers cryptocurrency wallets for those seeking to hold their own cryptocurrency. The wallets allow Coinbase members to send and receive cryptocurrency to each other in an easy and secure way, with a relatively user-friendly interface that simplifies the process of moving crypto assets.
You don't have to like bitcoin to like Coinbase
If you're already shaking your head thinking that bitcoin is the most dangerous investment ever, I get it. Plenty of smart investors have gotten onto the cryptocurrency bandwagon in recent months, but there's still a healthy debate, and many see the entire crypto craze as a bubble that has to pop eventually.
But here's the thing: You don't have to invest in crypto to like Coinbase. I'm a longtime Starbucks (SBUX 2.03%) investor, but I hate coffee. That hasn't stopped me from making plenty of money on the coffee-chain giant's stock -- and I can't help but smile every time I pass a Starbucks cafe with a long line of caffeine addicts waiting to shell out a few bucks for their daily latte.
Coinbase is in the same position . The exchange already has 35 million verified users, with $320 billion in trading volume. Coinbase users have $25 billion in cryptocurrency assets on the platform. Moreover, Coinbase is a worldwide business, with users in more than 100 countries and over 1,000 employees.
Best of all, Coinbase collects fees on every single transaction its users make. The company's website says it charges a spread of about 0.5% on purchases and sales of crypto assets. On top of that, Coinbase charges a transaction fee of $0.99 to $2.99 on transactions up to $200, and a 1.49% variable rate on purchases using a bank account or the Coinbase wallet. A base rate of 4% applies to transactions that don't qualify for a partial waiver based on the payment method.
To be clear, pro traders don't pay anywhere near those amounts, with a graduated fee schedule that enables some high-volume traders to buy and sell crypto with no fees at all. However, even traders that don't generate volume serve the valuable role of building liquidity for Coinbase's exchange, helping establish a leadership role in the fast-growing business.
A hush-hush IPO
Ordinarily, companies that are looking to go public have to give investors voluminous disclosures early on in the process. However, Coinbase took advantage of recent rules allowing companies considering IPOs to file their draft registration statements on a confidential basis. That's what happened in mid-December, with Coinbase tweeting about its SEC submission.
Coinbase didn't speculate on when it would move forward with its IPO, only saying that it expects the S-1 registration filing to become effective once the SEC completes its review process. It'll be up to Coinbase to decide the exact timing, although some believe the company could come public as early as February.
Until the IPO documents come out, investors won't know for sure just how lucrative Coinbase is. However, you can already see a few things that make it promising:
- Fee income of even a tiny fraction of $320 billion in crypto trades adds up to big money.
- The boom in bitcoin has more investors than ever looking for ways to trade cryptocurrencies, and Coinbase has established itself as a beginner-friendly place to start.
- Coinbase's fees are competitive with consumer-facing companies like PayPal Holdings (PYPL 1.44%) and Square (SQ 3.19%).
- Coinbase's most recent private funding round came in 2018 and put a valuation of $8 billion on the company. That came after bitcoin's first massive bull run, but it came after the cryptocurrency gave up much of its gains.
Keep your eyes on Coinbase
It's also possible that Coinbase will choose to go public using a direct listing instead of an underwritten IPO. If that happens, selling shareholders will be in a position to pocket more of the first-day pop rather than giving it to Wall Street's finest.
Whether you love bitcoin or hate it, Coinbase gives you a chance to profit from it no matter what happens to crypto prices. That'll have me watching closely as 2021 goes on to see what Coinbase says in its IPO documents when they finally come public.