wNews: Unpacking Crypto’s “Facebook Moment”

This week’s edition of wNews unpacks what Coinbase’s massive listing deal means for the industry.

After first announcing its listing plans last year, the San Francisco-based company finally released its public filing. Media and crypto enthusiasts alike scoured the document for a glimpse into one of crypto’s most successful businesses. 

The findings were nothing short of bullish. For those active in tech in the early 2010s, there are many similarities with crypto’s trajectory and so-called FAANG stocks. 

As for markets, Bitcoin and Ethereum underwent corrections despite the Coinbase news. The CB10 index confirms much of the same, with ETH dropping the most this month. 

Much of this red market action was related to various options contracts expiring and a shakeout of overleveraged bulls. 

But how do traders actually use options to make money? This week’s crypto to-do list is all things calls, puts, and strike price as Crypto Briefing does a deep dive into decentralized options trading. 

All that and more, below.

Coinbase Goes Public: Crypto’s “Facebook Moment”

First announced in July 2020, the Coinbase S-1 document was made public this week. The document reveals much about the growing industry as well as one of its most successful companies. 

Before a company can be listed on a national stock exchange in the United States, it must notify the Securities and Exchange Commission (SEC) via an S-1 filing. The document includes all the necessary information about the company, such as the firm’s business model, how it would spend the fresh capital raised, and so on. 

It’s essentially a diagram of the health of a business. It helps prospective investors do their necessary research before deciding to invest in the company’s stock. Coinbase’s filing is no different. 

The company is, however, taking a slightly different route than many others. 

They will be pursuing a direct listing on NASDAQ. A direct listing is different from an initial public offering (IPO) in a few key ways. For those familiar with Coinbase, these differences make a lot of sense considering the company’s history. 

IPOs require underwriters like banks and brokers to help price the shares, overcome regulatory hurdles, and ultimately sell the shares. For this, these intermediaries take a fee. 

Facebook, for instance, paid a 1.1% fee to its 30 underwriters back in 2012. This fee can rise as high as 7%. 

A direct listing is much different. For one, there are fewer, if any, underwriters, which means much lower costs. This also means that anyone holding Coinbase shares are the sole providers for the public market. Further, no new equity is created, preventing the dilution of shares available. 

Unfortunately, a direct listing also has some drawbacks. 

Underwrites are paid to help protect a stock from extreme volatility, ensure that shares will indeed be bought, and make sure the fundraising event goes smoothly. That being said, Coinbase does have a few big banks on its side. The most notable of which is Goldman Sachs. 

Not all costs are eliminated, but it will certainly be much less expensive than the Facebook IPO. 

The cost of these shares upon their listing, and the valuation of Coinbase, have made headlines since the listing became known last year. The figure has ranged from $20 billion to a whopping $100 billion.

Coinbase valuation:

Feb 2021: $100 billion*
Oct 2018:     $8 billion
Aug 2017:   $1.6 billion
Jan 2015: $490 million
Dec 2013: $140 million
May 2013:   $15 million

*media reports pic.twitter.com/veR3GuktlZ

— Jon Erlichman (@JonErlichman) February 26, 2021

At a $100 billion valuation, the firm’s CEO, Brian Armstrong, is looking at a $20.7 billion valuation for his holdings in the company. Other prominent investors include Andreessen Horowitz, Union Square Ventures, Fred Ersham, and several others. 

But besides the demand for Coinbase shares, how else are investors making evaluations?  

If shares are a reflection of expected future earnings in a company, then investors are unpacking Coinbase’s business model and successes. In the midst of a raging bull market, the successes have been myriad. 

When the company began in 2012, it boasted a mere 13,000 users. According to the latest S-1 filing, this figure is now over 40 million verified users. Though many of these investors are retail, Coinbase has also seen incredible growth on the business’s institutional side. 

Armstrong’s company helped execute multi-billion-dollar Bitcoin purchases for both Tesla and Microstrategy, for example. 

As for profits, 2020 was another break-out year, with Coinbase hitting $1.3 billion in revenues. 2019 touched only half that figure. 

All of these factors point to a thriving business that has grown across all metrics year after year. Still, risks abound. The company listed dozens of factors that could negatively impact its growth. 

According to the filing, these include:

• The reduction of Bitcoin mining rewards,
• Hacks, 51% attacks, and technical malfunctions of Bitcoin and Ethereum.
• Migration to Ethereum 2.0, Ethereum’s scaling solution.
• Core developers of both networks making changes to either protocol.
• Highly-contentious forks. 
• Failing to solve scaling issues.
• High fees and congestion.
• Continuing to entice developers and users to leverage either network.
• The rise of quantum computing and cryptography changes.
• Regulatory constraints.
• Identifying Satoshi Nakamoto. 

Non-crypto-specific factors also include a bear market and rising inflation, but these are assumed no matter the industry. 

Traditional investors are perhaps far busier trying to figure out if Craig S. Wright is indeed the creator of Bitcoin. 

Market Action: Bitcoin (BTC)

Bitcoin’s latest bullishness finally met its limits after BTC corrected 24.3% from peak to a trough of $44,100 on Coinbase on Friday morning. 

Dr. Micheal J. Burry, a savant investor who famously predicted the 2008 market crash, stated in a now-deleted tweet that the asset is in a bubble because of the same reason—exceedingly high leverage. 

Market participants went through a tumultuous week with nearly $10 billion in liquidations since last weekend. Since last week, the derivatives market also faced multiple shocks, grabbing a large chunk of liquidations in each strike, $4 billion of which occurring on Tuesday.

Bitcoin’s price has since ranged between $45,000 and $51,500. Since yesterday, $1.5 billion over-levered longs were punished. 

The resistance for Bitcoin is at the recent peak of $58,400. Before the leading asset moves to support levels, individual exchanges offer a more granular look into current trends. 

Binance is the largest exchange in terms of volume for perpetual swaps or future derivatives contracts. Last week, it was also the highest in terms of liquidations. The funding rate on the exchange was running as high as 170% APR on Feb. 20. 

The reset in rates across Binance occurred late Tuesday as BTC fell below $45,000. 

Bitcoin funding rate on BitMEX. Source: BitMEX 

The customers of Huobi have been dominantly short since the beginning of the year. The rumors around bearish Asian sentiments are visible across the exchange. 

The comparison of long and short positions depicts a level similar to last month’s downturn. 

Bitcoin long (green), short (red) position comparison. Source: Huobi 

Friday also marked the expiration of $3 billion notional value options contracts. The crowding of strike prices around $36,000 to $48,000 points towards a critical region for contract buyers. 

BTC/USD price chart. Source: TradingView

In the first two months of 2021, Bitcoin has dropped significantly during the week of monthly options expiration. The price formed a local bottom around $30,000 with a 30% correction last time from $42,500. 

Market sentiments point towards a revisit to similar levels at the moment. 

The last level of protection for the bulls remains around $30,000-$32,000, considering the long-term parabolic trend and last local low. 

Market Action: Ethereum (ETH) 

Ethereum’s native token ETH underwent a much steeper 33% correction compared to Bitcoin’s 25%. ETH tested the levels around $1,400, dropping from an all-time high above $2,000. 

ETH/USD price chart. Source: TradingView

The support levels for ETH are at $1,480 and $1,200. 

Network congestion dampened ecosystem growth, an important part of any crypto network’s price appreciation. Ethereum’s high fees saw the rise of the Binance Smart Chain and pushed the blockchain’s native token, BNB, to the third spot in market capitalization. 

The USDT supply on Tron also increased more steeply than Ethereum this month, moving from $8 billion to $14 billion. Whereas, Ethereum’s supply increased from $18 billion to $20 billion.

Still, the network’s usage reached its peak this week, with miners earning up to 70% from fees. 

Ethereum miner’s percentage earning from fees. Source: Glassnode

The second-largest cryptocurrency seems to have entered the cooldown period at the mercy of price movements in Bitcoin. 

Development during this period, especially around scalability, would likely help ETH return to new highs this year.

Crypto To-Do List: Trade Crypto Options

One of the fundamental breakthroughs of DeFi is the open-access it gives to everyday investors. 

The traditional finance world is closed off to most, but in DeFi, anyone with an Ethereum address can participate. 

Options form a major part of the traditional financial system, accounting for $300 trillion of the global derivatives market. Despite this market’s size, the instrument is still vastly misunderstood. 

Options are financial contracts that give buyers the right to buy or sell an asset at a set price. 

They can be bought, sold, and traded. They are often used as a hedging strategy and for speculation. Thanks to DeFi, traders can now use options for cryptocurrencies like ETH. 

Call options give the right to buy an asset at a set price before an expiration date. They’re commonly used by traders who are long on an asset, meaning they think its value will increase.

Put options do the opposite. They give the right to sell at a set price before the expiration date. Puts are often used for shorting an asset in anticipation of a fall in price. 

The expiration date is the last day until the option is valid. It can only be exercised before the expiry date. 

Call and put options can also be traded as a way of maximizing profits. 

If ETH is trading at $1,500, Alice may buy call options with a strike price of $1,700 for $10 each. If ETH hits $2,000 before the expiration date, exercising the option gives her a profit of $300 minus the $10 outlay, equating to $290 profit per ETH. 

She could also sell the call option for more than $10 as the ETH price increases; its value increases as the asset does. This is because someone else on the market may want to exercise the call option to benefit from the settlement increasing.

Conversely, Bob may buy put options with a strike price of $1,300 for $10 each. If ETH falls to $1,000, he could exercise the option and end up with $300 profit per ETH, minus the $10 outlay. He also makes $290 per ETH. 

Similarly to Alice, his put option would increase in value as the price of ETH falls. 

Sellers often create options to earn a premium, hoping that the contract will expire before the strike price hits. In the example above, the call option creator must sell the ETH to Alice at a low price when she exercises the option. Similarly, the put option seller must buy the ETH from Bob when he exercises his option. 

Options are a fairly complex form of derivative, but thanks to protocols like Opyn and Hegic, they’re now more accessible than ever to crypto traders. They can be instrumental as a hedge against falling prices, but as ever, caution is advised. 

DeFi is still risky, and options should be studied carefully before making any investment decisions.

That’s all for this week’s edition of wNews, readers. Stay tuned for next week’s dispatch.

Disclosure: At the time of writing, some of the authors of this feature had exposure to ETH, AAVE, BTC, UNI, and POLS. One or more members of Crypto Briefing’s management team owns HEGIC. The company (Decentral Media Inc.) owns HEGIC.