On Wednesday, Coinbase started trading publicly on the Nasdaq, blasting past its initial reference price and kicking off above $380 per share. Being the first cryptocurrency-focused company to land on the stock exchange, it capitalized on the surging fascination with digital currencies by choosing a direct listing rather than the classic IPO route. However, this choice brings a distinct set of risks for investors, diverging from the traditional method that typically involves investment banks.
Understanding the Unconventional Route: Direct Listing vs. IPO
The traditional path, an IPO, involves hiring investment bankers to facilitate the process: they advise, orchestrate the sale, and market shares to the public. Crucially, the company releases newly minted shares, raising fresh capital, while insiders sometimes offload part of their holdings. This way, the company scores new funding and insiders gain liquidity.
By contrast, a direct listing skips the banking middlemen entirely. Instead, shares are sold directly by current shareholders—founders, employees, or early investors—without issuing new stock or raising new money for the company itself. Coinbase pursued this path, meaning public buyers are snapping up shares only from insiders at the outset.
Direct listings remain an uncommon beast, traditionally favored by lesser-known outfits flying under Wall Street’s radar. Yet, recently, several recognizable names have embraced this model, including Spotify, Slack, Palantir Technologies, and Asana, proving it can be a high-profile alternative.
Companies may lean toward direct listings to dodge the hefty fees and stock dilution tied to typical IPOs—especially if they don’t urgently need extra cash to fuel their operations. Why shell out for fresh capital if the business can run without it?
Still, this approach exposes investors to atypical hazards absent in traditional IPOs. Let’s break down four standout risks accompanying Coinbase’s direct listing journey:
1. Market Liquidity Could Be Thin or MIA
Investment bankers in a classic IPO rally buyers hard, hyping the deal and boosting aftermarket trading. Investors know beforehand how many shares will hit the market, and even if they can’t get a piece during the IPO itself, they can jump in alongside other public buyers once trading begins.
That safety net disappears with a direct listing. The volume of shares available hinges entirely on insiders’ willingness to sell—and the amount they choose to part with. While Coinbase’s huge investor enthusiasm makes an oversupply unlikely, the supply-demand balance could still swing unpredictably.
Simply put, there’s no guarantee of a bustling marketplace for the stock initially, which could make snapping up shares tricky or costly until equilibrium settles.
2. Wild Price Swings Await
With relatively sparse share volume trading, Coinbase’s stock price may gyrate wildly, particularly during its infancy on the market.
Traditional IPOs benefit from underwriters who set an initial price anchoring investor expectations and often intervene technically to steady the stock, at least in the short run. They build institutional support that cushions the price.
Without that backstage engineering, a direct listing like Coinbase’s faces the merciless forces of raw supply and demand. Limited shares available against fervent demand can spark erratic price jumps, as traders scramble to lock in positions or dump shares.
These market mechanics might overshadow Coinbase’s actual business health, driving emotions-fueled volatility that triggers ill-timed buying or selling.
3. Dual-Class Stock and Concentrated Insider Control
Coinbase is going public with a dual-class share setup, meaning insiders enjoy disproportionately enhanced voting power—often by a factor of ten—compared to regular shareholders.
Currently, insiders command over 60% of the voting rights, effectively allowing them to steer corporate decisions, including their own paychecks, with little opposition.
Such concentrated control tends to unsettle outside investors, who see their influence diluted and fear insider entrenchment. Though somewhat orthogonal to the direct listing risks, combined they paint a picture of power imbalance.
Some smaller direct listings attract investors less fussed about this structural bias than big institutional players. Yet, this lack of checks-and-balances can amplify risks for outsiders.
4. Insider Selling Without Lock-Up Constraints
Typically, an IPO imposes a lock-up period preventing insiders from unloading their shares immediately, granting the market breathing room to absorb the new stock and evaluate the company.
Coinbase’s direct listing breaks this mold: no lock-up agreements apply, meaning insiders can dump unrestricted amounts of shares right after the debut.
This confluence of factors—unfettered insider selling, enhanced voting power via dual-class stock, and no enforced holding periods—can trigger negative optics. It raises suspicions that insiders might exploit public investors, even if the reality is more nuanced.
Quick Stats on Direct Listings
Since 2018, only about 15 companies have gone public via direct listings on major exchanges, with Spotify and Slack among the earliest high-profile cases. While bypassing investment banks may save up to 7% in underwriting fees, direct listings often see wider opening-day price swings—up to 30% volatility in some instances—compared to traditional IPOs.
Final Takeaway: Risks vs. Rewards
While Coinbase’s unconventional route raises eyebrows due to these four idiosyncratic risks, it doesn’t rule out long-term upside. Investors must weigh these factors carefully, acknowledging that a direct listing isn’t the standard fare and can color both market dynamics and governance.
Notably, direct listings haven’t all been doom and gloom—Slack and Palantir sailed through their debuts without major turbulence, suggesting that with the right company and market conditions, it can succeed.
Still, potential backers should perform thorough due diligence on all risk fronts, including the broader volatility of the cryptocurrency market. Coinbase’s fate is intertwined with crypto’s ascent, and understanding the business is critical beyond just the listing method.
Editorial Disclaimer: All investors should undertake their own research and consider their risk tolerance before committing capital. Past market performance does not guarantee future returns.