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14 April 2021updated 09 Sep 2021 10:58am

Coinbase IPO: like it or not, you’re now invested in Bitcoin

The great success of cryptocurrencies has not been their technology, but their ability to inveigle themselves into the financial system.

By Will Dunn

Whether you think Bitcoin and other cryptocurrencies are a scam or an economic revolution, you are becoming increasingly exposed to them as financial institutions incorporate them into payments and investments. This year, both Mastercard and Visa have announced plans to allow payments using cryptocurrencies, and the US’s oldest bank, BNY Mellon, has begun accepting cryptocurrencies for its asset management clients. And with the cryptocurrency platform Coinbase selling shares from today via a direct listing on the Nasdaq stock exchange, companies whose value is linked to the cryptocurrency craze are increasingly likely to be included in the passive tracker funds that are bundled into most pensions. Bit by bit, everyone is being exposed to crypto.

The UK’s largest pension provider, the National Employment Savings Trust (Nest) confirmed to the New Statesman that Coinbase would not be included in its Ethical Fund. However, Nest said that that if Coinbase is listed in the FTSE All-World Index, it could feature in its portfolio as part of a passive tracker fund. Nest said the amount invested would depend on the IPO pricing and how many shares were available.

Large numbers of pension funds would also use components that track the S&P 500 Index, to which Coinbase will probably not be admitted due to its share structure, but which already contains some exposure to cryptocurrency thanks to Tesla, the world’s most valuable car company by market cap, which has invested $1.5bn in Bitcoin and renamed its head of finance “master of coin”.

Coinbase is a cryptocurrency platform that allows users to buy and sell Bitcoin, Ethereum and hundreds of other currencies. It is the first such platform to float on a stock exchange, and estimates in recent weeks have suggested the company could be valued at around $100bn. This would make it the biggest listing since Facebook.

Such platforms have had a rocky start. Creditors of the first big Bitcoin exchange, Mt Gox (its odd name is because the domain was originally bought as a place to trade cards for the fantasy game Magic: The Gathering), are still waiting for the more than 500,000 Bitcoin – priced at almost £23bn at time of writing – that disappeared when the now-defunct exchange collapsed in 2014. Coincheck, a Japanese exchange, lost $534m to a hack in 2018.

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Coinbase has avoided such problems so far and, unlike some tech companies when they list on the Nasdaq, actually makes a profit. Its revenue totalled $1.8bn in the first three months of this year. It makes most of its money from the fact that it charges around 46 times as much commission per transaction as the New York Stock Exchange or the Nasdaq.

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But this is also its weak point: if the financial innovation that has allowed Coinbase to get to this point is to continue, institutional and retail investors will expect to pay less commission. Any competition on price will chop away at its revenue, unless it can magic up some special new way of making money.

Coinbase’s S-1 filing strongly suggests this is the plan. It says that “crypto” will be “as revolutionary and widely adopted as the internet”, and that it will “enable the creation of an internet-based financial system” (presumably the vast infrastructure of electronic payments and trading that has been built around the world since the 1970s counts as something else) and ”provide a development platform for applications that are unimaginable today”.

You’ve got to admire the chutzpah of a company that is prepared to describe the future applications of its technology as “unimaginable”. But if blockchain really was going to be as revolutionary as the internet itself, this would have happened by now, because blockchain is old technology. It is older than DVDs, MP3 players, text messaging and the USB stick.

In fact, blockchain technology is just as old as the web itself. It was first outlined in a proposal written in 1991 – the same year Tim Berners-Lee created the first website – by two researchers working at Bell Labs. Stuart Haber and W Scott Stornetta proposed a “digital safety-deposit box”, secured by cryptography and verified by all members of “a distributed network of users”. If this idea was so revolutionary, why was it ignored for 17 years?

Take another Bell Labs invention, the transistor. The first demonstration was built in 1947. Other technologists took to the invention immediately, and it was rapidly refined. In 1954 the Regency TR-1, the first pocket transistor radio, went on sale. Young people who still lived at home could listen to music with their friends, rather than with their parents in front of the family wireless. By the 1960s the transistor had enabled massive social and cultural changes to take place in the US and Europe, while the revolution in product design it created – allowing for cheap, rapid production of new electronics – restarted the economies of Japan and eventually China.

[See also: Will Dunn on why NFTs are not a new way to make money]

Blockchain technology, on the other hand, was only picked up again when it was attached to a payment system in 2008 – and it only became the vaunted, evangelically promoted technology of the future when enough people stood to gain from the price of Bitcoin.

This brings us back to the real innovation at the heart of the crypto economy, which is not the technology itself but the financial innovation of a new and unusually volatile asset for speculation.

This inherent volatility is the reason institutions and their customers should be wary of companies linked to the crypto boom. Bitcoin, as it is currently used, will not stop being volatile, because providing volatility is its only use. Like the small-cap stocks used in high-frequency arbitrage and the “meme stocks” favoured by Reddit, it is only of interest because its price varies so much. With no productive value of its own, it only functions to create a boom.

And in the long term still larger numbers of people, without even a tenuous connection to cryptocurrencies, could nevertheless be affected by the craze. Bitcoin alone uses around twice as much energy as Bangladesh; most of this energy use takes place in China, where most electricity is generated by burning coal. In 2019 Unicef estimated that 19 million Bangladeshi children are at serious risk from floods, cyclones, disease and malnutrition caused by climate change. The fast money being made from this boom may one day affect us all, but perhaps not in the way Coinbase would have us believe.

[See also: The meme-stock boom looks a lot like the online gambling boom​]