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This is the last of a three-part newsletter series about the risks facing crypto right now.
Here are the three topics this newsletter series covers.
Price and macro risk (two weeks ago)
Platform and protocol risk (last week)
Public company risk (this week)
This week we’ll take a look at public company risk.
Public companies are widely misunderstood, especially among the bitcoin and crypto crowd. That’s not really surprising. The whole thing is (enter: 100% of my cynicism) intentionally convoluted and confusing to make the investment bankers, lawyers and insiders on Wall Street feel smart.
I mean, these are called “public companies,” but they are decidedly private, for-profit enterprises. Words matter, but just not in high finance, apparently.
– George Kaloudis
For context, I want to lay out what it means to “go public” or “be a public company.” A company goes public by selling some or all of its equity to a group of underwriters, who then issue stock to trade openly on exchanges like the Nasdaq or New York Stock Exchange.
It’s “public” in that (almost) anyone can invest in this equity freely (in practice, it isn’t truly open). Also its financial information – from quarterly income statements to stock price – is publicly shared. Companies do this to receive an injection of money to aid growth or reward long-time equity holders and have easier access to future capital. These seem to be reasonable reasons to go public, and a lot of the time it works out.
But for more context, I’m going to tell you what I think about going public.
I think it’s dumb.
Going public puts the focus on short-term growth over long-term growth, and that could spell disaster under improper management for even the best companies. Corporations can survive longer and are best served when they have the long term in mind. Going public, in most jurisdictions, requires quarterly financial reporting, which is generally onerous. Additionally, you have public shareholders who demand the stock performs well or else they will tank your equity value of the company by selling the stock en masse.
What’s more, the capital markets have become exceedingly more open to private companies as a glut of private capital (debt and equity alike) is on the sideline looking for things to put money into. I’m mostly being fantastical for dramatic effect, but in general, going public isn’t a one-size-fits-all solution.
Especially in crypto. Hence this week’s focus on risks posed by public companies in the Hard Times of crypto …
Public company risk
During the last bear market in 2018, there were no public companies in crypto. Now we have trading platform Coinbase (COIN) and an army of public crypto mining companies. This is how their stock prices have performed this year (COIN, CORZ, HUT, HIVE, RIOT, MARA).
That’s not good. Normally, if these companies were private, they would be trying to figure out how to survive. Take Coinbase for instance. It has been around since 2012, and so it has survived multiple bear markets. But this time around, it has the public shareholder to worry about. And the highly liquid, public shareholder is far more impatient than the highly illiquid, private shareholder.
Going public has led to an unsavory situation for Coinbase.
The insistence for consistent, infinite, short-term growth by shareholders led to an immense expansion in headcount. At the same time, Coinbase also scrambled to increase revenue by listing countless (and sometimes off-the-wall) digital assets on its platform.
That strategy generally works in a bull market, but the market downturn has led to an absolute PR nightmare when Coinbase cut back on hiring in May, which rolled into rescinding new job offers. The blowback in turn led to a pointed tweet thread from co-founder and CEO Brian Armstrong urging dissenters to quit, following an employee petition to remove executives from the company, which was then followed promptly by the exchange laying off 18% of its workforce.
That same insistence for growth combined with post-Global Financial Crisis cheap capital has hit mining companies, as well. Miners were able to cheaply finance mining equipment and facilities, all while thriving without needing to sell much of the bitcoin they mined since the price of bitcoin was high and capital was cheap. Now that bitcoin is dipping and interest rates are increasing, public miners may be forced to dig into their coffers to sell some of the 40,000 BTC they collectively hold to survive.
While 40,000 BTC of potential selling might feel like a bad thing, Castle Island Venture’s Nic Carter pointed out in a podcast that miner selling marked the last move down during the 2018 bear market. So while we could be in for more pain, perhaps the light at the end of the tunnel is visible.
And to be undeniably clear, I’m not suggesting that going public is the sole reason these companies are struggling. In fact, these companies would be struggling if they were still private. Many companies are struggling across many industries, not just crypto exchanges and miners. I am suggesting that a company going public while it is still in growth mode with a business model highly dependent on the price of highly volatile assets was potentially unadvisable.
The only thing worse than being a private company going through a tough time is being a public company going through a tough time. I think most of these companies will be fine, but it will be tough going for the foreseeable future.