• The Twitter crowd got Coinbase all wrong…
  • The IRS is cracking down on crypto…
  • A good sign for the digital asset community

Dear Reader,

Yesterday was a pretty exciting day on Mars. I wish I could have been there to see it.

But fortunately for us, NASA’s Perseverance Mars rover was able to record the action for us and send it back home to Earth.

Ingenuity’s First Flight

Source: NASA

What we’re seeing above is a short video of the first aircraft in history to make a powered, controlled flight on another planet.

It was just a short hop for the first flight. Ingenuity hovered 10 feet above the surface of Mars for about 30 seconds. Here is a black and white image taken from Ingenuity of the surface of Mars while it was hovering.

Ingenuity Floats Above the Surface of Mars

Source: NASA

This is quite an achievement given the complexities of powered flight on Mars. The planet only has 1% of the atmospheric pressure on its surface compared to Earth. That means there are comparatively very few air molecules with which an aircraft can interact to create lift and fly.

On top of that, given the distance between Earth and Mars, real-time human flight control is impossible. Ingenuity’s flight was fully autonomous.

With Ingenuity fully operational, the team at NASA will get more ambitious with even more flights over the course of the next few weeks.

We have a lot to look forward to.

Now let’s turn to today’s insights…

Insights from Coinbase’s direct listing last week…

We have to start off today with Coinbase’s (COIN) much-awaited direct listing last week. This is one of the most widely misunderstood events that I can remember in stock market history.

The stock opened for trading last Wednesday at over $400 per share, which was well above the $250 reference price. But what really caught my eye was the company’s staggering earnings guidance.

Now that it is a public company, Coinbase is required to report earnings results each quarter. This is the first time we’ve had the chance to see just how great Coinbase’s business is.

And with its direct listing last week, we learned that Coinbase expects first quarter 2021 revenue to be a whopping $1.8 billion. The numbers aren’t finalized yet, but Coinbase expects to generate $730–800 million in profit. That’s impressive.

And get this – Coinbase did less than $1.2 billion in revenue for all of last year. It has already exceeded that number in just one quarter. Talk about exponential growth!

And we now know that Coinbase has over 56 million verified users worldwide. That makes it the largest brokerage platform in the world by a large margin. For comparison, Fidelity boasts 31.3 million brokerage accounts, and Charles Schwab has only 14 million accounts.

What’s more, Coinbase’s average revenue per user (ARPU) is between $34 and $44 per month. That’s fantastic! Simply put, this is one heck of a business.

That said, there was some negative chatter on Twitter regarding Coinbase’s “IPO.” First and foremost, it wasn’t an initial public offering – it was a direct listing. And there is a huge difference between the two.

As a reminder, Coinbase decided not to conduct a traditional IPO. It went with a direct listing. And with direct listings, existing shareholders – including company executives and employees – choose how many shares they want to sell into the market.

Yet many journalists and investors claimed that Coinbase’s executives were dumping more than 90% of their shares. They suggested that this was a sign that Coinbase was about to implode.

The people making this claim were completely missing the big picture. Had they simply taken 10 minutes to read the prospectus, they would have understood how the direct listing works.

And if we read the filings, CEO Brian Armstrong made just 1.5% of his Coinbase shares available for sale at the time of the IPO. That’s it.

What the journalists and Twitter alarmists saw was that Armstrong sold the majority of these shares when COIN listed for trading. But they failed to understand that Armstrong is holding on to 98.5% of his equity in Coinbase.

So the truth is the exact opposite of what so many wanted to believe.

Context is so critical to good investing. I review all information with a critical eye, and it is safe to say that most of what we see on social media is worthless.

The only way that direct listings work is if existing shareholders offer up a portion of their equity to trade publicly on the markets. It’s not like a traditional IPO where the company issues a whole lot of new equity, which dilutes all existing shareholders.

This is a real milestone in the blockchain and digital assets industry. And Coinbase is one of the few blue-chip companies in the blockchain industry.

Now that Coinbase is public, we can understand what an impressive business it is.

COIN has pulled back since it opened for trading. That’s in large part due to the widespread misunderstanding of what an IPO is versus a direct listing.

Full disclosure – I want readers to know that I am a shareholder in Coinbase. I was an early investor in the company years ago when it was small and still very much in the developmental stages.

And I don’t plan on selling anytime soon. For that reason, I am not permitted to publicly recommend Coinbase (COIN).

That said, I believe Coinbase is a great business, and I’m excited for its future as a public company.

The IRS is unleashing AI on digital asset transactions…

We have been talking recently about how the Internal Revenue Service (IRS) is ramping up its efforts to find unreported gains in the digital asset space. And that effort is heating up.

The IRS just announced that it will employ artificial intelligence (AI) and machine learning (ML) on blockchain data and publicly available sources to find people who have not paid taxes on digital asset gains. That’s happening this tax season.

I can’t emphasize this enough – every transaction involving a digital asset or cryptocurrency is subject to capital gains tax in the United States. That means even if we sell bitcoin or Ether to buy a lesser-known altcoin, we still must report that transaction to the IRS.

This is also true if we buy a product or service using bitcoin. The IRS treats this as a taxable event.

If the price of bitcoin increased since the time of our transaction, we are on the hook for capital gains taxes – even though we simply exchanged our bitcoins for a good or service.

Yes, the IRS is taking an onerous, heavy-handed approach here. But it is getting good at enforcement. And AI/ML will help it tremendously.

If we remember, the IRS forced Coinbase to turn over the records of about 13,000 users a few years ago. Now the IRS is asking both Kraken and Circle – two other large exchanges – to turn over user records as well. They won’t have much choice in the matter.

So the IRS is very serious. And now that the total market cap of all digital assets and cryptocurrencies has exceeded $2 trillion, the IRS sees this as an area ripe for tax collection.

As onerous as these rules may be, I strongly recommend all to comply with the existing tax policies and report gains in this space accurately. While not pleasant, it’s far better than finding yourself in the IRS’s crosshairs.

The Crypto Council for Innovation has formed…

We’ll wrap up today with a positive development in the blockchain industry. A new industry organization called the Crypto Council for Innovation (CCI) just formed.

We don’t talk much about industry organizations in these pages, but this one is important. What sets CCI apart is that some of the heaviest hitters in the industry are backing it. Coinbase, Square, Fidelity Digital Assets, and Paradigm teamed up to found the organization.

We just saw how explosive Coinbase’s business is with its direct listing. And we’ve talked quite a bit about how Square, through its Cash App, has become a major player in the digital space.

As for Fidelity Digital Assets… The fact that the world’s largest traditional brokerage house has a division focused exclusively on the blockchain space is telling. Fidelity has been putting a lot of resources into this division for years.

And Paradigm is one of the top venture capital firms focused on blockchain projects and digital assets. It drives a lot of capital toward the industry.

Historically, these firms haven’t been very involved with the industry’s trade organizations like the Chamber of Digital Commerce, of which I’m a member. Instead, they’ve done their own lobbying independently.

So these major companies coming together is a huge turning point for the industry. These firms will present a unified front in the battle for a better regulatory environment.

I’m very excited about this development. There’s a good chance that this will lead to more sensible regulations in the near future.

That would benefit all of us in the digital asset community, and it would drive innovation and economic development here in America. Everybody wins.

And if any readers haven’t yet positioned themselves to profit from the rise of blockchain technology, go right here to learn about my top recommendations in this space.


Jeff Brown
Editor, The Bleeding Edge

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