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Coinbase just filed for a direct listing and it revealed a list of risk factors that investors should be aware of – from the volatile nature of cryptocurrency to the potential for cyber attacks

brian armstrong coinbase
Coinbase founder and CEO Brian Armstrong at Consensus 2019 at the Hilton Midtown on May 15, 2019 in New York City.

Coinbase filed to go public on Friday morning with a direct listing.
The “Risk Factors” section of the document highlights various challenges facing Coinbase.
They include everything from the volatility of cryptocurrency to potential cyber attacks.
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One of the most popular cryptocurrency trading app companies, Coinbase, is officially going public: Coinbase filed with the Securities and Exchange Commission last year, with plans for a direct listing in early 2021.

As part of that process, Coinbase had to publicly disclose a trove of information in an S-1 filing, and the section labeled “Risk Factors” spells out some of the company’s worst fears.

We break down the most important of those factors below:

1. Cryptocurrency is volatile, and its future is unpredictable.

Bitcoin miners are seeing gold despite the cryptocurrency's recent fall.

If you haven’t been following the history of Bitcoin and other cryptocurrencies, you might not know that it’s prone to wild swings in value. Sometimes the bottom drops out suddenly, and sometimes it spikes in value by double or more.

It’s that volatility that is prime on Coinbase’s risk factors list.

“Our operating results have and will significantly fluctuate due to the highly volatile nature of crypto,” the filing reads. “All of our sources of revenue are dependent on crypto assets and the broader cryptoeconomy. Due to the highly volatile nature of the cryptoeconomy and the prices of crypto assets, our operating results have, and will continue to, fluctuate significantly from quarter to quarter in accordance with market sentiments and movements in the broader cryptoeconomy.”

This volatility is the foundational risk of Coinbase.

2. If Bitcoin and Ethereum become less popular, and another cryptocurrency doesn’t replace them, Coinbase would be in major financial trouble.

FILE PHOTO: Representation of the Ethereum virtual currency standing on the PC motherboard are seen in this illustration picture, February 3, 2018. REUTERS/Dado Ruvic/Illustration/File Photo
FILE PHOTO: Representation of the Ethereum virtual currency standing on the PC motherboard are seen in this illustration picture

With Bitcoin and Ethereum trades forming the foundation of Coinbase’s business, the company has a lot riding on the ongoing popularity of two cryptocurrencies.

Though Coinbase says it supports “a diverse portfolio of crypto assets,” Bitcoin and Ethereum trades made up 56% of the company’s total trading volume in 2020. 

As such, “the majority of our net revenue from transaction fees,” Coinbase says, was derived from just two cryptocurrencies. Should those cryptocurrencies fall out of favor and not be replaced by something else, Coinbase would lose the majority of its business.

3. As a company built around an online product, Coindesk is particularly vulnerable to cyber attacks.

Johnny Lee Miller in the film "Hackers."

Coinbase is a cryptocurrency trading platform that depends entirely on international computer networks to function. Since cryptocurrency is an asset, it is particularly attractive to nefarious actors.

The axis of those two risks is where Coinbase operates. To that end, the company says its business, “involves the collection, storage, processing, and transmission of confidential information, customer, employee, service provider, and other personal data, as well as information required to access customer assets.”

If hackers were to breach the company’s security, it could materially damage Coinbase’s standing with its customers. “We have built our reputation on the premise that our platform offers customers a secure way to purchase, store, and transact in crypto assets,” the filing says. 

4. Financial regulations are likely to be imposed on cryptocurrency, and that would assuredly impact crypto exchanges like Coinbase.

janet yellen fed
Treasury Secretary Janet Yellen.

It’s still early days for cryptocurrency regulation from federal regulators, and Coinbase considers that unknown future to be a major risk factor.

“We are subject to an extensive and highly-evolving regulatory landscape,” the filing says, “and any adverse changes to, or our failure to comply with, any laws and regulations could adversely affect our brand, reputation, business, operating results, and financial condition.”

Beyond cryptocurrency regulation itself, Coinbase operates in the financial services world, and that makes it subject to other types of regulation.

“These legal and regulatory regimes … evolve frequently and may be modified, interpreted, and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another,” the filing says. “Moreover, the complexity and evolving nature of our business and the significant uncertainty surrounding the regulation of the cryptoeconomy requires us to exercise our judgement as to whether certain laws, rules, and regulations apply to us, and it is possible that governmental bodies and regulators may disagree with our conclusions.”

5. Profitability isn’t assured in the near future, as operating costs are only expected to increase with the company’s growth.

coinbase mobile phone app
In this photo illustration, Bitcoin course's graph is seen on the Coinbase cryptocurrency exchange application on February 12, 2018 in Paris, France. Founded in June of 2012, Coinbase is a digital currency wallet and platform where merchants and consumers can transact with new digital currencies like bitcoin, ethereum, and litecoin. The company is based in San Francisco, California generated in 2017 a record turnover of one billion dollars (about 810 million euros) with exceptional trading volumes, which made it the most downloaded mobile app on iOS last December.

In the next few years, Coinbase has plans to expand — and that expansion is expected to cost a significant amount of money.

“We anticipate that our operating expenses will increase substantially in the foreseeable future,” the filing says, “as we continue to hire additional employees, expand our sales and marketing efforts, develop additional products and services, and expand our international business.”

Moreover, those growth expenses could potentially cost Coinbase profitability “on a consistent basis,” the filing says. 

6. Despite having millions of users, Coinbase still depends on a small number of its users for the majority of its business.

Bitcoin trader
A Japanese bitcoin trader in 2017.

As of the end of 2020, Coinbase counted 43 million verified users of its platform. Of that 43 million, just shy of 3 million were making monthly transactions on the platform.

More specifically: Just 6.5% of Coinbase users are actually using the platform to transact.

That dependence on a small percentage of the overall userbase is a major risk, the company says.

“A loss of these customers,” the filing says, “or a reduction in their Trading Volume, and our inability to replace these customers with other customers, could have an adverse effect on our business, operating results, and financial condition.”

7. The mysterious creator of Bitcoin owns a huge cache that, if sold, could destabilize the entire market.

satoshi nakamoto
A Japanese-American man named Dorian S. Nakamoto, who goes by "Satoshi Nakamoto," has been repeatedly misidentified as the creator of Bitcoin.

Bitcoin was created by a person or people going by the name Satoshi Nakamoto.

That name shows up three times in Coinbase’s filing document, but only one instance of its appearance is particularly interesting: When the company highlights that he’s a risk factor to its business.

“The identification of Satoshi Nakamoto,” the filing says, “the pseudonymous person or persons who developed Bitcoin, or the transfer of Satoshi’s Bitcoins,” could result in major destabilization. 

At least part of that is due to the massive cache of bitcoin that Nakamoto is said to have mined early on. If that cache were to be sold or transferred, it could have huge impacts on the entire bitcoin marketplace. 

Got a tip? Contact Insider senior correspondent Ben Gilbert via email (, or Twitter DM (@realbengilbert). We can keep sources anonymous. Use a non-work device to reach out. PR pitches by email only, please.

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