2020 could be the year that crypto companies step forward and take the plunge into going public. As the biggest players in the industry cautiously watch for opportunities to gain regulatory approval, Ripple CEO Brad Garlinghouse used the prestigious Davos World Economic Forum summit to announce that the firm was considering an initial public offering later on in the year.
Crypto companies looking to go public face a paradox. Financial firms often have to meet stringent regulatory standards. Failing to adequately reassure regulators can result in companies being frozen out of lucrative markets or forced to shut down altogether. But simply leaping to the other end of the spectrum and attempting as much integration with the financial mainstream as possible is not as easy as it sounds. Many investors and mainstream financial companies are reluctant to take on the high level of risk associated with crypto or don’t understand digital currencies at all.
Nonetheless, there are notable exceptions. Many of the world’s financial titans are experimenting both with blockchain technology and cryptocurrencies. A global race is on to develop central bank digital currencies. The world’s biggest tech companies are also working on ambitious stablecoin schemes that could change the world of payments as we know it. The ideas are there, but companies are struggling to get off the ground.
Not even the titans of the industry have been able to go public. Bitmain, once thought as practically untouchable with a self-valuation of over $1 billion, had several failed attempts at an IPO before succumbing to vicious in-fighting between the two founders.
But it can be done. Pro-crypto Silvergate Bank launched on the New York Stock Exchange on Nov. 7. Canaan, long considered the underdog in the battle for top spot with its Chinese mining rival Bitmain, limped across the finish line in late November last year. With these companies leading the charge, Ripple is clearly not far behind.
Ripple CEO predicts more IPOs in 2020
Davos is widely considered one of the most important gatherings of the world’s financial and political elite. Criticized by British Prime Minister Boris Johnson as a place where billionaires “quaff champagne,” the international summit attracts decision-makers from all four corners of the globe.
In a talk at the World Economic Forum sponsored by Ripple, Garlinghouse opined that IPOs will be more prevalent in both the crypto and blockchain space in the coming year. More importantly, the CEO also strongly hinted that Ripple itself would be one such company daring to go public in 2020:
“In the next 12 months, you’ll see IPOs in the crypto/blockchain space. We’re not going to be the first and we’re not going to be the last, but I expect us to be on the leading side… it’s a natural evolution for our company.”
Founded in 2012, Ripple has since grown into a crypto heavyweight. Regardless of how the cryptocurrency XRP has fared, the company eked out its existence prior to the pre-boom years and survived 2018’s so-called “crypto winter.” While the timing of Garlinghouse’s comments has piqued interest from analysts, the markets have not moved as much as some had anticipated. Bethel Loh, macro strategist at ThinkMarkets, explained to CryptoX that this was not altogether that surprising:
“Price action was largely unimpressed by the news, given this wasn’t the first time Garlinghouse had hinted at a potential IPO. While there was a bit of chop, it was nothing out of the ordinary in terms of Ripple volatility.”
But why now? All tentative launch proposals must navigate the treacherous crypto markets, and Ripple’s potential IPO is no different. Elias Simos, senior analyst at Decentral Park Capital, told CryptoX that Ripple is likely anticipating an improvement of market conditions, in which it forecasts increased demand for XRP, along with improved company equity value:
“We are at the early innings of a new bull market where at the same time last year, we had just concluded a brutal bear market. The perceptions that come with each phase of the cycle favor the current condition more. A bull market also means more volume and, with it, possibly more demand for the XRP token — and possibly a boost in the equity value of the co. After all, a bunch of Ripple’s revenues comes from what they call ‘programmatic sales’ of XRP, which is effectively selling the XRP token to crypto exchanges.”
But Ripple’s routine sell-offs are not the only source of funding. Throughout the course of the company’s existence, it has attracted some powerful backers. Andreessen Horowitz, Peter Thiel, Lightspeed Venture Partners and Google Ventures all invested in the first two years.
As 2014 drew to a close, the company reported further investments of $32 million, with CME Group, Seagate Technology and Banco Santander U.K. all participating in the deal. According to an analysis published by blockchain and crypto research firm Messari, funding is still flowing freely as of December 2019:
The company announced that it had raised $200 million in a Series C round that reportedly valued the company at $10 billion. While the company’s ability to consistently raise money, despite wildly fluctuating market conditions, is commendable, it’s worth noting that each round also adds to the long list of investors eagerly awaiting a return on investment. For Simos, this is likely to have played a role in inching toward a public offering:
“They have a lot of private investors that would like to see liquidity, I am sure. Don’t forget, Ripple is one of the oldest co’s in blockchain, with the first funding round having taken place in 2012. Considering an IPO 8 years in for a successful co that is past Series C, is almost expected.”
IPOs are easier said than done
The past decade has been explosive for the tech industry. Consequently, companies such as the ride-hailing app Uber and workplace solutions company WeWork have witnessed exponential growth and usage around the world. Many other companies have followed in their footsteps, focusing on growth and establishing a market-dominating brand.
But pursuing an IPO means that companies have to disclose the true state of their finances. The “growth first” philosophy clearly isn’t working for investors, who, after all, are seeking a profit. If Uber and WeWork managed to alienate investors, even with a global supply of use cases under their belts, the stakes are higher still for crypto companies.
According to Simos, the recent spate of high-profile public offerings taking place over the past few years has been the culmination of a long “coming of age” period for tech unicorns of the 2010s. While this means future tech IPOs will need to have financials that stand up to serious scrutiny, Simos also added that the 2020 investment environment is likely to be less cautious than that of 2019: “Last year was a big reckoning for the early 2010s cohort of unicorns that were brought up under the incubation of private markets.” He went on to add:
“It seems that public market investors are not buying the ‘grow first, ask questions (about profit) later’ philosophy, and it shows. That, together with the fact that the Uber’s and Lyft’s IPOs were mispriced, led to lackluster IPOs. Also, all of this was happening at a time where investors had tilted to a risk-off approach — in the face of a trade war with China, etc. So, naturally, the demand for riskier tech/growth stocks was low. 2020 is a different circumstance. I think we’re over the hangover from WeWork and co and appetite for risk/growth has returned.”
What does this mean for XRP prices?
There is an element of tribalism to cryptocurrency. Due in part to the ideological conviction that cryptocurrency is the key to creating a better financial future, each token often develops a large community of like-minded investors. XRP is no different, as Crypto Twitter was stuffed with analysis over Garlinghouse’s IPO announcement, and what this might mean for those holding the token. While XRP fans might be keen to pump up any momentum for the token to increase its value, Simos is not convinced that the price is set to soar any time soon:
“Aside from a possible speculative run that will likely be short-lived, I don’t expect much to change. XRP is one of the large-cap tokens with the poorest fundamentals — little to no utility and (theoretically) uncapped inflation — in that Ripple could just decide to print more XRP.”
Simos outlined his view to CryptoX that XRP is unlikely to experience a price hike in the event of an IPO due to the deflationary nature of the cryptocurrency:
“XRP is actually deflationary. A little XRP is meant to be burned as transaction fees every time it trades, thus more transactions lead to more deflation. In most cases, across the lifecycle of a crypto co, it has been very hard to reconcile token and equity as value accrual vehicles, if a for-profit co (and not a foundation) is involved in the org structure. Most co’s actually choose to drive value more to the equity, than to the token — to the detriment of the token holders.”
Loh explained to CryptoX that an IPO could fundamentally alter how Ripple is traded by investors, theorizing that the cryptocurrency could come to be treated similarly to stock rather than a digital token:
“While being under the watchful eye of SEC regulation, depending on where Ripple floats, could significantly decrease the risk premium associated with weak governance or poor oversight measures. Effectively, Ripple is likely to be treated more as a stock and less as cryptocurrency, and so, should exhibit lower volatility parameters. Indeed, an IPO could see XRP price adjustments closely pegged to the utility or revenue generating capacity of Ripple, not dissimilar to the revenue or EBITDA line of a stock.”
Will more crypto-related companies take the regulatory route?
There’s no clear-cut response to the question of whether IPOs are the best route for crypto-related companies. Beyond the struggles many companies would face in demonstrating adequately robust financial results, let alone having business models that stand up to regulatory requirements, public offerings simply don’t make sense for all crypto companies.
Decentral Park’s Simos told CryptoX that, depending on the nature of a crypto-related business’ activities, some are inherently better-suited for an IPO than others:
“For those that have no token exposure (e.g., miners), going the IPO route is (and has been) the only way to access public market liquidity. On the contrary, for protocol based orgs (e.g., Maker DAO), it’s almost impossible to go the equity route (due to nonprofit foundation structures, etc).”
For Loh, the IPO issue is more nuanced than it being a matter of individual business suitability. The fallout since the 2017 boom has lingered long in the public consciousness, and consequent news of the market’s volatility only serves to further erode investor confidence in cryptocurrencies. Loh outlined his belief to CryptoX that cryptocurrencies are best viewed as a long game, with little chance of predicting the outcome at such an early stage:
“Until the comprehension of the utility of all the various blockchain functions truly percolates the wider public, going down the IPO pathway will be an extremely difficult and tricky journey, especially given the capitulation of the 2017 bubble seems to still be fresh in the minds of many. For Ripple, while an improvement on a relic of the banking system that is the SWIFT network is ostensibly appealing, investors will need more than just hype to pull them away from the unabated highs of global tech stocks.“
As market analysts herald the arrival of the latest bull run, companies are rushing to capitalize on the favorable conditions. And for good reason. If Garlinghouse follows through on his public offering hint, a successful IPO would give Ripple a degree of authenticity that most other cryptocurrency companies are not yet able to obtain. This, in turn, could bring about greater demand for XRP, driving up prices and creating further use cases.
A successful public offering would also be a logical development for the company, given the ever-growing list of investors seeking their share of the profit. But recent events have shown that investors are not impressed by tech companies that do not actually make a profit.
The developing nature of the cryptocurrency industry, along with the volatility of the markets, don’t help crypto companies balance their books or gain investor confidence. Whether Ripple can produce the robust financials to please prospective buyers or can adequately divorce itself from criticism of XRP remains to be seen.
