Should you invest in Coinbase after its blockbuster stock market debut?

Cryptocurrency has crossed another milestone in its journey to mainstream adoption with the stock market flotation of Coinbase, the largest exchange for buyers and sellers of virtual coins in America.

Coinbase is the first crypto exchange to list its shares on America's stock market. The company's market value surged to $100bn (£73bn) as the shares started trading, which makes the nine-year-old firm more valuable than BP or GlaxoSmithKline.

But how does it make money, and are the shares a good investment?

What is Coinbase?

Coinbase allows DIY investors to buy, sell and store cryptocurrencies, including Ether, Bitcoin and XRP.

The company was founded in 2012 with the mission of making cryptocurrency more accessible and safer to buy. At the time, Bitcoin was complicated to trade and associated with criminals because Bitcoin allows people to pay for things anonymously.

Coinbase makes money by charging a flat fee for trades and a percentage fee for conversions between virtual coins.

In the first three months of the year Coinbase made $730m (£530m) profit on revenues of $1.8bn (£1.3bn), bolstered by Bitcoin’s meteoric rise. The exchange lured 13m new users in the first three months of 2021.

Coinbase has been profitable since 2017, according to chief executive and founder Brian Armstrong.

Is investing the same as owning Bitcoin?

Not quite, but the shares will be correlated to the price of price of cryptocurrencies because the more interest there is in crypto, the more trades are made and the more money Coinbase makes.

It is similar to backing companies which sell picks and shovels during a gold rush. Investors do not have to believe that cryptocurrency is the future and will replace regular currencies, just that other people will continue buying and selling virtual coins.

Coinbase's connection to Bitcoin means that shares are likely to be volatile given the dramatic swings in the digital coin's price. However, Laith Khalaf, of fund shop AJ Bell, said the shares were a safer way to profit from cryptocurrency than buying Bitcoin itself because Coinbase allowed trading in all different types of online currencies.

"Coinbase is an exchange so it makes money as long as people are trading crypto. A drop in the price of Bitcoin is not necessarily bad news, so long as people are still trading. The danger is that interest in crypto fizzles out, but this is looking less likely as the price rises and more big investors accept it," he said.

Coinbase’s stock market listing could also mark a turning point for the adoption of cryptocurrencies, which in turn will push up its share price as more people trade it.

Speaking ahead of the listing, Mr Armstrong told CNBC: “Hopefully Coinbase going public and having this direct listing is going to be viewed as kind of a landmark moment for the crypto space."

Who has bought shares and should I?

Some high profile investors are backing Coinbase. Cathie Wood, of American fund group Ark Invest, has added Coinbase shares to three of her popular ETFs: ARK Innovation, ARK Next Generation Internet and ARK Fintech Innovation. Her investment firm manages around £35bn and is a high-profile backer of tech stocks, such as Tesla.

However, most mainstream inventors are waiting to pass judgement on the stock. In the latest survey of professional fund managers overseeing about £430bn by Bank of America, 74pc said Bitcoin was in a bubble. If it bursts, then Coinbase could also suffer.

Mr Khalaf said: "There are very few serious fund managers buying Bitcoin or Coinbase shares at the moment. The exception is Ruffer, the British fund group, which added a 2.5pc Bitcoin position in some of its funds to diversify its investments," he said.

Mr Khalaf concluded that Coinbase shares were not as risky as buying cryptocurrencies directly but that the company's success still depended on interest in Bitcoin growing over time, which was hard to forecast.

How can I buy shares?

Shares are listed on Nasdaq, an American stock market, and can be bought via most stockbrokers. The largest include AJ Bell Youinvest, Interactive Investor, and Hargreaves Lansdown.