How to Invest in Coinbase Pre-IPO and Evaluate the Risks

Coinbase expects to go public by April 14, but some retail investors and cryptocurrency enthusiasts are itching to get a slice of the Coinbase pie before the debut.

Buying pre-IPO stock carries a heightened level of risk, even more so than an IPO debut stock, but it's possible—including with Coinbase.  

Much like FTX listed pre-IPO Airbnb stock on its platform, it has listed Coinbase as well. FTX is offering "CBSE" contracts ahead of the "COIN" ticker symbol Nasdaq debut.

FTX notes that these aren't tokenized shares or a digital equity representative of a company's future stock. In the case of tokenized shares, stocks are issued as digital assets (like cryptocurrency). Instead, FTX is offering contracts that track Coinbase's market capitalization. When Coinbase actually goes public through a direct listing by April 14, those contracts will convert into tokenized fractional shares based on the amount of equity each investor holds.

In a document, FTX shared that Coinbase pre-IPO contracts "represent futures contracts whose value is linked to the market capitalization of a specific stock—in this case Coinbase Inc.—at the end of its first trading day at the stock exchange."

FTX adds that these pre-IPO contracts "are settled exclusively by exchanging crypto assets," which should appease cryto fans.

Inside investors get the opportunity to buy and sell their pre-IPO shares on the Nasdaq Private Market, which helps incite interest in upcoming IPOs. Retail investors are able to get in shortly after an IPO's debut for non-tokenized and non-contractual shares.

Sometimes, platforms like EquityZen offer preferred equity for upcoming public stocks. However, that isn't the case with Coinbase. 

If and when you decide to add Coinbase to your stock market portfolio, you'll be a small fish in a big pond. Existing backers include Andreessen Horowitz, SV Angel, and Y Combinator.

After being founded in 2012, Coinbase started raking in sizable institutional funding from the get-go. Its first round came in April 2013 to the tune of $6.1 million. The numbers have increased exponentially since then. Coinbase has raised more than half a billion dollars in a single round. 

By the time fresh IPO shares hit retail investors' broker platforms, the price is often higher—much higher—than when trading first started. However, that isn't always the case. By buying pre-IPO stock, you can get new shares at a low value and see major returns. But you can also see your equity shrink right before your eyes.

With hoards of IPOs hitting the market, it's easy to forget that risk is involved. Deliveroo stock recently tanked 31 percent during its London Stock Exchange debut. Compass stock went public on March 31 and lost more than five percent of trading value on the first day. Losses aren't inevitable, but they're a reality that IPO (or pre-IPO) investors should be wary of before making a decision to buy or wait.