Coinbase's IPO is driving cryptos to record highs. A former Morgan Stanley trader who now runs a crypto finance firm breaks down why a near-term correction in Bitcoin might actually be a good thing for the industry.

Amber Group

Some call it an inflection point, others say it's the most important IPO of the year. 

The nearly $100 billion public debut of the largest US crypto exchange Coinbase (COIN) is sending ripples across the borderless crypto ecosystem.

Michael Wu, chief executive of the crypto finance firm Amber Group, is feeling the excitement all the way in Hong Kong.

"This is great news for the industry. Coinbase is setting a path that at least some in the industry thought was impossible," Wu said in an interview. "Coinbase shows the world that you can both embrace crypto as new technology and at the same time be compliant and regulated."

Backed by Coinbase Ventures and cryptoasset investment firm Paradigm, Amber Group, which engages in crypto trading, lending, market-making, and asset management, manages over $1 billion in assets. 

Prior to setting up Amber, Wu worked as a portfolio manager at a billion-dollar hedge fund. But it was his foreign exchange experience on Morgan Stanley's trading floor in Hong Kong that first brought Bitcoin to his attention. 

"I was running the offshore Renminbi book for Morgan Stanley, and at the time Bitcoin was very related to all the FX control and outflows," he said. "As an FX trader, I realized that this asset class is borderless, it is immediate."

In 2015, when Bitcoin was trading at around $400, Wu bought shares of the Grayscale Bitcoin Trust (GBTC) which was trading at a 20% to 30% premium to Bitcoin's spot price. 

Just a few months after Wu bought his shares, Bitcoin's price jumped to around $700, but the premium of GBTC also shot up to around 120%, he recalled. 

"As a professional trader and investor, it didn't make sense for me to pay $2.2 for $1 worth of bitcoin," he said."So we started buying Bitcoin spot."

Back then, the exchanges for buying and selling Bitcoins were "very sketchy" and that put a damper on Wu's desire to enter the crypto space. In late 2017, the crypto market became active again but there was still a lack of infrastructure to support crypto finance activities.

That's when Wu and his co-founders decided to build their own firm. Three years later, Amber Group serves more than 500 institutional clients and has traded over $330 billion across more than 100 electronic exchanges, according to its website. 

"Very early on, we decided to choose the same path as Coinbase," he said. "We decided to be compliant, to embrace regulation, and to be institutional, while at the same time using this new technology to be innovative in our products."

As the first crypto-focused company to go public, Coinbase is not only testing the stock market but also the current crypto bull market that has sent Bitcoin and Ether up over 800% and 1,300% in the past year, respectively. 

In part driven by institutional inflows, the price of Bitcoin has more than tripled in just over four months. As Coinbase goes public, some investors are worried that more conservative institutions will opt for Coinbase instead of Bitcoin as a proxy for crypto exposure. 

Wu is not as concerned. He explains that the Coinbase stock is priced based on factors like discounted future cash flows, which means that its transaction volumes are the most relevant factor influencing its stock price. (According to a company filing, 96% of the Coinbase's sales in 2020 came from fees it charged users)

"If you buy Coinbase's stock, it's because you fundamentally believe there will be more and more crypto trading volume and a lot of that will happen on Coinbase," he said. 

On the other hand, investors in Bitcoin are saying that it is better than gold as a form of inflation hedge and a store of wealth amid the flooding liquidity that is depreciating fiat currencies around the world, he added.

"There'll be short-term correlations that might help investors with some kind of hedging strategies," Wu said. "I think both are good assets in the long term but very different assets."

The short-term correlation was already showing during Coinbase's first few hours of trading. 

Bitcoin briefly breached a record high of $64,000 early Wednesday, just hours before Coinbase's market open. However, as Coinbase decreased to around $330 from an open price of $380, Bitcoin also retraced to just above $62,000 at around 3 p.m. ET. 

Many Bitcoin investors had expected the digital token to fetch a new high based on the momentum and bullish sentiment around Coinbase's direct listing, but Wu said it doesn't really matter whether Bitcoin reaches $60,000 or $70,000 next month. 

"In the long run, it's not even about what price you buy," he said. "Because this is an asset class that will go from $1.1 trillion now to at least $10 trillion or even $20 trillion in three to five years, in my view."

In the near term, a correction in Bitcoin price that sends it back to the $40,000 or $50,000 levels might actually be good for the industry. 

"I personally think if we see a correction in price, it will be a great sign for the industry, because then it gives more room for the institutional investors," he said. "For them, it may not be about the price either, it'll be about how they can get liquidity."

Because Bitcoin is capped at 21 million and there are only 18 million Bitcoins outstanding, there will be fewer and fewer sellers if the price keeps rallying, according to Wu.

"If natural sellers like Bitcoin miners or early adopters decide not to sell because prices keep going up," he said, "then institutions cannot buy because there's just not enough circulation liquidity for them to really buy at a meaningful size."

He continued: "On the other hand, if we do see some kind of price retracement, if we do see opportunities for these institutions to build their positions again, that will actually benefit the industry long-term."

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