The stock market was mixed on Wednesday, posting strong gains early on but giving them up as the afternoon progressed. Only the Dow Jones Industrial Average (DJINDICES:^DJI) managed to finish in positive territory, while the S&P 500 (SNPINDEX:^GSPC) pulled back from its record close on Tuesday and the Nasdaq Composite (NASDAQINDEX:^IXIC) was down nearly 1%.
The most noteworthy piece of news came from a newly public stock. Cryptocurrency exchange specialist Coinbase completed its direct offering, and while some were disappointed, it’s hard objectively to say that the debut was anything other than a big success for the cryptocurrency arena.
The story of Coinbase
The Nasdaq Stock Market initially set a reference price of $250 per share, based on views of the investment banking community and previous transactions involving Coinbase shares in the private market. That pricing would’ve given Coinbase a market capitalization of around $65 billion.
However, demand for Coinbase shares was extremely heavy. It took all morning and into the early afternoon before specialists could parse through all the orders and come up with a level at which everyone felt comfortable opening the stock for trading. That moment came just before 1:30 p.m. EDT, and the opening price for the stock was $381 per share — a greater than 50% rise from the reference price that implied a market cap of close to $100 billion.
From there, Coinbase’s stock price continued to surge. It would eventually get to around $430 per share within the first 10 minutes of trading.
A big correction
However, Coinbase lost its upward momentum at that point. From there, the stock drifted steadily lower in the mid-afternoon, eventually hitting a low of $310 per share just after 3 p.m. EDT. For the rest of the trading session, Coinbase traded in a narrow range, closing at $328 per share for a market cap exceeding $85 billion.
Mainstream financial journalists immediately trumpeted the failure of Coinbase’s direct public offering. They pointed to the 14% drop from the opening $381 price and the $328 close as evidence that demand somehow wasn’t as strong as it could have been.
That reaction only stresses the strange ways that newly public stocks get hyped. If the stock had opened at $250 and closed at the exact same price of $328, then the headlines could’ve been completely reversed and yet the stock would be at exactly the same level. Yet for whatever reason, many are anchoring on that initial $381 price.
Admittedly, those who bought the offering right out of the gate are disappointed with their losses. Yet that’s always the danger of trying to buy into a hot new stock on the day it goes public.
What happens from here?
Any one day of trading is irrelevant for any stock, and many investors are still quite bullish on Coinbase’s business. As a premier cryptocurrency exchange, Coinbase is likely to rise and fall alongside the prospects for major crypto tokens. If crypto prices keep surging, Coinbase will likely earn more revenue and see its stock climb from current levels. If cryptocurrencies undergo a huge sell-off, it could be harder for Coinbase to sustain its recent volume of business.
Regardless of what happens in the near term, investors can expect Coinbase to be a force in the industry for a long time to come. That could eventually make today’s prices look like a steal if Coinbase is as successful as it could be.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.