(Source: data.bitcoinity.org. Time period up to October 19 2018. Based on ranking system evaluating volumes and order books in USD)
Although the majority of the cryptocurrency world continues to evolve at a pace which governments and regulators can’t keep up with, Coinbase has toed the line set by authorities to ensure it stays on the right side of the law and, more importantly, is trying to mould the new legislation that is emerging. Coinbase has trumpeted itself as the bridge to connect the ‘fragmented financial system of today to the open financial system of the future’, but many cryptocurrency enthusiasts question not only how one company can truly create a decentralised, open financial system but also the company's enthusiasm to win over the financial institutions and governments that cryptocurrencies were designed to defy. Coinbase, like so many others, presents a crypto-conundrum of contradiction for the industry to solve.
Still, as hope of being accepted by the financial institutions and governments grows, Coinbase has been expanding its appeal by adding new cryptocurrencies and products to entice more individuals and more notably, the institutional investors that continue to flirt with the industry despite the huge cloud of uncertainty that hangs over it. The company is even considering listing through an initial public offering (IPO) - an unfathomable idea only a couple of years ago.
What is Coinbase?
Coinbase is a digital currency wallet and platform facilitating transactions in cryptocurrencies between merchants, consumers and investors. The firm, based in San Francisco, was founded in June 2012 to make it easier for people to trade bitcoin. It managed to attract over one million users within its first year of operation.
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Today, Coinbase is a much bigger business. Its trading platform for individuals is at the firm’s core and, after being launched as GDAX in 2015, has been upgraded and rebranded this year as Coinbase Pro. Since then, the business has unleashed a slew of new products and services.
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The open source nature of the market means new cryptocurrencies are continuing to emerge and there is now over 2000 different digital currencies and tokens in existence (according to Coinmarketcap.com) up from 1600 in June, and 16 of them currently have a market cap over $1 billion.
While the tactic of most exchanges has been to list huge pools of cryptocurrencies in order to provide investors with hundreds of choices Coinbase has taken a different tact that, until recently, saw it offer five of the best-known cryptocurrencies - bitcoin, bitcoin cash, litecoin, ethereum and ethereum classic.
Collectively they account for about half of the market’s total trading volumes. Ox (ZRX), is the first of what will be many new additions to bolster its offering.
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Coinbase has two priorities: to be the most trusted digital currency platform, and to be the easiest one to use. By building itself around the biggest cryptocurrencies on the market (and the forks) and investing in an aesthetically pleasing interface, the firm’s offering to retail investors has been simpler than others and, compared to the rides that lesser-known cryptocurrencies can experience, one with less volatility (although far from stable). Plus, sticking to a more limited number of cryptocurrencies makes managing security and scalability an easier task, which is vital as other exchanges such as Mt Gox have been lost following breaches and thefts from hackers.
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Coinbase co-founder and chief executive officer (CEO), Brian Armstrong, recently responded to questions about whether he was running a technology company or a finance firm by stating: ‘there will always be a blend of these two in our culture. That being said, if we were forced to label ourselves as one of the two, we would be a tech company first. The reason is simple: technology is driving a ton of innovation and growth in the world today. When you think of the organisations that have changed the world in the last 20 years, how many are finance companies? We’ll succeed against established players entering our space by being tech first. But ultimately, we are neither one. We are something different and new: a crypto company.'
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How much is Coinbase worth?
Having been the first US cryptocurrency start-up to earn ‘unicorn’ status, various reports suggest Coinbase’s valuation has rocketed over the past year. The company has raised more than $225 million over six funding rounds since inception and the latest one, held in August 2017 and led by Institutional Venture Partners (IVP), valued the business at $1.6 billion. Just over one year later and that valuation could be as high as $8 billion.
That figure is based on recent reports from Recode that Coinbase is on the cusp of completing a new financing round led by US investment firm Tiger Global, which would become a new shareholder, to raise up to $500 million. Although not confirmed, it is thought half will be ploughed into the company with the other being used to buy out existing shareholders.
Over the past six years Coinbase has secured investment from high profile institutions including but not limited to: US venture capital firm Andreessen Horowitz, IntercontinentalExchange, owner of the New York Stock Exchange (NYSE), Argentine bank BBVA, venture and private equity firm IDG Ventures, and tech-centred venture capital company Ribbit Capital.
Coinbase IPO: is it happening?
Suggestions that it could complete its biggest funding round yet may imply that any potential IPO is on the backburner, but any listing would be about more than just money. Securing support from regulators would be the major hurdle to going public, but success would reap equally major rewards, as a listing would emit an air of transparency, trustworthiness and regulation around Coinbase in a market clouded in secrecy, hacking and freewheeling.
The mood among US authorities has been hot and cold, and cryptocurrencies are mostly regulated on a state-by-state basis, which has not made it any easier for the industry to gauge a nationwide consensus. The sector is still largely unregulated and most activities have been squeezed into existing legislation, but the country has also taken action against illegitimate operations by bringing charges against fraudulent initial coin offerings (ICOs), whereby a company issues new ‘coins’ or ‘tokens’ to raise money much like a company would offer shares under an IPO. Countries like China have banned them altogether, describing them as ‘illegal fundraisings’. Meanwhile, other countries have implemented more extreme measures to restrict cryptocurrency trading, including Japan, where Coinbase launched earlier this year. National strategies on how to handle cryptocurrencies without hampering their adoption remain far off, and any international approach is even further away.
Coinbase threatened by established players and new models
The evolution in competition will also be a reason for Coinbase to consider whether listing sooner rather than later will be the right move over the longer term. There would undoubtedly be benefits to being the first to market, especially against any of its current competition that have the same idea, but threats from players already embedded in the traditional financial system are growing. Banks and other financial institutions are gradually coming around to the idea of cryptocurrencies and blockchain much like the regulators and, while that is good news for the industry as a whole, having to compete with the likes of IntercontinentalExchange – which recently announced it is launching a new company called Bakkt that will hold and manage people’s cryptocurrency, powered by Microsoft – could present an entirely new breed of competition for Coinbase and other exchanges that are carving out chunks of the market for themselves. Goldman Sachs has also publicly announced plans to open a bitcoin trading unit in what would be the first such expansion by a major US bank. Plus, new models are emerging that could leave Coinbase and others in the dust: Robinhood, which originally found success by not charging transaction fees when investors traded shares, has since moved into cryptocurrencies using the same model.
The role of Coinbase and the other middlemen that have dominated thus far is already widely debated: inserting exchanges flies in the face of the decentralised nature of cryptocurrencies and the concept that no single individual or organisation should be in control. Now, it seems questions are being raised about how these companies are charging people to use these liberated currencies that were designed to cut out the cost of using intermediaries.
Reports this year have suggested Coinbase is considering an IPO as early as the first half of 2019 but, whether or not Tiger Global invests, a listing is likely to be further away while the company establishes where future regulation is headed and whether opening itself up to public scrutiny is the right move, considering the rapidly developing market and uncertain outlook.
Is Coinbase profitable?
Coinbase, as a private company, does not publish specific details on its financials. However, it has confirmed it is profitable through regulatory filings submitted last year and in January it was reported revenue in 2017 - the back-end of which captured the hype of cryptocurrencies as the likes of bitcoin soared to their peak – surpassed the $1 billion mark.
It seems exchanges, despite their tarnished reputations, operational difficulties and security breaches, have proven the rewards on offer when trading levels outstrip capacity and interest is at its peak. The question now is whether Coinbase and others that make money through transaction fees can work when bitcoin isn’t spread across the mainstream media and trading volumes are considerably lower.
(Source: Diar. Only accounts for USD traded volumes and not those in other fiat currencies including EUR or GBP)
Over $600 billion was wiped off the market when cryptocurrency prices crashed this year. Bitcoin is trading about 66% lower than its peak and some are over 90% lower than they were late last year. While the price of cryptocurrencies doesn’t directly affect Coinbase, there is a correlation between peak prices and peak interest. Volumes, which drive Coinbase’s revenue, have collapsed with the prices this year as the hype wanes and competition increases. Ironically, Coinbase and others have invested to increase scale after failing to meet demand when investors were scrambling for bitcoin and others during the frenzy late last year, only for interest to decline in 2018.
Armstrong has previously conceded that people tend to trade more ‘in up markets’ but has remained tight-lipped about how the drop in volumes has impacted the business. However, actions can speak louder than words: the company’s diversification out of its main brokerage business into asset management and other business services is designed to shield the business from the volatile prices and trading levels within the market. This is also why it is expanding its very limited offering of cryptocurrencies in the hope of stealing volumes that are currently being traded through rival exchanges. While Bitstamp has taken a similar approach by limiting the amount of cryptocurrencies on offer, others have a much larger selection. Binance, the current industry leader based on trading volumes, has over 400 cryptocurrencies to choose from while OKEX has more than 600.
Read more about the top threats to cryptocurrencies in 2018
How is Coinbase regulated?
‘Ultimately, we can envision a world where we may even work with regulators to tokenise existing types of securities, bringing to this space the benefits of cryptocurrency-based markets — like 24/7 trading, real-time settlement, and chain-of-title. We believe this will democratise access to capital markets for companies and investors alike, lowering costs for all participants and bringing additional transparency and inclusion to the ecosystem,’– Coinbase.
Governments and regulators have had a lot to say about cryptocurrencies but they have been slow to implement adequate, bespoke regulation for the industry. What currently exists has been used to cast an umbrella of basic rules over the market, but it is filled with holes. Applying existing rules to the fiat operations as well as issues like money laundering and fraud makes sense but there is no cohesive approach to the rest of the industry. ICOs are banned in China but being evaluated on a ‘case-by-case basis’ in the UK for example, and the US Securities and Exchange Commission has shut down several new proposals to introduce cryptocurrency derivatives and new crypto-linked financial products. For now, cryptocurrencies will continue to trade in a grey area. In the future, the mood of governments could swing either way. Stable countries like Japan, the US and the UK all seem willing to integrate cryptocurrencies into the existing ecosystem (even if many in the market don’t share the same vision) and have become hubs for development but there is plenty of room for their already cautious welcome to be derailed. It is often forgotten that although governments do not have the ability to shut down cryptocurrencies like bitcoin they can take down the exchanges that hold vast sums of investor funds and lube the entire industry.
Cryptocurrencies were designed to allow people to circumnavigate the traditional financial system and break government control over our money but the exchanges are slowly realising the need to work with regulators rather than against them. This includes Coinbase, which saw its chief compliance offer (CCO), Martine Niejadlik, resign in 2015 shortly after reports emerged that she told investors that one of the best advantages of cryptocurrencies was their ability to flout international sanctions (although officially it was to spend more time with family). The fact that economically stricken countries like Venezuela have adopted their own national cryptocurrencies (in this case the petro, backed by the countries raw materials) in order to work around US-led sanctions means the role of cryptocurrencies in society is still questionable and does nothing to help clean up the industry’s image.
Read more about how cryptocurrency regulation is shaping up around the world
Coinbase aims to mould evolving regulation
Today, Coinbase is about setting standards rather than flouting them, particularly after the crackdown in some countries like China. It has established a political action committee (PAC), which raises funds to donate during US elections to help influence decision-making, and co-founded a lobby group named Blockchain Association to try to wedge its foot in the door of the White House. The company’s biggest step into the regulatory sphere has been made through securing SEC-registered broker-dealer status through a partnership with Electronic Transaction Clearing and after acquiring other licenses by snapping up Keystone Capital, Venovate Marketplace, and Digital Wealth, opening up doors for it to offer more financial services.
The relationship is strained however, and Coinbase has not been afraid of defending itself against what it has described as ‘inaccurate’ claims from the New York attorney general’s office about how it operates. The report released earlier this year accused Coinbase and others of proprietary trading, whereby they trade on their own exchanges to make profit, and claimed up to 20% of trading volume was conducted by the Coinbase itself. In response the company said it ‘does not trade for the benefit of the company on a proprietary basis’ and that all trades are carried out on behalf of customers, stating this activity allows it to quote a price and then quickly fill the order to ‘take advantage of the liquidity provided by the entire Coinbase ecosystem’ and to provide an ‘easy-to-use customer experience’. It has also tried to alleviate concerns over the limited protection being offered to investors and the funds deposited in exchanges, particularly as billions of dollars have been hacked and stolen worldwide, by insuring ‘all digital currency’ and keeping 98% of all customer’s coins offline to keep it out of the reach of hackers, while cash is also covered by insurance up to $250,000 (but this is for US residents only). This area is of the highest concern considering Coinbase holds over $20 billion worth of assets.
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It all comes down to trust and attempts like this are to move Coinbase away from the security, transparency and reputational problems that continue to weigh the rest of the industry down. But the company has already proven that exchanges eradicate many of the core traits of cryptocurrencies after losing a court case last year which resulted in the company handing over the details of 13,000 customers to the Inland Revenue Service looking to hone in on tax dodgers that, as far is it was concerned, hadn’t paid their tax owed from trading cryptos because they were deemed to be trading property, not currencies. Anonymity is a core principle of cryptocurrencies but all exchanges, including Coinbase, open up everyone’s identities.
Battle of bitcoin futures and cryptocurrency derivatives
The nascent cryptocurrency derivatives market is also evolving and, based on the current stance in the US, likely to fall to the world’s largest exchange group, CME Group, which has been battling for leadership with rival Cboe Global Markets. Dominating early on is seen as integral as it is rare for other similar derivatives to succeed on more than one exchange. This means, with two highly established firms already way ahead and receiving more support from regulators, that the barriers for new entrants are only getting higher.
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The performance of bitcoin futures on CME have defied the wider market and the downturn in prices that has knocked trading volumes on the likes of Coinbase Pro. Coinbase was recording daily bitcoin trading volumes of well over 30,000 when prices peaked late last year, when neither CME or Cboe were breaking through the 5000 threshold. In the middle of March, CME volumes officially surpassed that of Coinbase at a crossover point of around 16,500 bitcoins per day. The trend has continued: CME volumes were approaching 35,000 in August compared to just 12,000 on Coinbase and just over 5000 on the Cboe. This also demonstrates the power that these established and resource-rich players wield: the CME is boasting cryptocurrency trading volumes over 2.5 times greater than one of the leading exchanges and yet it barely contributes to the 13.5 million or so contracts it deals with daily.
Coinbase prepares for Brexit and European expansion
Coinbase is also chasing ambitious plans on the other side of the Atlantic and recently announced it will be opening a new base in Dublin. Although this is technically being dubbed as a move toward scaling up the business in the European Union and to leverage the technological hub that continues to ripen in Ireland Coinbase has admitted the new office, which will supplement its existing one in London, is also to ensure it can keep attracting talent post-Brexit and retain passporting rights. Describing it as ‘a home in a post-Brexit scenario’ and a ‘gateway’ to the EU, Coinbase seems pessimistic about future relations between the UK and the EU.
Like the US, there has been a lack of bespoke regulation introduced in the EU to facilitate cryptocurrencies and exchanges. Fiat operations are covered by existing laws and in the UK the likes of Coinbase are subject to carrying out anti-money laundering checks and offering certain protection by ringfencing client funds, for example. But otherwise the industry is operating unregulated with the Financial Conduct Authority (FCA) seemingly satisfied just keeping an eye on ICOs and derivative products as and when they emerge. The governor of the Bank of England (BoE), Mark Carney, has called for cryptocurrencies and exchanges to be brought under some form of regulatory control and the UK government has launched numerous reviews into the industry and to handle it, signalling the country is slowly warming to cryptocurrencies. That same attitude has been shown by the banks after an initially hesitant Barclays opened a UK account for Coinbase.
Coinbase revamp aims to attract broader clientele
This year has been one of huge progress for Coinbase which, using its broker-dealer licence and new additions from acquiring small cryptocurrency start-ups, is rapidly rolling out new products and services to broaden its appeal. Falling volumes among existing customers has prompted Coinbase to find other revenue streams and build a more complete offering:
- Coinbase Pro: originally named GDAX, the firm’s trading platform was renamed Coinbase Pro and enhanced with new features, such as a redesigned interface, improved price charts, and simpler withdrawal and deposit processes.
- Coinbase Commerce: deals with merchants seeking to accept cryptocurrencies as a payment option. It has over 2000 merchants signed up including Shopify and opencart, which can use the service for free. Coinbase recently added a new plug in that should significantly increase adoption, with the WooCommerce platform used to power more than 28% of all online stores, according to the company.
- Coinbase Digital API: this is the company’s developer channel which allows anyone to integrate the cryptocurrencies it offers into new and existing applications. This allows the creation of new wallets, information-based software and a variety of other bolt-on services that all help build the wider cryptocurrency ecosystem.
- Coinbase Prime: in May, Coinbase unveiled a slew of new products aimed at institutional investors with Coinbase Prime, its ‘professional trading platform for institutional clients’, at the centre. This service differs to the Pro version by providing capabilities such as margin finance, high-touch execution including OTC block trading, and execution algorithms.
- Coinbase Institutional Coverage Group: an addition to the new service rolled out for institutions that provides research, advice and dedicated support to clients from a New York-based office.
- Coinbase Custody: described as the ‘most secure crypto storage solution available’, Coinbase Custody has been launched so the company can earn revenue from being the custodian of its client’s assets, which institutional funds have to use by law. Coinbase, which boasts customers including Autonomous Partners, MetaStable, Polychain Capital and Multicoin Capital, aims to have over 100 institutional customers and over $20 billion of assets under custody by the end of 2019.
- Coinbase Asset Management/Coinbase Index: the biggest development to have spawned out of Coinbase since securing broker-dealer status has been its basket of products. The Coinbase Index tracks the performance of all the cryptocurrencies on the site, weighted by the market cap of each coin. The basket was originally comprised of just four coins but is growing to include all new cryptocurrencies that it lists on its platform (although bitcoin still accounts for around 75% of the weight). Although this is only currently available to institutional and affluent US clients it hopes to roll this out to all retail investors in the future.
- Coinbase Markets: the firm, which already claims to offer ‘the deepest pool of liquidity to the largest number of participants in the cryptocurrency space’, has rolled out Coinbase Markets to help attract high-frequency traders and others that use electronic marketplaces that are often automated using algorithmic trading. Obtaining information and market data a fraction of a second before the competition is vital and Coinbase aims to provide the datacentres and clearing services needed to offer the infrastructure that the likes of hedge funds and others demand.
- Coinbase Ventures: Coinbase’s expansion and introduction of new products and services has been possible through acquiring smaller crypto start-ups and tech firms and now it has a division to invest in early stage companies. Interestingly, it states it is willing to plough money into ‘companies that ostensibly look competitive with Coinbase’, as part of its efforts to build the wider ecosystem.
- Paradex: peer-to-peer platform Paradex. Paradex’s biggest selling point is its ability to facilitate transactions directly between users – moving cryptocurrencies from one user’s wallet to another – without the need to hold those assets (however briefly) on their behalf like Coinbase currently does.
The development and, more importantly, the launch of these new products and services has propelled Coinbase into a strong position in a market where domination is still up for grabs. Securing the broker-dealer licence has given it a distinct edge over other exchanges by opening the door to institutional investors and the debut of Coinbase Index represents a huge win.
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US authorities have rejected several proposals from companies like ProShares, Direxion and GraniteShares to launch cryptocurrency exchange traded funds (ETFs). While phrased in numerous ways on a case-by-case basis, the common theme that has prevented crypto ETFs from being launched in the US is their inability to ‘prevent fraudulent and manipulative acts and practices’ and because those making the proposals operate outside of federal regulation. Coinbase’s efforts to work inside the law and mould forthcoming regulation has already paid off with the launch of Coinbase Index and now it is reported to be in talks to launch its own ETF in partnership with investment management behemoth BlackRock, the perfect partner to win over authorities.
Coinbase Index and its attempt to broaden its appeal means new cryptocurrencies will need to be added to the platform. The company has confirmed that it is considering a long list of new ones and its most recent addition, Ox (or ZRX), jumped upon listing on Coinbase Pro to become the sixth coin on its platform. The launch of ZRX, the first ERC-20 token, and the acquisition of Paradex go hand in hand and both help Coinbase embrace the principles of cryptocurrencies that exchanges have shunned so far.
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