Coinbase: a Paved Road through a National Park

What I Learned

Apr 19, 2021

Hey y’all,

Welcome to another addition of What I Learned.

This week, we’re talking about Coinbase, who went public, via a Direct Listing this week. They closed on Wednesday at a market cap of $85.8 Billion, approximately ~5x bigger than any IPO in US history.

It was perfect timing for a crypto exchange to go public. Bitcoin and Ethereum, the two largest cryptocurrencies by market cap, both hit an all-time highs leading up to Wednesday. The stock market is firing. And the government is still printing money. The momentum for Coinbase—listed under the stock ticker $COIN—was palpable.

Coinbase ringing the bell in New York on Wednesday was a positive event for the crypto space, legitimizing and bringing crypto into the mainstream. But also, pretty ironic, seeing as the entire ethos of crypto is “eliminating the middle man,” and allowing free markets (protocols) to rule.

So why would crypto enthusiasts cheer for a *centralized* crypto exchange? I believe that it’s because Coinbase is a necessary evil.

• Anti-Coinbase argument: Not your keys, not your bitcoin.

• Pro-Coinbase argument: Coinbase gives access into crypto assets, to both retail and institutional investors, in a way that has never before been possible.

Coinbase Quick Facts

• NYSE price targets: Expected = $250/share, Opened = $420, Closed = $333.
• BTC price when Coinbase started: $5. BTC price Wednesday: $62,500.
• CEO, Brian Armstrong's net worth of $20B makes him the 73rd richest person in the world.
• Union Square Ventures invested $5M into Coinbase at 20 cents a share in 2013, now worth $4.6 billion.
• Coinbase opened at $381 a share, or, a market cap of around $100 billion—10x the company’s last private fundraising in 2018.
• This fun little email was bubbled up by a former YC colleague, from Summer of 2012:

Paved Roads in National Parks

Does paving a road through a National Park ruin the beauty of it? Or does it give necessary access that otherwise would not exist?

These same arguments could be made about Coinbase, a *centralized* cryptocurrency exchange. Let’s remember, Satoshi’s original whitepaper (which is what inspired Brian to start the company in 2012) states in the first line:

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.

Coinbase is, by all technical measures, a financial institution. So why does crypto need Coinbase?

In the end, I believe, perhaps counter-intuitively, that having a centralized exchange, listed on a public stock market, will help Bitcoin—and crypto in general—become mainstream. They are symbiotic. For now.

Haters

Many crypto-enthusiasts would argue that Coinbase is anti-crypto. I thought I’d see more shade on CryptoTwitter, but I actually didn’t see too much.

One of the core components (as I just mentioned) is that crypto is decentralized. Coinbase is centralized. They would also argue that if you keep your coins in Coinbase, you don’t actually ‘hold’ your coins. And finally, the exchange going public means the US government can now, well, govern the platform, and its customers, more closely (read: taxes).

And yet, Coinbase has 43 million retail users, 7,000 institutions, and 115,000 ecosystem partners in over 100 countries. They hold $90 Billion USD assets on the platform. And transact $4M USD per day. I’d say, that’s pretty darn good overall adoption. And thus giving exceptional exposure and adoption for the broader crypto landscape.

$COIN Risk/Reward

Brian Armstrong has built a company on the back of a growing trend. As we move to a crypto-economy, world-wide, I believe this will be one of the most important companies of this decade. Coinbase is one of the biggest companies, at the center of one of the biggest technological shifts in the last ten years (decentralized finance aka DeFi).

When Coinbase launched in 2012, Bitcoin’s market cap was under $1 Billion.
Today, it is worth over $1 Trillion.

For the speculators, or the Bitcoin bears, there’s an enormous risk to Coinbase’s core business. The usage of the platform is of course strongly correlated with the usage (buying and selling) of cryptocurrencies. So, if we see another dip in buying crypto, in the coming years—and I predict at some point we will see a 50%+ drawdown—we’ll see a stall in the growth of Coinbase. The market is objectively volatile (in both directions!).

Below, for context, I overlaid the Google Trends search for “Bitcoin,” on top of the price of Bitcoin, over the last five years:

Will the market cap of Coinbase be 100% correlated with the public’s interest in Bitcoin? No, of course not. But I do believe that it will loosely follow the adoption of Bitcoin.

At the end of the day, if people aren’t transacting on Coinbase, the business doesn’t make money. From Coinbase’s S1 filing last month:

Since inception through December 31, 2020, we generated over $3.4 billion in total revenue, largely from transaction fees that we earn from volume-based trades on our platform by retail users and institutions. For the year ended December 31, 2020, transaction revenue represented over 96% of our net revenue.

Adjusted EBITDA is up over 2,000% from 2019 to 2020, sitting at a healthy $527M. Revenue at $1.1B. For context, Zoom had $330M in Revenue, in the year preceding going public. Snowlake had $241M in Revenue, in the year preceding going public.

For a good take on the Coinbase Direct Listing, check out this video by crypto OG, Jill Carlson.

I also enjoyed this Tweet thread discussing Coinbase’s IPO, from Ellie Frost:

Ellie Frost ❄️ @BlockBytch_

1/ Make It Rain: Coinbase Earnings Will Blow You Away Coinbase is releasing their Q1 earnings tomorrow, before IPOing on the 14th. Will they blow Q1 expectations out of the water? Why should the broader crypto community care?

A Bet on a Digital Future

If you believe the world is moving digital, including financial services, including money and assets, then one way of having exposure to crypto as an asset class, is by buying shares of Coinbase stock.

Josh Elman 🇺🇸 @joshelman

Massive blockbuster public offerings are the flagstones of an era. 1986 - Microsoft - software 1995 - Netscape - internet access 2004 - Google - internet services 2012 - Facebook - social 2014 - Alibaba - Chinese internet 2019 - Uber - mobile on demand 2021 - Coinbase - crypto

This tweet got a reply that was wildly insightful to me:

adam james @adam_bycina

@joshelman Lol , coinbase is about as relevant to the blockchain as Netscape was to the Internet. It’s an intermediary that serves a useful purpose in the short term but long term the blockchain will be self autonomous. Buy ethereum instead.

Similar sentiment of Jack’s Tweet on Tuesday (also relevant of course, because Jack’s other company, Square, allows you to buy/sell crypto):

jack @jack

Why do we need an alternative? https://t.co/26dfIIpnmC

Fast Company @FastCompany

Coinbase’s $100 billion lPO provides an alternate investment to bitcoin https://t.co/g3e5guEgDu

This again proves the point, that Coinbase is necessary in the short-term, but will be unnecessary in the long-term.

The ultimate chest-bumping bitcoin maximalist, Pomp, put it bluntly this week:

Pomp 🌪 @APompliano

Taxi drivers yelled at Uber. Hotels yelled at Airbnb. Bankers yelled at Bitcoin. Journalists yelled at Substack. It didn’t matter. Disruption is inevitable.

There is also an existential threat to Coinbase, if a completely decentralized protocol like Uniswap can continue to climb in volume, with near-zero transaction fees, versus Coinbase’s ~2.5%, which is basically “highway robbery.”

In the end, I am grateful that Coinbase will certainly give exposure to tens of millions of retail (and institutional) investors who would otherwise not buy into the crypto asset class. In the same way that I’m glad they built a highway through the valley of Yosemite back in 1912.

Besides, that’s what backcountry passes are for, where true untouched beauty lies! ;) See you in the backcountry of the metaverse.