Many people ask where did they come from? How did they get funded? How did they just create this exchange? Are they an exchange or are they a currency? What are they? They're an app on my phone, and my friends are talking about it. So I'm going to breakdown Coinbase into two things, what are they and what do they do? If you're a professional trader this might be seem very basic to you, but I hope there's a couple nuggets in here, that'll help you as well, so let's start. Where did they come from? Well back in 2011, there was a guy named Brian Armstrong who was an engineer over at Airbnb.
He had a friend that he knew, some sort of an acquaintance, they got connected, named Fred Ehrsam and they go to Y Combinator. There they go again that incredible incubator that's cranked out some amazing companies, that have great products and services that we're using today that are anchor companies out there in the marketplace. Including Uber who's had its issues, but it came out of Y Combinator.
So here they go, they come out of Y Combinator with the idea to have the future of money, now Bitcoin was the early cryptocurrency and at that time you know you had a variety of questions around how are we going to trade these? What are we doing?
Bitcoin as a valid currency.
Then on the commerce side, they added Overstock and the DISH Network. Which is a satellite television company and then we all know what Overstock is, you can buy anything in anything from basically you know a more mature version of eBay if you will. So away they go to get to 2015, and things are really going well.
These are very serious commercial partners to have and they raised $75 million dollars from DFJ and once again Tim Draper strikes again. Making a big bet on something on the way up, and joining DFJ, the New York Stock Exchange. Which was very big because at this point in 2015, according to everything that I've ever read and things I've heard and I hope this isn’t folklore.
This was the very first time and there were a couple banks in here too, that mature financial institutions had crossed the line and invested in the Bitcoin side and the new fiat currency side of the street as all this emergence was coming. So that was a defining moment.
A year later in 2016, they received $10 million dollars from the Bank of Tokyo, and more importantly, they announced in 2015 the Coinbase exchange, where you can actually trade to get Bitcoin. There's two ways to get Bitcoin, one is the hard way, is you become a miner, and mining is very complicated we could do a case study on mining and the amount of energy and equipment that it takes to be a participant in the Bitcoin mining ecosystem so that if you are the clearer of something, that you get that sliver of a Bitcoin, you know there’s a lot that can be talked about the inefficiencies of that and the energy consumption, and the effort and utility, and equipment that needs to do that.
The other way? Take dollars and trade them for a Bitcoin at prevailing rates on an exchange. Well sometime later they re-branded that the Global Digital Asset Exchange, or GDAX. So let me summarize that a little bit better. What Coinbase is, is one, you've got the GDAX, which is the exchange, where they have an order book, the buy orders, the sell orders and those get reconciled to complete a trade.
Then they also have the brokerage where they work with you and me as individual investors and we have an account, and we actually, they, are actually the broker for the trade. Having both of those together allows them to go end-to-end. Now they make fees on this and they also make these operating the exchange, and then they're also something of the kingmaker, if you want to use that phrase, because anything they're putting on the exchange is given credibility because now it's being traded on Coinbase which is seen as a very credible exchange thanks to what they've done with GDAX. In 2017, they got really big.
A $108 million in venture capital from IVP and at the end of the year this is pretty significant, at the end of the year it was asserted that they were actually in December I believe it was, the most downloaded app on the Apple iTunes App store. Now that's saying something, because usually the social media apps or the social texting apps and games, are usually up there, not business apps, not financial apps, it's usually one of those three. Social media texting apps like WhatsApp, but to have Coinbase here, this shows you how much heat there is getting into the market into trading Bitcoin which was commensurate with all of the great price inflation that we saw in the numbers that were up there. They also in 2017, very importantly, they received the BitLicense in New York, which was a license to buy and sell Bitcoin. So now that they could have a license to be an exchange to trade for Bitcoin, Bitcoin Cash Litecoin and Ethereum or Ether. That was what they were permitted to trade, but that’s the lion's share of the market there, leaving out Ripple and a lot of the smaller ones. So now they are licensed to do that and then in 2018 as I like to say, “The cops showed up!”
The IRS comes out and says, “Hey! We want to know you know every person that made a trade or a transaction that was greater than $20,000 on the GDAX where they were buying and selling this digital currency, because we want to tax it just like regular stocks.” Hold it a year or more, capital gains taxes collected. Hold it less than a year, ordinary income is collected.
Nonetheless, the cops show up and the IRS says you now have to start reporting and we want information so that we can properly assess taxes. So which brings us to, okay where are they? Today, they have a vision to be an open financial system. Meaning to be the future of an actual currency ecosystem. Right now today, they are really two companies. The first company is they are the single most well-funded, over $200 million dollars in venture funding and funding coming from the traditional bank of Tokyo, New York Stock Exchange, and some others. So they got this funding making them the most well-funded digital asset exchange, digital currency exchange.
On the other side, they are nothing more than a retail, I guess you could just say like a retail broker, where they have a wallet, and they have the trading capabilities from the exchange you can do from your wallet, and then they've also announced this recently Custody. Where they could actually hold custody of assets. Which means that even the larger banks and other traders are going to be able, like investment banks, to have Coinbase actually hold custody of Bitcoin. So Coinbase brokerage is where you and I can go to buy and sell these cryptocurrency assets.
Similar the way we would go to Charles Schwab or Ameritrade or something like that to go to buy and sell stocks. It’s open to retail and then we'll pay a fee anywhere from 1% to 4% percent depending on what it is. Now if we were directly trading on GDAX, without brokerage, there are lower fees involved, but that kind of fogs the issue.
The fact is they've got a brokerage, you and I can open an account and then put cash in the account and trade these cryptocurrencies on the exchange, just like we would do going to Schwab put some money into account and buy some shares of Apple, Google or Facebook. So it’s all coming together, you’ve got the exchange and you have the broker. The nice thing about both of those is when you put them together, there are certain benefits that Coinbase has, because sources of liquidity and other things are very important, if you’re going to be clearing trades, because “this person clears the trade, they need to get their money, you need to collect the money from here, and sometimes there’s a float in the middle, so you need appropriate liquidity and other things in place so that you can successfully be that and be in compliance with securities laws that govern what you have to have in terms of assets and another backup before you can actually be the man in the middle operating the exchange.“
The most well-funded blockchain company in terms of exchange and a retail broker. Let's talk a little bit about the significance of Coinbase as an exchange. There are a couple things here, first, let's talk about security and safety. They've had no hacks. That's very significant that makes people very confident, that this isn't a bunch of engineers and hoodies making kind of a hack together system.
This is a very strong system that hasn't been hacked which makes people comfortable trading their dollars their euros, or whatever other currency they're bringing in to be in their accounts so they can begin trading in the cryptocurrencies. And when you're trading in the cryptocurrencies also you want to be confident that they can clear it. There’s something else that's interesting. When you think of the New York Stock Exchange you think of Nasdaq that's where places where stocks that are traded on those there’s high confidence in those. People say, “Oh it's treating the New York Stock Exchange? I have faith in that!” There’s also in the United States, penny stocks that are traded on what's called the OTC or over-the-counter.
There's less confidence in those companies. What has happened with Coinbase is they are now thought of as a very strong exchange, similar to the New York Stock Exchange or Nasdaq. Which means that when they put a green light on trading a currency, and as I indicated they trade Bitcoin, Bitcoin Cash, Litecoin and Etherium. If were to add another cryptocurrency like perhaps they bring in Ripple and they trade, that that is sort of a stamp of approval, that they're putting on that cryptocurrency and it's going to experience appreciation because they're seen as being a quality market or a confidence-building market, you follow that?
So they can really be a creator of value by green-lighting a currency to be traded on their exchange. People are going to say, “Ah there must be some confidence and stability in that!” and you’re going to see speculation, which is going to cause the price to go up. So it's very significant that they are seen is this because they’re going to be something of as they'll be determining winners just by green-lighting something to come on their exchange.
Just like today there are some companies are able to jump off the over-the-counter, the OTC onto the Nasdaq or even New York Stock Exchange and then get back on their feet because you have to meet certain requirements, certain size and profits and things like that. There has to be certain things you don’t just write a letter and say, “I want to be on the New York Stock Exchange!” There are securities regulations but once you cross those you're seeing is more credible stock. Same thing with these cryptocurrencies.
And that's why being an exchange that the retail investor maybe you and me may be a big investment fund, “trust” is so important and it's also why you start to see price speculation going up and down. Such as what's going on with Bitcoin is going up and down like the Russian space program, up, down, up, down and when it comes down, somebody dies.
You take a look at those people that said they were taking money out of their 401ks or on Christmas time and they were putting it all into Bitcoin? Well, Bitcoin was like $17,000 to $20,000 there you know they were at the beginning of February 2018, just a little while later? Prices dropped to $8,000 and there's only one word for that kind of a fall and that is “DAMN!”
That is a long way to fall especially if it’s somebody who's an unsophisticated investor who's jumping in on these cryptocurrencies and doesn't understand the risk in the volatility regardless of how confident they feel because “Oh, Coinbase is there, this seems like brokerage, saying I have an app here it seems like I can trust them!”
All of that may be true but the risk in the market is still present, so you have to protect yourself and be careful. So that is the overview of Coinbase I hope you found that helpful! Remember, Coinbase operates a brokerage where they broker the trades for you, and then they also operate GDAX, where they operate in the market for those buy and sell orders, or the order books get settled.
So they are making money either way. But we couldn’t go further and publish this without adding this little segment to it. Look at what happened to the valuations of cryptocurrencies when this market was going down. Suddenly in Coinbase, Bitcoin was down at just a little over $6,000. I think it bumped a little bit, back up $6,500, $7,000, but it is way down, and when we were writing this we were at $8,000, down from almost $20,000 around Christmas, so the volatility that's in the market is clear. But now Coinbase which is what the case study is about to remember, they make money, either way, operating the GDAX and being a brokerage taking fees on the individual trades. So either way, Coinbase makes money.
Now our cryptocurrencies here to stay? Well that all the Goldman Sachs seems to think that cryptocurrencies are going to zero it’s going to be an important lesson for America and the world and then they’ll be replaced by other digital currencies that quote do things right. Now I don’t know. Is this Goldman Sachs saying this because they are a naysayer and didn’t have a big play in cryptocurrencies who knows, but it's very interesting that a very powerful player like that is up there talking about it. What doesn’t change is the vision and brilliance of the founders of Coinbase and what they have done in a very, very real, new segment cryptocurrencies and how they had built Coinbase to what it is today.
November 14, 2018
November 14, 2018
November 14, 2018
November 06, 2018
November 06, 2018
November 06, 2018