The other side of Coinbase: Compliance becomes a competitive disadvantage. Its ability to make money is far inferior to Binance and even worse than Huobi OK

Wu said author | Colin Wu

Editor of this issue | Colin Wu

As expected, Coinbase finally disclosed the full text of the S1 form on the 25th, including the company's financial data since its establishment, as well as the company's judgment on the future. Just as the cover of the prospectus pays tribute to Satoshi Nakamoto, the successful listing of this leading company in the cryptocurrency industry will bring the industry into the next stage of "compliant development", which will be conducive to the entry of ordinary investors and institutions outside the cryptocurrency circle, and is a big boon to the industry.

After reading the prospectus, many people's first reaction is that its ability to make money is not strong, far less than Binance, which Coinbase regards as a competitor, or even less than Huobi and OKEx. The reason is naturally because Coinbase is subject to strict restrictions on security tokens and derivatives under US law, which also leads to the fact that most of Coinbase's revenue comes from spot transactions of Bitcoin and Ethereum.

According to Coinbase data, its revenue in 2020 was about 1.3 billion US dollars, and 530 million in 2019; its profit in 2020 was about 320 million US dollars, and it suffered a loss of 30.4 million US dollars in 2019. In comparison, according to Zhao Changpeng's disclosure to Bloomberg, Binance's profit in 2020 was between 800 million and 1 billion US dollars; Binance's profit in 2019 was 577 million US dollars.

Huobi once disclosed that its revenue in 2019 was 680 million US dollars, which also exceeded Coinbase in 2019. OKEx was about the same level in 2019, with a profit margin of about 50%. This shows that Coinbase's ability to make money is not only far inferior to Binance, but may even be inferior to Huobi and OKEx. (Of course, the data of the three major exchanges are disclosed by themselves, not audited data, and there is a possibility of exaggeration)

As for the reasons, Coinbase itself also stated in S1 that it has strong regulatory restrictions, which means that its competitors will have a significant advantage over it.

Coinbase said: Our primary competitors are companies located outside of the United States whose business models rely on being unregulated or regulated in only a few lower compliance jurisdictions, while also offering products in highly regulated jurisdictions, including the United States, without having to comply with the relevant regulatory requirements of such jurisdictions. Due to our regulated status in multiple jurisdictions and our commitment to legal and regulatory compliance, we are unable to offer many of our popular products and services.

Coinbase took the initiative to mention Binance. Coinbase said: We also compete with many companies that focus solely on the cryptocurrency market and have varying degrees of regulatory compliance, such as Binance.

As we all know, one of the core money-making businesses of the three major exchanges comes from derivatives, but Coinbase is subject to strict restrictions in this regard. In addition, Coinbase is very strict in selecting coins to list and is extremely cautious about securities. The S1 form shows that the vast majority of Coinbase's revenue comes from Bitcoin and Ethereum transactions. For example, after the US SEC punished XRP, Coinbase immediately suspended trading and subsequently removed it from the shelves, but Binance and others did not have this problem.

Coinbase first discusses potential advantages of competitors: the ability of competitors to offer products and services that we do not support or offer on our platform (due to restrictions from regulators, banking partners, and other factors), such as tokens that constitute securities or derivative instruments under US or foreign laws.

Currently, the top four derivatives exchanges are all established by Chinese founding teams: Binance, Huobi, OKEx and Bybit. Binance currently offers more than 162 derivatives products, which are basically not available to US users. In terms of currency listings, Binance listed 184 coins in 2020, an increase of 33 year-on-year; Coinbase has only 125 trading pairs in total. In comparison, Binance has 948 trading pairs, Huobi has 864, and OKEx has 546 (according to coingecko data).

For the three major exchanges, the volume of derivatives trading has far exceeded that of spot trading. In 2020, the highest 24-hour spot trading volume of Binance Exchange was US$15 billion, and the highest 24-hour contract trading volume was US$37 billion, an increase of 34 billion USDT year-on-year.

In addition, the three major exchanges have issued their own platform tokens, and most of the tokens are in their own hands. They can use the platform tokens as cash flow for investment, which greatly increases the flexibility of operations. If the appreciation of the platform tokens can be calculated as profit, the appreciation of BNB held by Binance in the past month may exceed billions of US dollars.

In an interview with TokenInsight, Yang Haipo, founder of Coinex, pointed out that the entire exchange industry is divided into the "compliant" market and the "non-compliant" market, both of which are very important. The "compliant" market is relatively limited, whether in terms of listing or trading methods, and the restrictions are very high. This is why there is a need for the "non-compliant" market, and the decentralized technology of blockchain itself is also to liberate the restrictions brought about by "compliance".

He believes that the "non-compliant" market will always be the mainstream of the entire cryptocurrency circle, or it is an advantage in itself. The "non-compliant" market has many innovations and gameplays in sales and products. Even if there are some bubbles in it, it is generally promoting market development. So he does not think that "compliance" is a major trend.

Of course, Coinbase also has its excellent aspects. Its platform stores more than 90 billion US dollars in assets (a very crazy number) and has 43 million users (2.8 million monthly active users). After its listing, the encryption industry will gain more recognition from mainstream institutions and will become the encryption entrance for people outside the industry and traditional institutions. It is rumored that Tesla's 1.5 billion US dollars to purchase Bitcoin was through Coinbase.

In summary, with the listing of Coinbase, it will be beneficial for cryptocurrencies to further enter traditional industries, but its future direction will be further and further away from non-compliant exchanges, and it is destined to take a different, even diametrically opposed path.