How did Coinbase build its $100 billion crypto empire?

According to Bitpush, the U.S. Securities and Exchange Commission (SEC) has approved major cryptocurrency exchange Coinbase to be listed on Nasdaq.

Coinbase plans to list its Class A common stock on the Nasdaq Global Select Market through a direct listing, with the ticker COIN. Based on the trading of Coinbase shares on the Nasdaq private market, the exchange's total valuation could reach $100 billion, making it one of the most watched IPOs this year.

It took Coinbase only nine years from its establishment in 2012 to its valuation of $100 billion in 2021. BitPush reviewed the entrepreneurial journey of Coinbase founder Brian Armstrong and sorted out the key factors that influenced the development of Coinbase.

1. Introduction to Bitcoin

Armstrong graduated from Rice University in 2005 with a bachelor's degree in computer science and economics. After graduation, he found a job at Airbnb as a software engineer.

The global payments infrastructure at the time was a patchwork of local companies, with little system for coordinating global payments, which caused a lot of trouble for companies like Airbnb, which had to coordinate cross-border payments almost constantly.

On Christmas Day 2020, Armstrong accidentally read Satoshi Nakamoto's Bitcoin white paper, and he was shocked by the concept of a peer-to-peer payment network described in the white paper.

Later, Armstrong began attending Bitcoin meetups in San Francisco, small gatherings of academics and tech enthusiasts to talk about cryptocurrency before most of the world had even heard of it.

He attended conference after conference, learning all he could about new technology. He shared his new hobby with friends, but they were skeptical and thought the new wave of digital currencies sounded like a scam.

Despite facing skepticism from his friends, Armstrong continued to ponder Bitcoin until one day he came up with an idea worth $1 billion.

2. Building Coinbase

The idea for Coinbase came to Armstrong when he was working on a platform like Gmail that provided email services to people who didn’t want to run their own email servers. He realized that a similar platform could be designed for the Bitcoin protocol, allowing people to trade cryptocurrencies without having to run their own wallets.

But his idea didn't go smoothly at the beginning. He firmly believed that it was a great idea, but when he presented it at a Bitcoin conference in San Francisco, he was criticized. Most people believed that a custodial Bitcoin wallet was not worth building because it would fall into the hands of hackers. Although he knew there were risks, Armstrong understood that if cryptocurrency was to become mainstream, there had to be a way to promote its use, especially without requiring people to run their own servers.

On weekends and holidays, Armstrong began to design prototypes and write code. This project later received $150,000 from the startup incubator Y Combinator, which became the catalyst for Armstrong to quit his job at Airbnb and laid the foundation for the later establishment of Coinbase.

He continued to meet with investors to raise funds and worked six days a week, several hours a day, with co-founder Fred Ehrsam. As they worked, the idea behind Coinbase expanded, and the team realized that people wanted to buy Bitcoin on the platform, not just use it as a wallet service.

3. Thriving Development

As the crypto industry developed, Coinbase grew rapidly after its establishment.

In 2015, Coinbase raised $75 million in Series C funding and launched the first licensed Bitcoin exchange in the United States. In 2017, with the advent of the crypto bull market, more investors purchased cryptocurrencies through Coinbase. In 2018, Coinbase announced the launch of its first index fund, entering the asset management industry.

This year, Coinbase expanded its business scope, hired former executives from Twitter and TD Ameritrade, and made two high-profile acquisitions. The company's headcount also soared from 100 employees the previous year to 300, and it opened more offices in North America, Europe, and Asia.

Coinbase is also actively playing a role in building the crypto ecosystem. It launched an investment arm, Coinbase Ventures, to inject funds into early cryptocurrency initiatives. Many former Coinbase employees have started their own virtual currency companies and investment funds. Coinbase Ventures has said it will provide financial support to some of them. This entrepreneurial cluster of Coinbase employees has a huge influence in the industry, so it is called the "Coinbase Mafia."

Custody also provides crypto brokerage, financial control and storage solutions for institutional investors trading crypto assets. The service is aimed at large players on Wall Street. In the past six months, Coinbase has helped MicroStrategy and Tesla purchase large amounts of Bitcoin.

Coinbase’s trump card: security and compliance

In the process of the development of the encryption industry, there have been many security incidents in which exchanges have been hacked and caused user fund losses. The characteristics of cryptocurrency determine that it will be favored by the black market and criminal groups, which also attracts special attention from regulators.

Armstrong knows that only by achieving the utmost in security and compliance can one survive in the cracks of regulation. Especially when more and more financial institutions begin to enter the cryptocurrency market, investors and regulators hope that they can have fully authorized traders who can withstand scrutiny and be supervised like traditional exchanges to implement transactions.

Of all the funds at Coinbase, 99% are customer funds and 1% are the company's liquidity for trading. In order to protect customer funds, Coinbase chooses to keep 99% of the funds off the Internet, so these funds will not have direct contact with the market. The remaining 1% of the funds come from the company's reserves and are insured by Lloyd's of London, which in a sense provides another layer of insurance.

Coinbase has more than 40 security personnel, including senior people who assess peripheral risks and cryptography PhDs who conduct encryption attack analysis. Coinbase also has nearly 100 compliance personnel who comb through transactions to sort out money laundering.

Coinbase also cooperates extensively with law enforcement. Coinbase follows strict identity verification procedures to comply with regulations such as KYC (Know Your Customer) and AML (Anti-Money Laundering), and tracks and monitors crypto assets sent to and from its website. Coinbase also sends 1099-K reports to the IRS for traders with a total transaction amount of $20,000 or more or 200 or more transactions in a year.

V. Disputes and Risks

However, the development of Coinbase has always been accompanied by controversies, which may have unexpected impacts on the development of Coinbase.

Coinbase’s acquisition of Neutrino, a crypto analytics platform with close ties to a group called “Hacking Team,” has raised questions in the crypto community.

Coinbase's close cooperation with the government has also made some crypto enthusiasts unhappy, as they believe that this goes against the ideas of cryptocurrency such as decentralization, anti-censorship and anonymity.

Even in 2020, Armstrong's remarks within the company asking team members to focus on the company's mission rather than politics sparked controversy. Coinbase asked employees to delete certain politically themed messages posted within the Slack messaging platform, and Coinbase's leadership had conversations with specific staff members about the importance of deleting certain content, and some employees resigned because of the incident.

However, for Coinbase, the more important issues are from the technical level, such as long transaction waiting times, delays in customer service, and downtime when cryptocurrency prices change dramatically.

In its prospectus for listing, Coinbase also mentioned the unique business risks in the crypto industry, including competition from decentralized finance (DeFi) and the possible revelation of the true identity of Satoshi Nakamoto, the anonymous creator of Bitcoin.

VI. Impact of listing

Today, Coinbase is not just a cryptocurrency exchange, but an important part of the entire crypto ecosystem. Coinbase looks a lot like a traditional financial services player. Coinbase makes money by charging brokerage and exchange fees. It also custody user funds like a bank and decides which crypto assets to list, just like Nasdaq or the New York Stock Exchange.

Coinbase has set a successful example for other crypto companies, and by positioning itself as a safe haven among crypto asset exchanges, Coinbase has transformed itself into a gateway for mainstream investors to invest in cryptocurrencies. Unlike many of its competitors, the company has never been hacked. Coinbase complies with existing regulations and enforcement, keeping it on the right side of the law, which is particularly important in an industry that is still in desperate need of regulatory guidance.

Coinbase's listing is considered a key event by the crypto industry because it shows that the mainstream investment field has truly accepted the significance of the crypto industry, and cryptocurrencies and related products will truly usher in large-scale applications.

Image source: pixabay, Coinbase, Nasdaq

AuthorLiang Che

This article comes from Bitpush.News. Reprinting must indicate the source.