Wednesday, January 31, 2018

"Coinbase Strategy Teardown: How Coinbase Grew Into The King Midas Of Crypto Doing $1B In Revenue"

Coinbase is the Andreessen Horowitz backed cryptocurrency play that's working out.
21.co is the one that isn't.

Here's CB Insights:

To sustain the cryptocraze, Coinbase will need to foster real applications of cryptoassets — and not just speculation.
Coinbase is the most popular consumer-facing cryptoasset exchange in the United States. Operating since 2011, the company allows users to buy, sell, and store cryptoassets, like bitcoin and ethereum.
The company already has significant visibility with consumers in a sector that was once exclusively the province of cryptoasset enthusiasts. In mid-December, the company’s mobile app reached the top spot on Apple’s App Store.

Coinbase has soared in popularity and turned itself into the on-ramp for mainstream crypto investors by positioning itself as a safe harbor among cryptoasset exchanges. The company has never been hacked, unlike many of its competitors. Coinbase has also maniacally pursued compliance with existing regulations and law enforcement, putting it on the right side of the law — another huge asset in a sector that is still in desperate need of regulatory guidance.

This has helped Coinbase secure $217M in equity financing from some of the biggest-name VCs, and vaulted the company into the unicorn club.

However, while Coinbase is best known for its cryptoasset exchange, it has bigger aspirations than helping people buy and sell crypto. The company’s stated goal echoes cryptoasset enthusiasts’ ultimate vision: to create a new, “open financial system.”

For the time being, though, Coinbase looks a lot like a traditional financial services player. Coinbase makes money by charging fees for its brokerage and exchange. It also custodians user funds, like a bank, and decides which cryptoassets to list, like the NASDAQ or NYSE.

Coinbase thus finds itself caught between worlds: it’s the most well-funded blockchain company in the United States, but it’s a centralized company, not a decentralized ledger. The company once advertised cryptoassets as the “future of money,” but now positions itself as a way to “buy and sell digital currency.” In many ways, Coinbase is a centralized on-ramp to a decentralized ecosystem.
This begs the question: how does Coinbase view the assets that it enables customers to buy and sell? Is it still interested in encouraging crypto adoption to build a new financial system, or primarily occupied with encouraging the speculation that fuels its core lines of business?
In this report, we examine Coinbase’s strategy, financing history, product offerings, business initiatives, threats and future opportunities. We dig into how Coinbase operates, how it’s capitalizing on cryptoasset speculation, and what it’s doing to push forward blockchain technology.

TABLE OF CONTENTS
Style notes: “Cryptoassets” includes all coins, tokens, and digital assets traded on cryptoasset exchanges. “Bitcoin” refers to the Bitcoin ledger, or protocol, while “bitcoin” refers to the asset or a unit of account on the Bitcoin ledger. This is reflected for all cryptoassets in this report.

Exchanges 101
Cryptoassets like bitcoin, ethereum, and litecoin are primarily obtained in one of two ways: through mining or through an exchange.

Mining has high barriers to entry. Participating in a mining pool or operating mining “rigs” can be expensive and complicated. For the more novice consumer, fiat-cryptoasset exchanges and brokerages – like Coinbase, Kraken, and Bitstamp – have established themselves as the primary on-ramps to this asset class. These allow consumers to trade fiat (e.g. USD, GBP) for cryptoassets (e.g. BTC, ETH, LTC).

There are a couple of important terms to understand when discussing exchanges.
An annotated screenshot of Coinbase’s exchange, GDAX.
  1. First, the “trading pair” (or, “currency pair”) is the product being traded. In the above screenshot the product is ETH, and the “quote currency” is USD. This means that traders are buying and selling the cryptoasset ethereum, priced in dollars.
  2. The order book shows all the bids and asks at a given time. A “bid” is the price at which a buyer will buy, and an “ask” is the price at which a seller will sell. The order book also shows the aggregate amount of asks and bids (supply and demand) at a given price, called the “market size.”
  3. The “depth chart” is another way to visualize the order book, showing cumulative bid and ask orders over a range of prices. Coupled with volume — or, the total amount traded over a given time period — the depth chart provides a good way to measure “liquidity.” Liquidity describes how easy it is to turn an asset into cash. For instance, if ethereum suddenly saw a massive sell-off, there might not be enough buyers, or enough “liquidity,” for sellers to sell to.
  4. Lastly, the “mid-market price” is the price between the best “ask” price and the best “bid” price. It can also be defined as the average of the current bid and ask prices. The “price” of an asset (as quoted on Yahoo Finance or Bloomberg, etc.) is a direct function of the bids and asks in the market, which in turn reflect supply and demand.

What is Coinbase?

Coinbase was founded in July 2011 by former Airbnb engineer Brian Armstrong and was first funded by Y Combinator. In 2012, co-founder Fred Ehrsam, a former Goldman Sachs trader, joined the company, after which Coinbase launched services to buy, sell, and store bitcoin.
Today, Coinbase operates in 32 countries and can be divided into four primary lines of business:
  • Coinbase
  • GDAX
  • Custody
  • Toshi
COINBASE & GDAX...

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