This article is part of Wellesley Hills Financial’s Market Movements series, found in our weekly newsletter.
Bitcoin was introduced in 2008 with the intention of facilitating financial transactions without the need for third-party intermediaries. Bitcoin does not require a nation-state to vouch for the full-faith-and-credit of the medium, nor does it require a bank to facilitate the movement of funds from one account to another. Bitcoin is a truly decentralized currency. As it has been triumphantly branded over the past decade – bitcoin is digital gold.
It was only fitting that Coinbase debuted on the Nasdaq via a direct listing. Without the involvement of large investment banks, Coinbase entered the Nasdaq in a fashion that would make Satoshi proud (albeit shares still traded hands through financial intermediaries). However, as true as the form of the listing may have been to the ideals of Bitcoin, Coinbase, and exchanges of kind, pose an existential threat to Bitcoin. Does a centralized exchange have any place alongside a decentralized currency?
In 2020, Coinbase derived 96% of its revenues from creating economic friction on crypto transactions. For a retail investor to purchase $100 worth of bitcoin over the Coinbase exchange, an investor should expect to pay a brokerage fee of 1% to 1.5%. Of course, as transaction size increases, the spread declines; even still, in 2020, the average brokerage fee incurred on Coinbase was 0.57% of the total transaction value, generating over a billion dollars in revenue for Coinbase over the year. Given that Bitcoin was formed with the intention of eliminating this type of economic friction, Coinbase’s current operating model is a step in the wrong direction.
In line with the brokerage business model noted above, Coinbase also provides custodial services for crypto, requiring platform users to validate their identity during the registration process. At the end of 2020, Coinbase held $20 billion worth of crypto in their custody. Despite being an advocate for additional transparency in the crypto world, storing an asset that aims to disrupt fiat currency within reach of potentially adversarial governments should raise concerns. Those who are quick to say the U.S government would never confiscate crypto may not be the strongest history buffs. In fact, in the 1930’s the U.S. government forced all American citizens to sell all of their gold bullion and coins to the U.S. government at a rate well below market. Ownership of gold bullions and coins remained illegal for U.S citizens until the 1970’s. There are few signs that the U.S. government would ever intercede and confiscate Bitcoin, but Coinbase’s custodial ledger would certainly make the extraction all the easier.
The climactic rise of crypto has existed on the forefront of both technology and financial regulation for over a decade now. With the development of platforms such as Coinbase, it remains to be seen if Bitcoin, and crypto at large, will herald an era of decentralized, frictionless, global transactions, or if we will unknowingly convert digital gold into nothing more than a speculative fad.
Coinbase ended trading on Friday afternoon with a market cap of $67.29 Billion, up 36.8% from the initial listing price of $250.00 per share.