Meet Coinbase: The First Crypto Exchange to IPO in the United States

Hey Everyone Harry here 👋

Welcome to Issue #18 of Deep Dive with Inquisition. In this edition, we’ll cover the story of Coinbase, one of the world’s largest cryptocurrency exchanges, serving over 330 million users across more than 100 countries, with a valuation of $41.00 billion as of October 2024. We’ll explore everything from its founding story to the strategies that have helped it become the company it is today.

Early Days of Coinbase:

Coinbase Global, Inc., branded as Coinbase, is a publicly traded American company that operates a cryptocurrency exchange platform. It is the first cryptocurrency exchange platform to conduct an Initial Public Offering (IPO) in the United States, allowing retail and institutional investors to exchange cryptocurrencies on its platform. Known for its popularity and trustworthiness, Coinbase boasts high trading volumes. In addition to trading cryptocurrencies, it enables users to store crypto, purchase items from stores that support cryptocurrency payments, and allows businesses to accept cryptocurrency as a form of payment. Backed by a diverse range of institutional and retail investors from around the world, Coinbase was founded by Brian Armstrong and Fred Ehrsam in 2012 in San Francisco, California.

Overview of the Global Cryptocurrency Market:

1. As of October 2nd, 2024, the Global Market Cap for Cryptocurrency is $2.26 Trillion.

2. According to The State of the Global Cryptocurrency Ownership in 2024 from Triple A, “[a[s of 2024, we estimated global cryptocurrency ownership at an average of 6.8%, with over 560 million crypto owners worldwide.”

3. As of October 2024, the most popular cryptocurrency is Bitcoin with a market cap of $1.3 Trillion.

4. According to the PwC 2023 Global Crypto Hedge Fund Report, “[t]he number of traditional hedge funds investing in crypto-assets fell to 29% – down from 37% last year – however no traditional hedge fund plans to decrease exposure in 2023.”

5. According to the 2024 Institutional Crypto Hedge Fund & Venture Report, “[c]rypto hedge fund AUM jumped in Q4 2023 to ~$15.2b. Fundamental strategies held $11.4b, Quant Directional Funds held $1.8b, and Market Neutral Funds held $1.9b.”

6. According to the 2024 Institutional Crypto Hedge Fund & Venture Report, “[a]nnually, global venture capital firms in crypto/blockchain raised $5.75b in 2023 across 58 funds, down from 2022’s record year of $37.7b across 262 funds. When comparing crypto venture firm’s share of global venture capital fundraising, crypto funds tallied roughly 3.53% of global funding down from 2022’s high of 12.62%.”

The Rise of Coinbase: How it was first started:

Brian Armstrong, a former fraud systems engineer at Airbnb, witnessed firsthand the complexities and inefficiencies of cross-border payments. This experience, combined with his interest in Bitcoin and Satoshi Nakamoto’s “White Paper,” sparked Armstrong’s belief in Bitcoin’s potential as a global, decentralized currency that could enable seamless online transactions. In 2012, with around 100,000 active users in the global Bitcoin and cryptocurrency market, Armstrong recognized an opportunity to address the challenges of buying, selling, and storing Bitcoin.

Over the next few months, Armstrong became obsessed with Nakamoto's paper, brainstorming solutions to simplify cryptocurrency transactions and envisioning a decentralized financial system. Armstrong began discussing his ideas with other Bitcoin enthusiasts who shared his vision. After these conversations and further exploration into Bitcoin, he developed a Minimum Viable Product (MVP) for storing Bitcoin, which led to the concept of cryptocurrency “wallets.” His initial product was a success, receiving over 15,000 downloads and being featured in the tech publication Wired.

As Armstrong continued to build tools to simplify the buying, selling, and storing of Bitcoin, he applied to Y Combinator and was accepted into the 2012 YC Batch. He was not a typical entrepreneur; since high school, he had challenged himself by creating a new business every six months. Coinbase, which started as a weekend project while he was still working at Airbnb, emerged from Armstrong's belief that Bitcoin and cryptocurrency would fundamentally change the way transactions were conducted. Unlike many at the time, he believed the demand for Bitcoin and other cryptocurrencies would continue to rise, pursuing his ideas with conviction.

At that time, Bitcoin and cryptocurrency were not widely accepted and were often dismissed as unrealistic or merely popular among a small group of tech enthusiasts. Armstrong aimed to build a simple and secure platform for trading Bitcoin, especially since existing exchanges were difficult to use and unreliable. His vision became a reality when Coinbase was officially launched as a startup after being accepted into Y Combinator's 2012 Batch, receiving an initial investment of $150,000.

Soon after, Armstrong partnered with Fred Ehrsam, a former trader at Goldman Sachs who shared his vision for the future of cryptocurrency. Ehrsam’s background in traditional finance helped Coinbase navigate its early growth and build credibility in a market still perceived as niche. Together, Armstrong and Ehrsam focused on creating a platform that was easy to use and secure, emphasizing the importance of building trust in an industry often associated with scams and volatility.

Coinbase quickly gained attention as a platform that simplified the process of trading and storing Bitcoin, attracting users who appreciated its straightforward approach and commitment to security. This early success was bolstered by increasing interest in Bitcoin and cryptocurrency from both mainstream investors and the media.

As Coinbase grew, the company expanded its services to include crypto storage, merchant services, and tools for businesses to accept cryptocurrency as payment. With a focus on making cryptocurrency more accessible and easy to use, Coinbase became one of the most trusted and popular cryptocurrency exchanges in the world.

How Did Coinbase Become One of the Biggest and Fastest - Growing Cryptocurrency Exchange?

Obsession. That is the word that describes the reasoning behind Coinbase’s success. From the beginning of its journey—where Armstrong was reading Satoshi’s papers on Bitcoin and the world of decentralized finance—to its current status as a leading cryptocurrency exchange that continuously challenges the existing system and aims to empower economic freedom for every individual.

The founders of Coinbase didn’t have any significant advantages, whether in terms of market position or a successful track record. Neither of them was a seasoned entrepreneur with millions of dollars in exits. Additionally, the market, with only around 100,000 users in 2012, didn’t provide much support. Despite this small market, Coinbase recognized an immense opportunity to become the dominant player by solving one of the most urgent pain points: the ability to send, receive, and store Bitcoin and other cryptocurrencies without friction. The company didn’t introduce the concept of sending and receiving Bitcoin, as there was already a dominant player, Mt. Gox, a Bitcoin exchange based in Shibuya, Tokyo, which once controlled 70% of the world’s Bitcoin transactions and provided worldwide Bitcoin transfers.

However, the factors that contributed to Coinbase’s growth and success can be identified as: its continuous obsession, its  drive to solve a critical pain point, and their conviction that the market, idea, and solution addressing this pain point would fundamentally change how transactions were conducted.

We must remember that Coinbase defied the odds to become a:

• Successful startup that impacted how cryptocurrency transactions are conducted; and

• Startup that IPO'd.

This is noteworthy because only around 1% of startups worldwide achieve an IPO, given the overall low probability of any startup becoming successful.

By leveraging the factors that contributed to the company’s success, Coinbase not only attracted early users and experienced rapid growth, but also shaped the current model and future of cryptocurrency. Coinbase influenced retail investors and later expanded to engage institutional investors, promoting the idea that cryptocurrency should and is a legitimate digital asset. The impact of which caused regulators and government officials to acknowledge cryptocurrency, ultimately leading to the popularization of Bitcoin and cryptocurrency as a whole.

By 2024, Coinbase generated $3.1 billion in revenue for 2023 and was valued at $40.87 billion as of October 3, 2024. It safeguarded around $269 billion as of June 30, 2024, with over $240 billion in quarterly trading volume. The company has raised approximately $1.9 billion from institutional and retail investors.

Below are the strategies that contributed to Coinbase’s growth:

1. Are you obsessed enough?

   → The founders of Coinbase were both obsessed not only with Bitcoin but also with the entire process of making Bitcoin and cryptocurrency accessible to people around the world. They focused on finding solutions to pain points and improving the product to reach more users, creating a bigger impact. One of the most important characteristics of a founder is having an obsession not just with the result but with the entire process from the beginning—a key lesson that can be learned from the founders of Coinbase.

2. Expose yourself to new opportunities by being active:

   → Armstrong was able to expose himself to new opportunities through his obsession—such as researching Bitcoin in depth and studying Satoshi Nakamoto’s work—and by being open to new discoveries. During the early days of Coinbase, he attended various events that were, at the time, niche and specific to those interested in Bitcoin. He also actively interacted with people in the community, asking for their opinions on various issues, including the pain points they experienced as members of the Bitcoin community. By engaging in these activities, Armstrong uncovered both major and minor pain points, ultimately leading to the creation of a wallet that could store Bitcoin and other cryptocurrencies and facilitate cryptocurrency trading.
   The key takeaway is the importance of continuous exposure, even if you don’t have a clear picture of what you’re going to build or a specific purpose for attending an event. Expose yourself as much as possible, interact with people, and remain obsessed with your mission.

3. Make it as simple as possible:

   → What is the purpose of creating and implementing user-friendly designs? The goal is to make the product simple and as frictionless as possible to encourage existing users to continue using it and to attract new potential users. Cryptocurrency, in general, is a complex field that many people find challenging to understand. However, by making the product (Coinbase) as simple and beautifully designed as possible, the company takes one step closer to its goal of enabling economic freedom for everyone around the globe.
   Providing tools alone isn’t sufficient to make cryptocurrency accessible; implementing user-friendly designs and frictionless experiences also plays a crucial role. This approach makes it easier for users to engage with the product, similar to how Airbnb leverages design to foster trust and satisfaction among its users.

   
   A key lesson here is the importance of simplifying not only the designs but every process as much as possible to create a frictionless experience that can be easily accessed by everyone, from anywhere.

4. Ship Fast:

   → Whether you are shipping an MVP for your initial idea or a feature that might or might not benefit your users, ship as fast as you can. To know if your product is actually solving pain points or uncovering hidden bugs, the only way to find out is to ship it.

   
   Remember: Creating and scaling a product is very similar to building a huge snowball. Ship it, iterate by listening to feedback, improve, release, and repeat. Customers who experience your improvements and dedication will continue to use your product and spread the word to their friends, family, and networks.
   When this process continues to unfold and builds momentum, you will experience continuous growth and eventually become a major leader in your market.

5. Leverage partnerships to further scale:

   → One of the best ways to further scale your company after building a solid foundation is by establishing and leveraging partnerships. For example, one of the early partnerships Coinbase established was with Expedia, where it partnered as a payment processor, allowing customers to pay for hotels booked on Expedia with Bitcoin. Another example of a growth strategy leveraging partnerships to scale is the collaboration with Stripe. By allowing its users who use Stripe as a payment processor to accept crypto payouts (a new feature from Stripe), it enables Coinbase users to achieve the following:

   1. Increased adoption of cryptocurrency as a payment option in daily life: By allowing payouts in cryptocurrency, individuals can receive their payments from Stripe with lower transaction fees, which also benefits Coinbase since the payouts go to Coinbase Wallet.

   2. Allowing Coinbase users to buy crypto using credit cards: Thanks to Stripe being added as a payment processor, this benefits both parties by making it simpler to buy and add crypto, which is always an advantage for Coinbase.

6. Establishing trust is super important especially as an Fintech:

   →  Establishing trust is crucial for any business—whether you are a consumer product company that specializes in skincare or a software company that facilitates financial transactions. Coinbase is no exception; the company has invested significant resources and time to build trust with its users and regulators around the world. By continuously improving its platform security through internal developments and the acquisition of companies that provide security solutions, Coinbase has built trust since its early days.
   Additionally, working with regulators to facilitate cryptocurrency trading as much as possible can be seen as a continuous effort to enhance platform safety, positively impacting the company’s image and its appeal to retail and institutional investors. This provides an important lesson on trust and safety, demonstrating how a company can shape new policies and create a positive impact in a market that was previously viewed negatively.

7. Always Go Global regardless of your market:

   → Coinbase is not just obsessed with its global expansion; it is actively taking steps to extend its presence worldwide. One of the reasons for its rapid global expansion is the desire to increase its user base, diversify its revenue streams, and continuously differentiate itself from competitors in the cryptocurrency exchange and payment market. The key takeaway is to always find ways for your company to serve beyond the current market, ultimately aiming for your product or service to be used around the world.

8. Never settle down on one thing:

   → Coinbase is a prime example of a company that consistently improves in areas related to its industry. It started as a wallet, then evolved into a platform for trading and storing Bitcoin, later expanding to include other cryptocurrencies. Now, it enables institutional investors to trade and store cryptocurrency while also allowing businesses to accept and receive payments in cryptocurrency. By actively expanding within its core market, Coinbase is providing solutions across as many areas as possible, which can be seen as a positive development for the company. This teaches us the lesson to never settle for just one thing and to keep moving forward after successfully building a solid foundation.

Challenges for Coinbase:

1. Navigating through the regulatory challenges:

   → Unfortunately, cryptocurrency is not yet fully accepted by regulators around the world, despite its increasing demand and adoption by retail and institutional investors, as well as businesses. Fewer regulations on cryptocurrency would not only positively impact the global market but also provide more opportunities for Coinbase to enter and thrive, as it is seen as one of the most regulator-friendly exchanges. We can expect Coinbase to actively work with existing and new regulators in an effort to change cryptocurrency regulations and make economic freedom possible for everyone, everywhere.

2. High Security Risks:

   → As one of the largest cryptocurrency exchanges, Coinbase is a prime target for hackers. It is crucial for the company to continuously improve the security of its platform, not only to protect itself but also to safeguard its users and their assets. We can expect Coinbase to further enhance its security measures, and one way to do this is by hiring white-hat hackers to test the system, identify security flaws, and continually find ways to strengthen the platform's security.

3. Navigating through the competition:

   → As the company tries to enter the global market more assertively, it is expected to face significant competition both inside and outside the U.S. market. It will be crucial for the company to either confront the competition directly or leverage a partnership strategy to collaborate with local exchanges. This could involve creating a new company entity, acquiring a specific percentage of a local partner company, or even selling its local operations to competitors in exchange for shares. This solution is similar to how Uber did with Grab (one of the most popular ride-sharing apps in Southeast Asia), thereby becoming a long-term strategic partner while continuing to benefit from the local operations through the partnership.

Future of Coinbase:

1. Global Expansion:

   → We can expect to see more global expansion from Coinbase in the coming years, as the company has publicly stated its intention to expand globally. Specifically, the company is working directly with local government officials to comply with local regulations in an attempt to offer its products to specific local markets and fulfill its mission to increase economic freedom worldwide.

2. Diversification in Revenue Streams:

   → By offering products specifically targeted at institutional investors and payment solutions for businesses to accept cryptocurrency, we can predict that the future of Coinbase will involve a combination of services for both retail and institutional investors as the adoption of cryptocurrency continues to increase worldwide. This product diversification can be seen as an attempt by the company to not only diversify its revenue streams but also to increase the revenue and profits generated from its users.

3. Continuous Improvement on its Product Offerings:

   → Coinbase offers a wide range of products for retail, institutional, and even SMB to enterprise investors. We can expect the company to continuously improve its offerings by listening to user feedback and implementing it. In the future, Coinbase is likely to further integrate decentralized finance (DeFi) and Web3 technologies into its platform, giving users access to even more decentralized applications (dApps) and blockchain-based services. These efforts reflect the company’s ambition to increase economic freedom worldwide.

Key Takeaways from the Story of Coinbase:

When you look at successful companies after they've achieved a series of successes, everything seems aligned. However, what most people don’t realize is the journey the founders went through, as many focus only on the results. The sleepless nights, doubts as leaders, visions, and potential of the company are just a few of the many challenges the founders of successful companies face and must overcome. This was no exception for the founders of Coinbase. As the company scaled, it encountered not only growth challenges but also significant regulatory hurdles, especially in the cryptocurrency space, along with public criticism from well-known and influential figures like Warren Buffett and Jamie Dimon (CEO of JP Morgan). Despite these challenges, the founders and the team behind Coinbase managed to scale the company, ultimately becoming the first cryptocurrency exchange in the U.S. to go public on the Nasdaq.

One of the key lessons from the story of Coinbase is the importance of having an immense amount of conviction. This belief makes anything possible—whether it's successfully convincing regulators to change policies or introducing a little-known concept and making it mainstream. These achievements are only possible when you are so convinced that what you're doing can change the world and create a new order. Having such conviction also influences others, and when a group of people shares this unbreakable conviction, it leads to change, whether for better or worse. The takeaway for founders and individuals alike is:

1. Find or create something you believe in with immense conviction.

2. Spread that conviction to others through influence and unite people around it using the right methods.

3. Challenge the status quo.

As Steve Jobs once said, “[w]hen you grow up, you tend to get told that the world is the way it is and your life is just to live your life inside the world. Try not to bash into the walls too much. Try to have a nice family life, have fun, save a little money. That's a very limited life. Life can be much broader once you discover one simple fact: Everything around you that you call life was made up by people that were no smarter than you. And you can change it, you can influence it, you can build your own things that other people can use."

The same rule applied to the founders and the team behind Coinbase: They had such strong conviction that they attracted like-minded individuals. This made Bitcoin and cryptocurrency accessible by enabling people to easily and securely trade and store it. And they built credibility through their growing user base and investors, and continued to challenge the status quo with proven results and solid credibility, all while staying true to their mission.

Below are the key - strategies that Coinbase used to become the company it is today:

1. Do you have enough conviction to believe that the next big thing you are believing is indeed the next big thing?

   → When Armstrong and Ehrsam founded Coinbase, Bitcoin was seen as an experimental, niche technology. However, due to increasing demand and efforts from companies like Coinbase to make trading and storing cryptocurrency more accessible, regulators, governments, and both retail and institutional investors have started to take positive actions toward cryptocurrency, whether by investing in it or changing laws to make it easier to use. This was all possible because the founders had the conviction that Bitcoin and cryptocurrency would become the next major thing, despite the market being small and niche at the time. They firmly believed they could solve the desperately needed pain points and predicted that the market would grow larger and eventually become significant.

   The key takeaway here is the importance of having strong conviction in the problem you're trying to solve and the belief that the solution you're providing will create a positive impact, with the market you're addressing potentially becoming the next big thing. As Sam Altman once said, "[i]t’s much better to build a product that a small number of users love than a product that a large number of users kind of like," emphasizing the strategic advantage of focusing on emerging markets with growth potential rather than established ones.

2. The world is your playground:

   → Many founders tend to focus solely on their local target markets. However, no matter where they are from, the ultimate goal for every company should be global expansion, as demonstrated by Coinbase. This approach is driven by the immense potential available worldwide, where diverse markets offer opportunities for growth and innovation. By thinking globally, companies can tap into new customer bases, diversify their revenue streams, and enhance their overall impact. Companies can enter a global market through various methods, such as partnering with local competitors in the same market or strategically entering the market by collaborating with local regulators to amend existing regulations—something Coinbase is actively leveraging.

3. You will have access to new perspective, opportunities, relationships - everything once you remove your Ego:

   → Having an ego is one of the most common things that can hold you back—whether in your career, personal life, or elsewhere. Armstrong was able to access new perspectives and opportunities, even from the early users of Coinbase's MVP, because he didn’t let his ego interfere with his openness to new ideas, relationships, and more. The lesson here is the importance of setting your ego aside and always putting in 100% effort while being positive and open to everyone and everything. We never know when, how, what, or who will impact us. Did the founders of Coinbase even know they were going to co-found a billion-dollar company and eventually take it public when they first met on Reddit? Probably not. However, both of them were open-minded and shared a strong conviction that Bitcoin—and later cryptocurrency in general—would become the next major thing. They believed that the solutions to the pain points they were addressing were important, and the numbers have shown that, leading them to continue building their conviction and further improving their offerings to meet needs and wants.

4. Follow the flow:

   → When looking back at Coinbase, it has always managed to fulfill the needs and wants of the market and has excelled at it. When it first started, there was a significant need for a secure place to store Bitcoin, so it created a solution to address this. This solution then led to the identification of another problem: the lack of a smooth trading experience for Bitcoin compared to existing competitors like Mt. Gox. As a result, it expanded into Bitcoin trading and later into other cryptocurrencies, responding to the rising demand for coins like Ethereum. By actively following market trends, the company was able to further scale by providing its users with the solutions they needed and wanted. Subsequently, it expanded into new areas, serving institutional and business users while also increasing its global presence and services. The lesson from this is to always follow the flow and strive to excel at it.

5. Establishing trust is crucial:

   → In general, trust is one of the most important aspects of business. If you are managing billions of dollars, trust, security compliance, and other factors are not just options; they are a must. However, the fundamental question is: How do you establish trust as a startup that has recently formed?
   Looking at the story of Coinbase, it established trust through various methods, such as the founders engaging in activities that don’t scale (e.g., attending events during the early stages to conduct market research, spread the news, and gain or share insights). It's simple design also makes it accessible for people to trade and store cryptocurrency, while leveraging the credibility of its investors helps build trust.

   
   As discussed in Issue #13, “Meet Wiz,” the company has intentionally uploaded client logos, testimonials, and testimonial videos to establish trust with potential and existing users. For Coinbase, one clear method of establishing trust includes displaying key statistics, such as Total Assets Under Management. These metrics help potential users feel safer, positively impacting the usage of the company’s products, which, in turn, enhances the overall synergy of the company.

   
   The lesson here is the importance of establishing trust from the early days by employing various methods, such as engaging in activities that don’t scale, gaining credibility from Tier 1 investors, highlighting key statistics that the company represents, and implementing designs that provide simplicity while conveying trust—similar to how Coinbase and Airbnb do. 

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Thank you so much for reading!

-Harry