The Rise and Fall of Coinbase

This article was published in the KGA China-US Forum, author: Coco Kee.

Coinbase, the largest cryptocurrency exchange in the United States headquartered in San Francisco, is set to go public on Nasdaq on April 14. Coincidentally, I just finished reading the recently published book about Coinbase by Harvard Business Review Press, "Kings of Crypto - One Startup's Quest to Take Cryptocurrency out of Silicon Valley and onto Wall Street."

The book is primarily an inspirational story about Silicon Valley entrepreneurship, detailing how several young individuals channeled their obsession and enthusiasm for Bitcoin into a company called Coinbase. Secondly, it serves as a brief history of Bitcoin's development, with its ups and downs forming the backdrop for the founders of Coinbase.

Here are my notes from the book.

01---Accidental Path to Cryptocurrency

Brian Armstrong was born and raised in San Jose, California, and graduated from Rice University in Houston, Texas. He worked as a software engineer at Airbnb. He is introverted and shy, with a pale complexion, yet exudes confidence. In his spare time, he enjoyed browsing the internet.

On Christmas 2010, while at his parents' house, Brian read Satoshi Nakamoto's Bitcoin white paper online and was deeply shocked by it. He read the paper three times in a row. His obsession with Bitcoin began, believing it would bring immeasurable changes to the world. After that, he worked during the day and programmed to buy and sell Bitcoin at night. Trading Bitcoin was not an easy task at that time.

In 2012, he quit Airbnb with a simple wish—to make it easier for more people to trade Bitcoin—and signed up for a pitch at Y Combinator to present Coinbase's business plan. The project successfully made the cut and received $150,000 in startup funding.

Brian had a partner, a British guy, whom he met online, and they programmed together to prepare for the project. Just before the pitch, due to disagreements, Brian resolutely parted ways with him. Brian envisioned an exchange that would hold customers' keys, allowing them to focus on trading and owning Bitcoin.

Satoshi Nakamoto's "orthodox" followers, including Brian's former partner, believed that the exchange Brian wanted to build was "centralized," which contradicted Bitcoin's "decentralized" mission and was even seen as a betrayal. These individuals adhered to the principle of "Not my keys, not my coins."

Brian remained steadfast in his vision, which led to an ongoing feud with the "orthodox" Bitcoin followers. In the following days, Coinbase faced constant attacks from them; as the company grew, the attacks became fiercer, and Brian and some employees even received death threats.

It should be said that Brian was quite lucky. He lost his British partner but met Fred Ehrsam from the East Coast. Fred came from a "noble" background, was exceptionally good-looking, and was articulate. Not only was he a top student, but he was also an athlete. After graduating from college, he joined Goldman Sachs to trade foreign exchange. Fred's father graduated from Harvard Business School and had high expectations for his son. Everything Fred did was to make his father proud. Despite appearing to have it all, he felt empty inside and did not enjoy his job at Goldman Sachs.

By chance, he read an introductory article about Bitcoin on Reddit and immediately realized that this digital currency was different. At that time, Bitcoin was most active in California. So, Fred quit his job at Goldman Sachs and moved to California.

Fred and Brian, two young men from different backgrounds on the East and West Coasts, "fell in love at first sight." That year, Fred was 23, and Brian was 29. They worked tirelessly together, programming day and night. In November 2012, four months after Brian's Y Combinator pitch, Coinbase was born.

In May 2010, an American living in Florida proposed on an online forum to exchange 10,000 Bitcoins for two pizzas, completing the transaction with a British man. By the time Coinbase was born, Bitcoin was already worth several dollars, allowing for quite a few pizzas in exchange.

02---Breaking Through Walls

"Running through brick walls" is Coinbase's motto. When encountering obstacles or difficulties, it's like facing a brick wall; you must do everything you can to charge through it.

From the day the exchange officially launched, Brian and Fred, along with their employees, worked like a bunch of madmen day and night, breaking through one brick wall after another, often getting hurt in the process; sometimes, they nearly lost their lives without breaking through the wall; and at other times, they broke through only to find that what lay beyond was not what they wanted.

From the very beginning, Coinbase aimed to build an exchange that was compliant, clean, and as secure as a bank. Their expectations were not high—just to avoid being hacked, to stay within the law, and to have a company account in a bank. Even such simple requests were a luxury at that time.

Coinbase was a target for hackers. They kept quiet about a significant attack and loss that had occurred. Additionally, scams and money laundering activities caused Coinbase a lot of headaches, making each day feel like walking on thin ice.

In 2014, the Tokyo-based Mt. Gox exchange was hacked, resulting in significant losses. Mt. Gox handled 70% of the world's Bitcoin transactions at the time and was one of the largest exchanges, also a major trading partner for Coinbase. The downfall of Mt. Gox sent shivers down Coinbase's spine.

At the end of 2014, Bitcoin was exposed for being widely used in illegal transactions on the dark web's Silk Road shopping site. Charlie Shrem, the founder of BitInstant, which was backed by the Winklevoss twins, was arrested at the airport by U.S. federal authorities on charges of money laundering, tarnishing Bitcoin's reputation.

These events combined dealt a severe blow to Bitcoin. The price of Bitcoin plummeted from $1,100 at the end of 2013 to less than $200 in early 2015. At that time, the market generally believed that Bitcoin was just a gimmick that wouldn't last long.

In addition to the plummeting price of Bitcoin, Coinbase's banking partner, Silicon Valley Bank, proposed to terminate its business relationship with Coinbase, which was undoubtedly adding insult to injury. In the eyes of Silicon Valley Bank, Bitcoin and the non-compliant behavior of its two founders were like a ticking time bomb buried in the bank.

In 2015, the ailing Bitcoin led to a sharp decline in Coinbase's trading revenue, and company morale plummeted, with one-third of the employees resigning. The board suggested that Coinbase pivot its business towards enterprise software. To survive, Brian and Fred decided to lay off a significant number of employees.

Fortunately, by the end of 2015, Bitcoin's price began to recover, turning the tide.

03---Benefactors

During the Series A funding round, Coinbase brought in Union Square Ventures (USV). USV is a New York-based venture capital firm, and its founder, Fred Wilson, is one of the few East Coast investors respected by Silicon Valley. More importantly, his fund was one of the few willing to invest in Bitcoin at that time. Most venture capitalists either didn't understand it or were too afraid to touch it. In May 2013, Fred Wilson invested $2.5 million in Coinbase and brought in Ribbit Capital for another $2.5 million. Ribbit Capital's founder, Micky Malka, hails from Venezuela and is also a Bitcoin believer.

On May 7, 2013, The Wall Street Journal reported on Coinbase's Series A funding:

The report quoted Fred's comments: "Digital currency, especially Bitcoin, is a very interesting field, and if handled properly, there is significant upside potential. If Bitcoin truly becomes a global currency accepted by all countries and businesses, and Coinbase becomes the JPMorgan of Bitcoin, this company will be worth a lot."

USV not only brought capital but also established a business relationship between Coinbase and Silicon Valley Bank. Additionally, under Fred's repeated urging, Coinbase began to focus on legal compliance, gradually shedding the style of a Silicon Valley software company and moving towards improving its financial services.

With the board's push, Coinbase hired its first Chief Operating Officer (COO), Chief Financial Officer (CFO), and Chief Technology Officer (CTO), promoting formal operations, breaking through some development bottlenecks, and upgrading the trading system. These measures brought profound changes to the company but also left painful scars. However, the board coldly believed that these growing pains were absolutely necessary.

04---Wall Street and Mainstream Media

For a long time, Wall Street looked down on Bitcoin, considering it something criminals meddled with, unworthy of serious attention, adhering to the mantra "blockchain, not bitcoin."

In addition to serving individual investors, Coinbase also developed services for institutions. Brian realized that while Silicon Valley had no shortage of innovative talent, it lacked the capital depth of Wall Street and knew little about financial infrastructure. Brian sent "envoys" to reach out to Wall Street, only to be met with ridicule and returned empty-handed.

JPMorgan CEO Jamie Dimon bluntly told the media that Bitcoin wouldn't survive for long. Around 2014, mainstream media were mostly keen on headlines like "Bitcoin's Financial Network is Doomed" (Washington Post) and "This Could be the End of the Bitcoin Era" (Yahoo Finance).

It wasn't until 2016 that The Wall Street Journal and Bloomberg began sending reporters to specifically track Bitcoin developments. By then, Circle and Gemini had already emerged in New York.

05---Brian the Person

Without Brian Armstrong, there would be no Coinbase today.

Brian is not an outstanding leader. He is not good at speaking, does not enjoy interacting with people, does not charm the media, and is introverted. In the company, he is often seen wearing large headphones, indifferent to the world around him. He is more passionate about programming and perfecting products. Any bug in the code drives him crazy.

He has never cared much about corporate culture or employee morale, believing that if employees no longer believe in the company and have no faith in Bitcoin, they should leave Coinbase as soon as possible. His approach to dealing with people can sometimes be ruthless.

Fred Ehrsam, who fought alongside him for several years, left Coinbase to start the fund Paradigm; the company's first employee, Olaf Carlson Wee, also left to establish the fund Polychain Capital.

Brian's ability to lead Coinbase stems from his vision and persistence, as well as his unwavering belief in Bitcoin. He has always worked towards one goal—to make it easier for more people to trade Bitcoin, undeterred by the rejection and attacks from the "orthodox" followers of Bitcoin. His and his team's efforts have helped Bitcoin move towards the mainstream.

From Brian, we also see the spirit of Silicon Valley: to think what others dare not think and to do what others dare not do.

06---The Handshake Between Coinbase and JP Morgan

On a spring morning in 2019, Brian arrived in New York and met with JPMorgan CEO Jamie Dimon at the bank's headquarters. Bitcoin still existed.

Although Bitcoin had not yet become a world currency, Coinbase was already preparing to apply for a banking license. Nearly six years had passed since Fred Wilson's prediction that Coinbase would become the JPMorgan of Bitcoin. Dimon agreed to provide banking services to Coinbase, finally helping Brian wash away the shame of being ousted by Silicon Valley Bank.

On April 14, Coinbase will go public on Nasdaq, with an expected market value of $100 billion, while JPMorgan's current market value is $465.5 billion.