The Maturation Of A Market

Yesterday’s announcement that our portfolio company Coinbase is launching a suite of institutional products for the crypto market made me step back and think about the evolution of their institutional business.

Coinbase started out as a place for individuals to buy, sell, and hold Bitcoin. They launched that in 2012.

In 2015, Coinbase added the GDAX exchange where institutions, other exchanges, and large traders could trade Bitcoin.

By the middle of last year, it became clear that many big institutions were entering the market and needed a lot more. And so Coinbase went back to the drawing board and developed a plan for a comprehensive suite of institutional products. And that is what they announced yesterday:

  • Coinbase Custody
  • Coinbase Markets
  • Coinbase Prime
  • Coinbase Institutional Coverage Group

What started out as a simple web and mobile app for buying, selling, and holding Bitcoin has evolved into a full-fledged financial services company, serving both the consumer and institutional market.

Say what you will about crypto, it has become an important asset class and the market is maturing before our eyes.

I have had the opportunity to watch a bunch of markets go through this cycle over the course of my career and it always gives me chills to watch it happen.


Comments (Archived):

  1. LIAD

    whilst the adoption curve for this asset class is reversed to what is normal, retail–>institutional, seems the innovator’s dilemma at hand is playing out textbook.however the moat of compliance/regulation is non-trivial so i’d expect CB to be able to cover their low-end flank at least in the medium-term without any issues.

  2. JamesHRH

    Of all the investment announcements you have made here, the two that stand out IMO are both financial – eShares & Coinbase.I am not a believer in crypto, but the Coinbase idea was Levi Strauss selling tools to the fools – brilliant.I am amazed that the institutional demand is so high that they have uptake on these services, but not at all amazed that they fillled the demand.Perfect idea and from outside, what appears to be excellent execution.Those BoD meets must be enjoyable.

    1. Richard

      When it comes to wall st, the name of the game is commisions. Bitcoin is the sperm bank of investing, yearly custodial fees etc. when you combine high commissions with high volatility, it’s easly to see why wall st talks up bitcoin.

      1. JamesHRH

        Deeply cynical but not untrue.

  3. OurielOhayon

    Unfortunately until the regulator has clearer stance institutional money will only be experimental at this stage and given the speed of things it does not look like it s going to be this year or even next

    1. pointsnfigures

      Maybe not. The few conversations I have had with both SEC and CFTC people were hopeful. No turf battle either.

      1. OurielOhayon

        yes. i am hopeful too. does not mean it s going to happen fast. this is is phase 1 aka: we learn about it. no regulation, i doubt highly, will come in 2018

        1. pointsnfigures

          could come in phases too. or outsourced to an SRO.

          1. OurielOhayon

            in phase yes. SRO is certainly not enough for the vast majority of intitutions

      2. LE

        No turf battle either.That says to me that nobody wants to be at the wheel in a risky endeavor when it blows up. [1] [2] Meaning they don’t want the blame it’s not a cake run. That is a potential explanation for the courtesy if widespread (and not just from your conversations).[1] “Not on my watch”.[2] And god knows I hope it doesn’t as I have deals I am putting together in this area and think the activity is great (even if my comments come across as a skeptic).

  4. sigmaalgebra

    Yup, “say what you will about crypto”, there’s got to be some money to be made in there somewhere, and Fred’s the VC with the best chance.Or, from The Hunt for Red October,The hard part about playing chicken is knowing when to flinch.The hard part about riding the back of a tiger is knowing when to get off and not stay too long and end up inside.When to buy is the easy part. When to sell is the hard part.Don’t be greedy: When have some good returns, take them.

  5. William Mougayar

    And we’re having a panel at the Token Summit tomorrow with the leaders of each one of these 4 businesses.Coinbase is the most diversified blockchain company today, perhaps even with the most revenues.

  6. Ben Mackinnon

    I’m not too smart on this space, but it seems that Coinbase is taking steps to become the centralized bank that crypto hates so much.

    1. jason wright

      Smart enough

    2. jason wright

      my impression of the crypto space is that there are quite a few (many, and possibility the majority) entrepreneurs in there who actually have the instincts, psychology, and desires associated with those who inhabit the ecosystem facilitated by the centralised banking system. wolves in sheeps clothing. they hide what they really are.

  7. Tom Labus

    A large bank will come callin’ soon!!

    1. jason wright

      is that what its investors are hoping for? is that the exit, selling to the dark side of the force?

      1. Tom Labus

        Large pile of cash equals memory loss of 08 crash and Big Banks looting.

  8. Frank W. Miller

    You can put lipstick on a pig…

    1. Tom Labus

      MIss Piggy

  9. JLM

    .Classic “pick & shovel” play like the difference between oil and oil field services.If there will be crypto, there will be a need for agnostic services of all kinds.Well played.JLMwww.themusingsofthebigredca…

    1. LE

      there will be a need for agnostic services of all kinds.Great reality show you should watch “Selling Jets” (older show recently caught it on cable). About the industry that surrounds the jet industry and the money to be made in that. Nothing new but I just love that show. You would like it. (So would Phil Sugar and anyone who loves planes).…(The wives and girlfriends are hoots. Many of the guys buying jets made money in tech. One even said ‘why would I want two pilots??’ to which the broker replied ‘um redundancy’.)

  10. JLM

    .Thought – Is Coinbase becoming the “trusted intermediary” whose elimination was part of the reason why crypto was needed? Desired?Meet the new Boss, same as ……………………..JLMwww.themusingsofthebigredca…

    1. LE

      Coinbase has to be concerned with setting fees so high that they drive others to enter the space. And unlike coinbase those others will not cannibalize existing revenue so they will be free to take less for the exact same function. If I read books instead of doing I’d probably know the actual academic term for this. But simplistically it could be ‘pigs get fat hogs get slaughtered). Observed many times over the years (look what happened to Whole Food even). You have to set your prices low enough that you will not invite attention from people thinking they can do it cheaper (or make it in China). Because that is where this always ends up. A napkin calculation that gets someone to enter your market (faster than if the money to be made weren’t so obvious).

      1. PhilipSugar

        I could not agree more. There is one more reason……the fish grows to the size of the aquarium.It is SOOO hard unless you are a really small shop to not have your managers load your business with fixed costs (i.e. people). The two best professors at Wharton Myles Bass and Edwin Moldt both would just harp on this.You can spend a ton of money on capital items, but it is the fixed costs that kill you.You see this all of the time.Think if you hired a manager to come in and run your business. Very soon they’d have a staff and that staff would need more staff to support that staff. Then people would start to have meetings back to back to back, not with customers but internal meetings, then you need more people to manage, and actually do work, but they get productivity sapped by managers wanting them to do TPS reports. Make sure they have the right cover sheet. Come to meetings.Then a competitor comes in and starts kicking your ass. Now the pain train starts. Managers aren’t going to fire themselves, they downsize the doers. The good doers leave, the bad doers stay. The managers aren’t doers and now spend even more time internally making powerpoints and building projections.Now the competition if they are smart really starts kicking some ass, they lower prices and really accelerate the pain train. Investors are now pissed and fire top management. New mercenary management comes in doesn’t really care (hey I have nothing to lose I didn’t break it) and more internal machinations happen.Customers see the death spiral leave in droves and it accelerates. Vendors go from giving great deals and generous terms to giving crappy deals and requiring cash on delivery.Bam! You are ToysRus, Aeropostale, or about a million restaurants. Done. Been on the front row of this scene.

        1. LE

          New mercenary management comes in doesn’t really careMore importantly no personal ties. Easy for them to fire that guy in your office that cracks you up and that you have had beers with. Like in the death camps they rotate the guards for the same reason. Don’t want people to get to friendly.Edwin Moldt At Wharton I interviewed him before he was at Wharton late 70’s maybe 1980. He operated out of an office on the main line. He had some idea to use telemedicine essentially high speed links and said it was the future of medicine that doctors would be able to diagnose remotely. Later of course he ended up at Wharton. He yelled at me because I was late for the appointment to interview him. I had gotten lost and he was pissed.It’s amazing to me how many large successful business suck because they can. It’s like a ship that leaks but still sails.Yesterday I berated the customer service desk at whole foods because there are no labels on the bagel containers and also other things related to the bakery (which I have done before). I said ‘why isn’t there someone that is monitoring what they do and why do I have to be the one telling you multiple times??? I do this because it makes me feel better of course. But it’s actually amazing how poorly run these places are and how the guys at the top don’t understand nitty gritty of what is going on at the bottom. When are things perfect at Whole Foods? When they know in advance that someone from the district is coming by. I have heard them say that and they are all on the floor tidying up for them (I can tell). Back when I was in high school my friend worked for Roy Rogers. He would say they would get advanced notice from the previous store that ‘the boss is on the way get your act together’. It’s like some of these corporate guys have no clue what goes on at the lower levels or don’t care.

    2. jason wright

      Coinbase is a contradiction.

    3. LE

      The other thing the post made me think of is Chevrolet and the Corvette in the showroom as a way to elevate and legitimize the brand (among as always other reasons). I did a version of this back in the day bringing on products to make it appear that what we were doing was more sophisticated and that we were a bigger player than we were (and it worked).

      1. Lawrence Brass

        What’s that? Allure management maybe?

      2. JLM

        .Haha, reminds me of the first really tall building I ever built. I was 29 at the time.Guy from Citicorp (construction lender) comes down from NYC in January (lots of visitors from the north in January) and looks down into the hole, says, “How many tall buildings have you ever built?”I say, “Including this one, one.”He was an older guy, salty, says, “This one isn’t finished yet, kid.”To which I say, “Yes, sir. I know that.”He comes to visit every two weeks for the rest of the job. Takes pictures. Disburses loan draws every month.When the job is finished, he sends me a complete book of his pics. Title on the front? “Everybody Remembers Their First One.”Later when we do some more with Citicorp, he never comes to the job. Asks me, “How is it going? Everything under control?”Is this a great country or what?JLMwww.themusingsofthebigredca…

        1. Lawrence Brass

          Can you post the coordinates?… to do a flyby in Google Earth, please, Sir. 🙂

          1. JLM

            .Corner of Congress Avenue and Sixth Street, Austin By God Texas.Within proximity are the Littlefield Bldg, Norwood Tower, Sampson Building, and the Colorado Building — all large scale renovations.JLMwww.themusingsofthebigredca…

          2. JLM

            .Great pic. When I built that building, I leased the air rights over an alley for 100 years plus a 100 year renewal. This set off a shitstorm in ATX because some folks contended I never revealed my plans to build above the alley but the head of City Planning stood up for me. I had.The building with the penthouse to the left is the Norwood Tower. My office was in the small building atop the garage to the left of the building. My first big trip to the paywindow was from that office which was the old Austin Club.One of President LBJ’s daughters lives on the top of the building in the old OO Norwood penthouse.There is a clock rosette at the top of the building. The guy putting in the clock jumped to his death when his company in Chicago told him they had gone bankrupt. He haunts the building and the clock — in the clock room — has never been installed.Across the street from the front of the big building, the old building is the Littlefield Building which was LBJ’s HQ when he was a Senator. When I sold those buildings I got out of the development racket. I did a lot of buildings in my day.Sometimes, I go downtown and talk to them.I had about 500 employees with ops in ATX, San Antonio, Dallas, Houston when I folded my tent.JLMwww.themusingsofthebigredca…

        2. LE

          Funny but back around the same time my older cousin told me he had ‘bought an office building’. While I didn’t think it was 50 stories I did think it was at least 5 stories, 25,000 sf with lots of glass. It turned out to be a house with offices inside. Not exactly curb appeal. 50 stories is curb appeal. Elevators at the rear loading dock.To this day I will not buy anything (and I don’t want to make like I am ‘mr big owner’ I’m not) that doesn’t have curb appeal in some way. I own a few things in an office complex across from where my stepdaughter goes to school (among other properties). She tells her friends ‘my stepdad owns offices over there’. It’s a sharp modern style building and while not 50 stories has curb appeal. The only variance (to curb appeal I mean) is if you can see the ocean, a back bay or both. A good view floats all boats (assuming in a good neighborhood of course).The funny thing is not everyone understands this principle when buying (people buy crap all the time). But when seeing they always understand the point.I took the picture attached quite good I must say….. https://uploads.disquscdn.c

          1. JLM

            .One story flex space or office/showroom is one of the best products in which to invest as it has the future potential to be knocked down and replaced with ten story buildings.Real estate is always on the job — working while you’re sleeping.JLMwww.themusingsofthebigredca…

          2. JamesHRH

            Pimping the program.

          3. Lawrence Brass

            Nice place to work.I guess that is your Porsche parked out there. Boss collecting the rent or fixing something. 🙂

          4. LE

            That’s an older one actually I bought 3 or 4 more since I took that photo. I definitely don’t fix things (and I don’t pick up rent either haha). I could fix things (have the skill) but I spend my time on activities that I can’t pay someone else to do and whose time is less valuable.I am in the process of buying a property in a condo complex. I am negotiating with the condo association that if I buy the condo I get some kind of an offset against condo fees in return for them having certainty and not waiting for it to go to sheriff sale. [1] That is the type of thing I spend time on, using my head and what I know creatively. I gave them two choices one a fixed period and another a variable period based on when I rent but with a cap.[1] Their attorney’s first reaction was ‘oh we can’t do that because we can’t make special deals with an owner and favor one over the other’. To which I replied (among other things) ‘doesn’t apply to me I am not an owner yet I am a potential owner and doing so you will not only gain income but you will avoid more attorney fees as this goes through bankruptcy and sheriff’s sale’. So by spending $x you will save $y and that makes sense for you to do so (like installing LED lights!)

  11. Lawrence Brass

    I think that disruption in isolation doesn’t work. I even dislike the word.It’s disruption first, integration next what makes this galaxy tick. Functional disruption, that is evolution. Under this view Coinbase is today the alpha, the dominant integrator.Here is a recent post from Christine Lagarde, head of the IMF:…It is hard to be a full time skeptic.

  12. Vasudev Ram

    This sounds like an example of the “whole product” concept mentioned in Geoffrey Moore’s book Crossing the Chasm, which I had mentioned here a few weeks ago – what @JamesHRH said is known as the bible of B2B Marketing for tech entrepreneurs, even now, many years after the first version was published:…>I have had the opportunity to watch a bunch of markets go through this cycle over the course of my career and it always gives me chills to watch it happen.It might be interesting if you wrote a few posts or a series of posts about that stuff, with hindsight, and drew some lessons or generalizations (to be taken with a pinch of salt, of course, as generalizations should) from it, for this audience. My guess is many would be interested.

  13. edev14

    Why does seeing a market mature give you chills?

  14. The Fog of Crypto

    Say what you will about beanie babbies…As you have indicated, Warren Buffet and Charlie Munger are saavy investors. Both see that crypto is merely a collectible like, say, beanie babbies and pet rocks.When this crypto fad collapses—and it will collapse like all fraudulent investments and quasi-fraudulent investments—I don’t want to read how noone warned you that you were shilling what is essentially a scam. You’ve been warned… numerous times. You are headed for a place similar to Robert McNamara in “The Fog of War.” You are currently in the “The Fog of Crypto.”Wake up Fred!