Our Investment in Coinbase

I’ve been a customer of Coinbase since the fall of 2013, after a late night dinner with friends, wherein Chamath Palihapitiya waxed poetic about Bitcoin and its future as the world’s reserve currency. Whether it was the economist in me or the Pinot Noir, I opened an account and made my first purchase. To be honest, it’s a bit laughable to hint at any prescience-in-hindsight, and even now I wince slightly at the air quotes used in my tweet.

As I studied the market, however, I became more convinced of the role that cryptocurrencies would play in our future. Shortly thereafter, I made additional purchases (including one following a particularly bad experience with a major US bank that led me to close my account and move all of my funds into BTC in protest), and today, I’m excited to announce that my first investment as a GP at Greylock is in Coinbase.

Much has happened over the past four years. Alongside Bitcoin having reached >10x its then value, the total market cap of digital currencies has grown to over $100 Billion, with almost half of that from currencies which didn’t exist at the time. Ethereum alone has grown to roughly half the value of Bitcoin in the less than two years since its inception. As my friend Elad Gil penned recently, it feels as though cryptocurrencies are nearing their Netscape Moment.

A few months ago, my colleague and Greylock investor Matt Heiman introduced me to Brian Armstrong and his team at Coinbase. Before Brian came into the room to present at our office, we asked for a show of hands from anyone who owned a stake in any cryptocurrency and then again for those who were Coinbase customers. Almost every hand remained up, and we already had empirical evidence of the dominant brand that they have built with consumers.

As Brian laid out Coinbase’s progress and plan, it became clear they are building something much more transformative — and contrarian — than is apparent. Their incredible growth, coupled with Brian’s vision to create an open financial system for the world, makes Coinbase a market-transforming company with an uncapped opportunity ahead.

The most transformative ideas are typically the most contrarian until they gain massive momentum. Cryptocurrency is one of those ideas. Digital currencies hold the promise of transforming the entire global financial system, and yet we are just beginning to see the ways in which they allow users to go over-the-top of traditional financial infrastructure and thereby reach parts of the world that banks and payment networks never could.

Large and transformative opportunity

There has been a lot of recent discussion around the stability of today’s digital currency prices. Though we can’t predict the day-to-day movements of currency markets, digital currencies are still in their infancy compared to other relevant asset classes like gold and fiat currency. Consider this: the value of all digital currencies today is approximately $100 Billion, while there is $2 Trillion worth of gold available for private investment (i.e., excluding jewelry, industrial, or central bank reserves). If Bitcoin alone were valued the same as investable gold, it would be worth $100,000 per Bitcoin. That’s the potential for just the store-of-value use case for cryptocurrencies, and yet Coinbase’s vision is far more expansive than just this.

Digital currencies have network effects at scale when they are used as a medium of exchange, but need widespread adoption to be useful. That’s why Coinbase has built the easiest to use and most trusted brokerage to allow users to buy and hold digital currencies, bringing digital currency investment to the mainstream.

Coinbase also sits at a unique position as the access point between mainstream users and digital currencies, as well as a center of trading liquidity for more sophisticated entities via GDAX, their institutional exchange.

Coinbase’s work around Toshi also represents a massive expansion of the market opportunity for digital currencies, starting with enabling the developing world to participate in the global financial system through messenger-like payments. As a platform to enable the far easier creation and use of digital currency-enabled applications, Toshi also has limitless potential.

Together, this unique position of owning these codependent layers of value will enable Coinbase to become the core enabling technology behind the new global financial system.

Reputation of trust

Coinbase is a beacon of trust in this rapidly evolving and sometimes murky market. Since their inception, digital currencies have been plagued by incidents of hacking, fraud, and loss, and Coinbase has done more than any other player to ensure security of their customers’ funds and compliance with domestic and foreign regulators. Their years-long investment in seeking banking licenses, deposit insurance and in building market leading anti-fraud technology has given them defensible lead that will be difficult for others to challenge.

The initial appeal of digital currencies was that they did not require trust of any central entity, since users could control funds on their own. But there are problems associated with user-controlled security. If a user loses his/her private key, then the currencies are permanently lost. That is different from how most financial accounts work: if a password to a Chase account is lost, there are steps that can be taken with the bank to reset the password and regain access to the account.

For this reason, we believe that mass market adoption of digital currencies will come via a trusted entity like Coinbase, which is built on a custodial architecture. By taking on responsibility for the security of users’ funds, Coinbase removes the complexity of using digital currencies, making them accessible to all consumers.

World-class team

Greylock has a long history of backing entrepreneurs who are building disruptive, market-transforming companies. Brian Armstrong is a visionary who has long understood the risk and, more importantly, the potential upside of digital currencies. The incredible team he has built at Coinbase has deep domain expertise in technology and operations, and this strength has allowed them to scale through the hypergrowth of the last few years.

As the leading platform for consumers, Coinbase has helped customers exchange over $25 billion USD of digital currency, and today, they are valued more highly than any other digital currency company. We are excited to join them on their journey as they expand offices to New York, build their products and continue to create access to digital currencies for everyone.