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Protocol | Fintech

How the crypto industry will ride the Coinbase wave

Investors expect today's Coinbase listing to legitimize the industry and help kickstart crypto tech that sticks.

Bitcoin

Many believe Coinbase's listing is the event that will bring sustained attention and capital to crypto companies.

Image: Viktor Forgacs

Coinbase's direct listing today isn't just a major financial event for the company. It's also expected to light a fire under the already-growing crypto industry.

There have been several crypto winters and technological false starts — along with plenty of volatility and controversy for currencies such as Bitcoin — that have prompted skepticism about the industry. But many believe Coinbase's listing is the event that will bring sustained attention and capital to companies and protocols building on blockchain technology.

"Everyone focuses on Bitcoin and the speculation part of it, but we've always looked at this as blockchain as the next generation and evolution of the internet." said Barry Schuler, partner at DFJ Growth, which first invested in Coinbase in 2014. "It's going to enable a lot of very important and disruptive technologies."

In addition to ramping up general interest in crypto products, Coinbase's listing will bring more venture investors into the industry, which will help existing crypto companies and result in more crypto companies being built, Schuler said.

"More VCs will come in funding companies doing interesting things once they see how well the returns were [on Coinbase]," Schuler said. "They'll say, 'We want the next big one.' That will bring more capital for developers into the industry."

The public listing is the culmination of recent growth in crypto adoption, says Michael Gronager, CEO at crypto data and analysis startup Chainalysis. Since 2016 and especially since the current crypto bull market started in 2017, mainstream adoption of crypto has been growing, particularly among large institutions, he said. While the overall crypto industry has grown over that time, Coinbase in particular saw trading volume spike 142% in 2020 compared to 2019, according to the company.

"You saw mixed interest from established financial institutions [before], but all this changed roughly a year ago." Gronager said. "Crypto went from being this 'maybe' thing to 'we better figure out how to work with crypto longer term.'"

Even if its listing is the success it's expected to be, Coinbase could just be the first inning for crypto, investors believe. Buying Bitcoin on Coinbase is to crypto what AOL email or instant messaging were to the early internet, Schuler said. "Buying digital currencies are like the first killer app," he said. "The first killer app of the internet was mundane email or instant messaging. They would keep coming back."

In addition to trading, Coinbase provides services specific to crypto that are harder to find elsewhere. That's why using a "crypto-native" app is different from buying crypto on Robinhood, PayPal or Cash App, said Tom Loverro, general partner at IVP, which invested in Coinbase in 2017. And those specific features could go on to be the building blocks on which whole new sectors are built.

The best analogy is ecommerce, Loverro said. "When Amazon came out, competitors like Sears and Kmart said, 'Ecommerce means adding a website. We've done sears.com so we're done, we have the internet handled now,'" he said. "But they couldn't take advantage of the features specific to the internet that made Amazon the first internet native retailer."

Those specific Coinbase services beyond buying and selling crypto — such as staking tokens or voting on protocols — are some of the things that make crypto unique, Loverro said, and what we may look back on as giving rise to a whole new sector.

Getting legit

For the broader crypto industry as it exists today, Coinbase will be a first stake in the ground, providing mainstream legitimacy and broader support for other crypto outfits, some investors say.

Much of the interest and growth so far has been in products that support investing in crypto, or relatedly, holding, tracking or managing bitcoin. Crypto companies that have raised sizable venture rounds include tax management startup TaxBit, blockchain data and analysis firm Chainalysis and crypto custody companies Fireblocks and Anchorage.

Beyond these investing-specific products, investors point to fledgeling products enabled by smart contracts using blockchain that could enable escrow, loans, royalties payments, derivatives, insurance or savings, without using traditional financial intermediaries. Decentralized finance, or DeFi, has accelerated in use recently. The market has grown in value to $56 billion, up from $16 billion at the start of 2021, according to DeFi Pulse.

Still, most DeFi products are currently still hard to access for mainstream users. "Some of the user interfaces are difficult and at times perplexing," Loverro said. "That's exactly why a company like Coinbase exists — to take the complexity and bury it."

NFTs, the blockchain ownership of digital goods, are the current example of the mainstream potential of crypto, despite a host of issues that still haven't been worked out. "NFTs are demonstrating digital asset ownership," Loverro said. "This is one of the original things people said blockchain could be used for. A piece of art or song that lives on the blockchain can be transacted on the blockchain and be able to build logic and contracts that automatically disburse royalties on a piece of art."

Still, before crypto comes into mainstream consumer use, the underlying crypto infrastructure needs to be built out. "In the early days, we tend to look at picks-and-shovels plays — what are the tools to make it easy and accessible to use?" Schuler said.

This includes technology to make crypto less of an energy drain, and to massively increase the volume and speed of transactions, he said. Right now, we're still at the AOL stage of the blockchain, just as when online video used to mean stuttering and postage stamp-sized videos streamed over modems, he said.

This isn't to say there aren't still questions about crypto around security and regulation. While Coinbase has addressed some issues of "know your customer" and anti-money laundering checks that regulators require trading, a number of issues still need to be addressed, Gronager said.

Crypto exchanges in the U.S. are doing a "phenomenal job" working with regulators and law enforcement, but "we're not there yet" in terms of regulation for crypto, said Gronager. "We definitely need more regulatory clarity," he said.

But for today, many of those concerns are taking a back seat. Today, for most people watching the crypto space, we're entering a new era — one being shaped by Coinbase, but with plenty of room left for all.

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