The history of Coinbase
By: Andrey Costello
Tags: Cryptocurrency, Hashmart, Bitcoin, Mining

Coinbase remains as the first cryptocurrency exchange in terms of popularity and user base in the United States. It made a long journey to this point.

Let’s take an in-depth look at Coinbase history, one of the first Bitcoin trading platforms in the U.S. and still a leading cryptocurrency exchange in 2020.

It is to the camp of digital anarchists in the style of doing business and life philosophy that 37-year-old co-founder and CEO of Coinbase Brian Armstrong is close, whose fortune estimated at $1 billion.

Turning to the description of the Coinbase business model, he, however, “turns off” the anarchist and finds himself closer to the “white collar” in business suits working in the buildings next door. Let’s explain the conservatism: during eight years of development, the cryptocurrency exchange has reached a huge scale — it opened 35 million accounts for its users, keeps assets for more than $21 billion and, in 2020 it will reach the revenue indicator of $800 million.

The mission of Coinbase

This success is due to the fact that the company works like a real bank: it accepts clients’ funds via bank transfers and stores assets (digital keys for token unlocking) in safes. Coinbase uses the insurance market of Lloyd’s of London, and its security department employs 41 professionals, including an Iraqi war veteran who is responsible for guarding the “physical” office and a PhD in cryptography who also protects the “digital” space of the exchange.

Security is Armstrong’s main competitive advantage. The crypto industry has plenty of examples of bad security systems employed at crypto trading platforms. First — the Japanese platform Mt. Gox, at one point the leader of the global market, was destroyed in 2014, when hackers secretly stole the tokens of its customers for $480 million. Second — QuadrigaCX, once the largest exchange platform for digital assets in Canada. The exchange’s founder, who died suddenly in 2018, is rumored to have been the only person with access to its crypto assets. As a result — $150 million in losses for QuadrigaCX staff and clients.

In order not to make the same mistake, Armstrong had to give up anti-government rhetoric, which once grew Bitcoin. This, in particular, meant cooperation with government regulators.

The Coinbase Corporate Control division has 55 employees, and by the end of the previous quarter it had grown to 70. These specialists review the flow of transactions and try to identify transactions related to money laundering. They are also responsible for monitoring the new rule, which is widely accepted in the U.S., according to which each transfer of tokens from one crypto exchange to another is recorded. Coinbase regularly sends the U.S. IRS 1099-K reports on traders who make 200 or more exchange transactions in a year with a combined turnover of $20 000.

How, given its “collaborationism,” does the startup hope to win the loyalty of crypto die-hards? On the one hand, the company is ready to offer them a wide range of investment opportunities — Coinbase clients have 26 trading pairs with cryptocurrencies available, among which there are those that surpass Bitcoins in privacy. On the other hand — since August 2018, exchange users can move funds into a personal wallet, which is not subject to either the principle of “know your client” procedure (KYC) or the mentioned mechanisms to combat money-laundering.

GMail for Bitcoin

Armstrong was born in a family of engineers in San Jose and was fond of entrepreneurship back in elementary school. After graduating from Rice University in 2006, he founded the first startup, a service that brought tutors together with students. At that time, the future CEO of Coinbase managed to live in Buenos Aires while developing the educational project remotely.

Later Armstrong returned to a regular job as a programmer at Airbnb. At that time, he received an insight into the prospects of cryptocurrencies. In 2010, he read a manifesto published by the mysterious Satoshi Nakamoto, which invited all crypto enthusiasts to use bitcoins as an alternative currency. Transactions in the case of bitcoin are recorded in a “virtual” blockchain led by a group of self-proclaimed node keepers (miners), none of whom have supreme power over the entire system. Disputes over operations and operation rules are resolved by a majority vote. Only users with impeccable reputation can be “nodes”. To confirm transactions, a member must perform certain arithmetic tasks. The “node” that coped with them receives several new tokens (BTC reward) in the process called mining.

Armstrong placed a bet on Bitcoin and spent $1000 on cryptocurrency, buying BTC at the price of $9. It then fell to $2, but the future co-founder of Coinbase did not lose faith in his idea.

Working late all week long, he wrote in Ruby and JavaScript a special software environment where he could buy and store the cryptocurrency. In fact, Armstrong did for Bitcoin what the developers of the first browsers did for the Internet.

The task seemed ambitious, but was it worth giving up the usual work for it? The answer became obvious in 2012, when Armstrong’s startup attracted $150 000 from the most influential Silicon Valley accelerator Y Combinator. Former manager of Goldman Sachs Fred Ersam also supported the project. Thanks to him, Coinbase gained trust among the banks with which it later established cooperation.

Another $500 million in investments was provided by a pool of investors led by the Andreessen Horowitz Fund. Chris Dixon, a partner in the fund and part-time board member of Coinbase, notes: “[Coinbase technology] is as if Google made Gmail for Bitcoin. That’s exactly how they described it”.

The last round of Coinbase was estimated at $8.1 billion. The 31-year-old Ersam left the startup, but still remains its major shareholder, and also invests in companies that build payment systems for corporations on the basis of cryptocurrencies and blockchain.

Rebranding and expanding

Later in 2016 Coinbase announced the upcoming listing of Ethereum, and the exchange itself was waiting for rebranding — the platform received a new name and logo. According to the announcement of Coinbase vice president of business development Adam White, the name of the exchange was changed to GDAX (Global Digital Asset Exchange).

There have been rumors of possible support for Ethereum on Coinbase for quite some time, but in March, when Ethereum founder Vitalik Buterin made a presentation at Coinbase headquarters, the company founders Brian Armstrong and Fred Ersam refused to confirm them.

However, as White said, the Coinbase team has been watching the development of Ethereum for a long time and has been keeping abreast of all the latest developments, mainly due to conversations with Buterin, as well as drawing information from the press. According to him, Coinbase employees have participated in numerous Ethereum meetings as part of their research, but more attention was paid to the project only after Ethereum announced a partnership with Microsoft Azure platform.

In January and then in March 2017, Coinbase obtained a BitLicense and a trading license for Ethereum and Litecoin from the New York State Department of Financial Services (DFS). In November 2017, Coinbase was instructed by the U.S. Internal Revenue Service to report all users who made transactions worth at least $20 000 per year.

The last few years

In April 2018, Coinbase announced the creation of Coinbase Ventures, a venture fund focused on investments in companies related to blockchain and cryptocurrencies. Later Coinbase Ventures invested in Compound Labs, the startup focused on creating Ethereum-based smart contracts.

Later Coinbase officially launched Coinbase Pro. This is a new interface that is created on top of the existing GDAX trading engine. The clients of this trading platform were not required to do anything, their balances and transaction history were automatically moved to the new platform. When an attempt is made to log on to the GDAX site, the new domain is automatically redirected.

One of the latest controversial cases related to Coinbase is cooperation with the U.S. Secret Service. The exchange provides the agency with its analytical software to track transactions on the blockchain. Brian Armstrong explained in his Twitter account all the details of the partnership, but the news still caused a lot of criticism in the crypto community.

According to the website USASpending.gov, which displays the state budget spending, Coinbase signed a contract for four years with the Secret Service. Its cost is 183 750 dollars, and the contract will expire in May 2024. The contract will allow the Secret Service to gain access to Coinbase Analytics software. Company representatives claim that the information provided by Coinbase Analytics is separate from the data Coinbase collects about its own users.

According to Brian Armstrong himself, there is nothing new in the work with the analytical software, which is focused on the blockchain. Such programs use information that is open to everyone, most often to search for bad actors. Armstrong believes that programs for analysts simply collect public information and structure it for good. The deal with the U.S. Secret Service was supposedly an ordinary business move to make up for the $13.5 million in expenses that arose after the Neutrino blockchain startup purchase last year.

Coinbase remains as one of the most trusted and robust platforms for crypto trading in the U.S. If you want to trade BTC on Coinbase, earn cryptocurrency with our Bitcoin cloud mining platform Hashmart.io!