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The Unique Journey of Coinbase: The #1 Cryptocurrency Startup

Headquartered in San Fransisco, California, Coinbase is the largest cryptocurrency exchange in the United States, according to Forbes.

Headquartered in San Fransisco, California, Coinbase is the largest cryptocurrency exchange in the United States, according to Forbes. Now a late-stage venture, Coinbase was once a typical cryptocurrency startup founded seven years ago in June 2012 by Brian Armstrong and Fred Ehrsam. Ben Reeves, the co-founder of, was also a key member of the original founding team. He and Armstrong, however, had a clash of ideas over how the Coinbase wallet should operate and it resulted in the two early believers of the broad potential of bitcoin going separate ways. Brian Armstrong, on his Medium profile as co-founder and CEO of Coinbase, says that his company looks to create “an open financial system for the world.”

The Beginning

As with every seeker of opportunity looking to make it happen, while at the home-sharing website Airbnb working as an engineer, 27-year-old Brian Armstrong had this idea that digital currency bitcoin could be the way to make a lot of money. During this time, Brian was witness to how Airbnb was moving payments worth hundreds of millions of dollars annually across 192 countries through financial networks which can be described as delicate and vulnerable and yet it involved transaction fees at every stage. And, being one of the early believers of bitcoin’s broader potential, he was active in online forums where bitcoins and Blockchain were the talking points. In one such discussion forums, Brian chanced upon another like-minded enthusiast – Ben Reeves who managed Blockchain, a website that tracked bitcoin transactions.

They hit it off immediately as Reeves understood the technology well. In fact, Reeves was already using bitcoin. He had also built a bitcoin wallet with thousands of people having tried it out. Naturally, he too wanted the digital currency to become more popular and widespread.

Brian and Ben started discussing a new kind of company that would leverage the idea of cryptocurrency. Their bouncing ideas included serving as a trusted broker of the cryptocurrency while charging a small fee although there would essentially be no charges for spending money within the bitcoin network. Soon after, tech company incubator Y Combinator readily extended the invitation to the duo to join the class of summer 2012, once the billion-dollar idea was presented.

Incidentally, at this critical juncture, the two potential co-founders of a unique company found themselves at loggerheads with each other. They had a clash of ideas on which neither was willing to cede ground. Armstrong was of the opinion that having a way to recover lost user wallet passwords was important for bitcoin to eventually gain mass acceptance. And, this was only possible if the company retained access to users’ private keys – 64-character access codes – used for proving ownership of bitcoin. Otherwise, in a probable scenario in which the user lost their password, they would potentially forfeit their entire bitcoin fortune. Retaining the user’s private keys was the only way to avoid this.

Meanwhile, Reeves completely disagreed and argued that retaining access to user private keys would mean operating just like the way a usual bank does. People put their trust in a bank and therefore, give access to their money. According to Reeves, retaining the user private keys would defeat the very idea of bitcoin as it is supposed to put the person or user with the bitcoins in control. Furthermore, what if hackers broke into the system and stole or messed up the user private keys, which apparently cannot be totally ruled out as often evidenced by many such episodes, and on the other hand, the government could start issuing subpoenas in the event the company kept exclusive access to people’s private data.

In the end, Brian Armstrong decided to go it alone at Y Combinator and parted ways with Ben Reeves.

The Bitcoin Challenge

Bitcoin, founded on the idea of an anonymous, encrypted, devoid-of-government control digital money which is fast, secure and cheap, made for an attractive alternative to the prevalent banking system. However, it was difficult to use for non-coders and this difficulty stood in the way of bitcoin going truly mainstream. Bitcoin could only be used by means of complicated software called wallet. Moreover, bitcoin was difficult to obtain and also difficult to spend. Bitcoin could be purchased through middlemen, who would not come out in the open due to regulatory issues. And sometimes, these middlemen turned out to cheat. If users managed to lay their hands on bitcoins, they were discouraged by the fact that very few merchants accepted bitcoin payments as the currency was new. In contrast, all this provided for a fertile ground for hackers, libertarian activists, and drug dealers to flourish in the bitcoin economy and they had started to make the bitcoin domain their own.

On top of everything, the bitcoin network was able to process only seven transactions per second compared to ten thousand of other transactions of financial nature per second which the major online vendors such as Visa were able to handle. In other words, the exponential growth of the bitcoin ecosystem could have actually strangled itself.

Armstrong, however, had other things in mind and he believed he had a solution for bringing about the widespread acceptance of bitcoin – a user-friendly wallet.

Treading a Different Path

After Brian Armstrong and Ben Reeves went separate ways, the latter became more resolved to make Blockchain, which he co-founded, much more than a data-gathering website. Armstrong and Reeves, however, at least converged on one point, that is, they both saw the bitcoin wallet as a platform for financial services. Apart from that, Reeves’ opinion continued to differ at the fundamental level and maintained that the service provider must not have access to the users’ bitcoins. True to his belief, Reevedesigned a wallet which can be accessed from a browser but the private key is left on the user’s computer. This way, Blockchain can never lose bitcoins but if the password is lost, users forfeit their bitcoins as even Blockchain will not be able to find those for users.

With sheer individualism at its core and with the idea of giving 100 percent control to users of their bitcoins, making it beyond the control of corporations and governments, Reeves went ahead on his mission. Not many investors showed interest in Blockchain’s wallet though. Yet, with limited resources, Blockchain managed to add more servers and improve its software. Eventually, Blockchain emerged as the most reliable source of information on bitcoin and offers crucial services in the bitcoin ecosystem similar to what Google offers in the search engine universe. Apart from this, Blockchain provides web services which bitcoin traders and developers need leading to revenue generation to the tune of several hundreds of dollars a month from ads, all billed in bitcoin.

Interestingly, Blockchain has no office and no bank account which Blockchain’s CEO Nic Cary describes as “liberating and flexible thing for us”.

The success of Blockchain has also had a corollary benefit for its wallet. More and more people are downloading it with over 1.3 million customers now using it. Blockchain has now set its eyes on developing a trading platform to help users find the best deals on various bitcoin exchanges and a mobile news app.

Funding, Acquisitions, and Investments

On the other side of the story, as of today, Coinbase has been through eight rounds of funding, raising a total of $547.3M. Investors of Coinbase include Union Square Ventures, Andreesen Horowitz, Ribbit Capital, Draper Fisher Jurvetson, the New York Stock Exchange, USAA, several banks among others. Investors and venture capitalists funding Coinbase with much anticipation show that they are upbeat about the bitcoin ecosystem and view it as a better financial system in the making.

Meanwhile, Coinbase has made twelve acquisitions and four investments apart from numerous partnerships it has formed with Overstock, Dell, Expedia, Dish Network, Time Inc. among others which means these companies are now ready to accept bitcoin payments. These strategic acquisitions and partnerships are expected to further the cause of Coinbase as it forges ahead and looks to be the next billion-dollar Silicon Valley company. Coinbase’s key acquisitions include “blockchain intelligence platform” Neutrino, “blockchain explorer service” Blockr, “web bookmarking company” Kippt among others. Coinbase has spread its wings further by lending bitcoin payment processing capabilities to online payment vendors such as Stripe, Braintree and PayPal and securing insurance which would cover the value of bitcoin stored on their servers and launching a vault system for secure bitcoin storage.

Coinbase Ventures’ investment in Compound Labs, a start-up specializing in building Ethereum smart contracts, is considered significant. Apparently, Coinbase wants to see bitcoin business emulating money markets.

The Success Story

Even as the conceptual conflict between Armstrong and Reeves continues to play out in the bitcoin economy as to what bitcoin should become, with regulators and governments weighing in once in a while, a growing number of mainstream businesses are being seen openly adopting bitcoin while investors and enterprises keep taking a keen interest in the new currency. Coinbase is today seen more inclined towards showing that it is willing and able to follow rules and road map likely to be established by state and federal governments with the view to keep out criminals and money launderers.

Some of the venture capitalists and entrepreneurs, mostly new entrants to the bitcoin domain, however, have a more practical vision of bitcoin. To them, bitcoin eventually offering seamless but flexible, efficient online transaction system which is cheaper, faster, more secure and with minimal third-party involvement means a lot more.

Apparently, despite visible conflict of visions, Armstrong’s solution to making bitcoin mainstream seems to be headed in the right direction if certain Coinbase facts and figures are anything to go by. Coinbase today broker exchanges of Bitcoin, Bitcoin Cash, Ethereum, Ethereum Classic and Litecoin in 32 countries. It also facilitates bitcoin transactions and storage in 190 countries. The company’s estimated revenue as of 2017 stands at $1 billion with a user base of 13.3 million and transactions processed to the tune of $100 million.

To Be or Not To Be

It’s hard to side with either Brian Armstrong or Ben Reeves on their conceptual conflict of whether companies should retain users’ private keys or not. It has been aptly put when someone said that “Bitcoin straddles the line between transparency and privacy. All transactions are out in the open but anonymous.” There is a price for seeking total control of your bitcoins. Basically, if you lose your private key or password, it’s your problem – that’s what Ben Reeves attests to.

All said and done, however, it would simply be unfortunate to misplace your bitcoin today at a time when the worth of bitcoin has seriously skyrocketed. Newsweek has reported that around 2.78 million bitcoins have been lost since its inception. This amount is worth over $20 billion today.

Some people have been trying out all sorts of things to recover their lost bitcoin. One has been trying to locate his mistakenly placed hard drive into a waste bin in a toxic landfill. This hard drive was once the physical memory of his PC that crashed and using which he used to mine bitcoin. Certain bitcoin investors are undergoing hypnotherapy with the hope of being able to access older memories so that they can remember their complex security codes which they originally created to gain access to their Bitcoin wallet. Another man has hacked his own Bitcoin vault to find his lost password.

The bitcoin ecosystem is meant to be where it is headed. Coinbase seems to be working to ride the tide by finding a middle ground. But, it’s always going to be a tightrope walk because there is always the fear of being regulated right out of existence and, on the other hand, without safeguards for people’s digital holdings, there is the fear of the whole bitcoin ecosystem becoming fundamentally unstable and even collapsing. The intentions of Coinbase became quite evident when they hired a prominent compliance officer whose job is to sort through all the rules an official financial-transaction business has to follow in addition to what new regulations are put in place. Clearly, Coinbase has miles to go before they sleep and so do the bitcoin universe.