How the Heck Is Coinbase Worth $8 Billion?

On Wednesday, Recode broke the news that an impending funding deal would value Coinbase, the biggest cryptocurrency exchange in the U.S., at $8 billion. That’s up from a $1.6 billion valuation just over a year ago, and would make Coinbase worth more than Slack ($7 billion) or Robinhood ($5.6 billion), two extremely promising private startups providing important services to growing user bases.

Which demands the question: What the hell?

Coinbase is, on the face of it, an extremely limited crypto exchange. It currently only deals in five digital assets, and at least two of those are garbage*. Cryptocurrency as a whole is in a pretty grim place right now, with a solid nine months of descending triangles on the charts, ICO projects ejecting like Goose in Top Gun, and the lurking fear that Tether could bring the whole thing crashing down.

But while the present may be grim, startup valuations are based on expectations about the future. And there are at least two big reasons to think that Coinbase has an $8 billion future (at least).

Crypto Is a Popular Game

Here’s a ground truth: There will always be a market for gambling. In the stock market, the 2008 crash has imposed a new kind of grown-up discipline, with investors overwhelmingly shifting towards index funds and automated trading. But crypto! It’s still the Wild West. It’s where you go for 100x gains and to be The One Who Knows More**.

That sense helped fuel last year’s crypto bubble, which in turn helped Coinbase book $1 billion in revenue for 2017, again according to reporting by Recode. That surge came on the back of a crypto hype-bubble that saw everybody and their grandma opening Coinbase accounts to buy bitcoin. The 2018 bear market almost certainly means Coinbase volume and revenue will be down this year. But Coinbase collects fees for both buying and selling cryptocurrency, so when all those new customers panic-sold in January, Coinbase was still making money.

In other words, Coinbase has established itself as the primary regulated, U.S.-based supplier of picks and shovels for individual cryptocurrency speculators. That gives it pole position for the next surge of cryptocurrency interest—or just slow and steady recovery over the next few years, as everyone who got burned this year inevitably convinces themselves that things will be different this time. The pump is already being primed, by the way—according to data compiled by investor Alistair Milne, Coinbase’s user base has grown by roughly 20% in the past six months, even at about half of the growth rate at last year’s peak. And CEO Brian Armstrong has made his ambitions clear, saying he wants Coinbase to be the “destination for the next 100 million people who want to access, own, and use cryptocurrency.”

The recent announcement that it will start adding new assets shows that Coinbase knows exactly what this segment of its audience wants. And its friendly basic accounts form is a slippery ramp into the depths of Coinbase Pro (formerly GDAX), a day-trading platform with enough bells and whistles to appeal to the hyperactive millennial’s Monster Energy-fueled monkey-mind.

Coinbase Is an Investment Firm, Not Just a Crypto Exchange

Beyond its basic and pro accounts for individuals, Coinbase is trying to attract institutional investors with a suite of products for managing and trading crypto assets. Their target market includes not just crypto-focused investment funds, but mainstream investment firms that might begin directing their clients towards bitcoin or ether, and using Coinbase to handle the backend. Coinbase could also become a broker of “security tokens”—digital assets that represent an actual legal claim on a venture capital fund or similar investment.

There have been a many recent milestones toward building that future, largely in the form of recruiting from the mainstream finance world. Most recently, Coinbase added Chris Dodds to its board of directors. Dodds had a long career at investment banking giant Charles Schwab, and in the private equity world, where the liquidity of security tokens may prove particularly attractive. They also hired a former head compliance officer from the Wall Street investment firm BNY Mellon, and a chief legal officer from Fannie Mae.

What does all that look like to an investor? Apparently, it looks a lot like buying a part of a small investment firm like Vanguard circa 1979, just as the democratization of stock trading was really getting started. As of late 2017, Coinbase had more than 11 million users, more than some established financial institutions. If crypto-assets can prove they have legs, Coinbase is positioned to dominate that trade.

*To find out which two Coinbase assets are garbage, open an account, buy $100 worth of each, and wait two years.
*Another ground truth, updated for the digital age: You really, really can’t beat the market, especially the highly manipulated crypto market.