Tag Archives: Coinbase

Business, Technology

Hedge Funds Lose Billions as FTX Implodes

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Hedge funds trusted crypto exchange FTX with billions of dollars. Now, they stand to lose it all.

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Some funds have lost most of their assets and may cease to exist. From a report out overnight in the Financial Times:

Hedge funds have billions of dollars stuck on failed cryptocurrency exchange FTX and could face years of waiting to recover anything at all from a marketplace they once believed to be one of the industry’s most reliable bets.

“I lost my investors’ money after they put faith in me to manage risk and I am truly sorry for that,” tweeted Travis Kling, founder of Ikigai Asset Management, which has a “large majority” of its hedge fund’s assets stuck on FTX. “I have publicly endorsed FTX many times,” he added. “I was wrong.”

Other funds, such as Galois Capital, had half or more of their assets on FTX. It could take years to recover those assets, if they’re recoverable at all.

Crypto exchanges typically hold customers’ money longer than stock brokers. This leaves customers more exposed to problems at the exchange.

To add insult to injury, hackers may be looting what little money FTX has left. A series of abnormal transactions have vacuumed hundreds of millions out of the bankrupt exchange.

Rather than place their trust in FTX, hedge funds should’ve used a service like Coinbase Custody.

Coinbase Custody puts customer assets in segregated cold storage. Its parent company is US-based.

As a public company, Coinbase has to make disclosures FTX would never dream of. And it even has SOC 2 security certification.

An exchange like Coinbase is a real, grown-up company. FTX was an amphetamine-fueled commune in a questionable jurisdiction.

But hey, why not trust them with billions in your investors’ money?

I expect to see a lot of the funds that did business with FTX shut down. It’s hard to trade when all your money’s gone.

Investors big and small should be careful about who they do business with. Stick to companies in reputable jurisdictions with the right controls in place.

It turns out the brave new world of crypto is a lot like the old world: full of scammers. Buyer beware.

After the implosion of FTX, who do you think is next? Leave a comment at the bottom and let me know!

More on tech:

How SBF’s Hedge Fund Imploded

Is SBF Headed to Prison?

FTX Blows A Massive Hole in Tiger’s Portfolio

Note: I have no affiliation with Coinbase.

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Photo: FTX CEO Sam Bankman-Fried

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Business, Politics, Technology

Why is the SEC Threatening Coinbase?

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The SEC has threatened to sue Coinbase Global, Inc. over its plans to introduce a crypto lending product called Coinbase Lend :

The U.S. Securities and Exchange Commission has told Coinbase Global Inc (COIN.O) that it plans to sue the cryptocurrency exchange if it goes ahead with plans to launch a programme allowing users to earn interest by lending digital assets, Coinbase said.

Coinbase was working with the SEC prior to the surprise lawsuit threat, per CEO Brian Armstrong:

Why is the SEC Doing This?

It’s not every day that the SEC privately threatens a lawsuit against a major American corporation. What is the SEC’s motivation here? From Cointelegraph:

The Commission could have a reason for not being forthcoming with information related to cryptocurrency lending products and this stance could be related to upcoming enforcement actions against the interests of BlockFi.

If the SEC is preparing to go after BlockFi and other players in the crypto lending scene then perhaps responding to Coinbase’s request for guidance might have constituted revealing its enforcement playbook prematurely.

Behind the Crypto Lending Boom

Behind the rush into crypto lending: incredibly low interest rates. Whether you look at bank deposits or treasury bonds, returns on safe assets are well below the rate of inflation.

Coinbase planned to offer 4% interest in its Lend product.

Is the SEC Right?

It seems likely to me that Armstrong is wrong in saying his Coinbase Lend program isn’t a security, and thus need not comply with typical securities laws. Banks have an exception from these laws when they pay interest on an account.

But Coinbase is not a bank. So it’s hard to see how this product isn’t a security.

SEC Shenanigans

That said, I think the SEC’s behavior here is extreme and bad for American business. If the SEC has determined that Lend is illegal, they should tell Coinbase that. At least Coinbase could move on to other projects.

Instead, they’ve left Coinbase in regulatory limbo. They don’t know if their product is legal or not, they don’t know what the SEC’s standard is, and they can’t launch anything without being sued.

This is a recipe for stagnation, not innovation. How can American businesses compete in the global economy when regulators won’t work with them?

As part of its threats to Coinbase, the SEC is even digging into private citizens:

Apart from the threat of legal action, a move seemingly out of left field from the Commission’s usual approach to enforcement, the SEC also asked Coinbase to provide customer details from its Lend waitlist.

On what authority are they doing this? And what are they planning to do to those prospective customers?

Keeping investors safe has its place, but bringing business to a standstill and snooping on average Americans isn’t part of it.

The SEC needs to clean up its act.

More on tech:

How Solana Could Wipe Out Visa and MasterCard

What if Everyone on Earth Had Super Fast Internet for $1?

China’s Real Goal in Tech Crackdown: A Regimented, Obedient Society

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Business, Podcasts, Technology

“Everybody Thought I Was Crazy”: How Brian Armstrong Built Coinbase

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“Everybody thought I was crazy.”

That’s Brian Armstrong, CEO of Coinbase. When he started the company in 2012, it was a small and quirky startup. Bitcoin had only been in use for three years and remained relatively obscure.

But now, it’s safe to say not many people think Armstrong is crazy. His company just went public yesterday and its valuation currently sits at $66 billion. Coinbase holds $200 billion in cryptocurrencies, around 11% of all crypto in existence. So how did Armstrong go from lunatic to visionary?

Armstrong had to build interest in his new product. He settled on a cost effective and attention getting marketing tool: send people free money. But not just any money; bitcoin, of course! He sent tiny amounts of the cryptocurrency to countless people. One of them was angel investor Garry Tan, who became one of Coinbase’s first backers. His $300,000 bet turned into $2.4 billion yesterday.

In an interview with Jason Calacanis on This Week in Startups, Armstrong emphasized the importance of entrepreneurs being scrappy and doing whatever it takes to get the job done. His original approach to investors, repeated countless times, paid off in a major way and Coinbase was accepted to Y Combinator, the most prestigious startup accelerator in Silicon Valley. Armstrong’s resourcefulness and persistence definitely inspire me.

To build a major business, Armstrong had to make sure not to run afoul of regulators. Unlike, for example, a social media app, finance is heavily regulated. Armstrong ditched the anonymity most people expect from cryptocurrencies, abiding by “know your customer laws.” In turn, he offered users a much more secure way to store their cryptocurrencies:

The selling proposition here is security—security conspicuously lacking at some of the exchanges with which Coinbase has competed. The Mt. Gox exchange in Japan went bust in 2014 after hackers spirited away coins worth $480 million. Customers of QuadrigaCX, which was one of Canada’s largest exchanges, have been unable to retrieve $150 million in crypto since the founder supposedly died suddenly in December 2018, holding the only set of keys to unlock their money. They now want the body exhumed.

Armstrong wasn’t afraid to reimagine the crypto business in a way that could grow big, and he doggedly pursued anyone who he thought could help him do it. I find his extraordinary career quite instructive.

For more on Coinbase and crytocurrencies, check out these posts:

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Business, Technology

The Ultimate Score: Turning $300k into $2.4 Billion on Coinbase

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In 2012, investor Garry Tan got an e-mail. A young Airbnb engineer named Brian Armstrong had sent him a tiny fraction of a bitcoin, worth just a few cents. But this message piqued his curiosity. How many people send you money for nothing?

Tan happened to be one of the few people other than Armstrong paying attention to bitcoin at the time. The digital currency had only been in use since 2009. Tan had actually bought some before, using a janky website called Mount Gox. The process was frustrating. He knew there had to be a better way.

So Tan tried Armstrong’s new system. He found buying and selling bitcoin a breeze, and happily wrote a $300,000 check to Armstrong’s nascent company, Bitbank. That company became Coinbase, which went public today on the Nasdaq. Its current market cap is nearly $100 billion.

Tan’s initial investment is now worth $2.4 billion, making him one of the wealthiest men in America. But why did he spot Coinbase when other investors turned them down?

Tan’s familiarity with cryptocurrencies and the problems in buying and selling them was a major factor. He could see Coinbase’s technology was better than what he and other users had had to put up with, so using it would be a no brainer for others. He had also studied the removal of the gold standard in 1971 and was convinced fiat money was risky.

What do I take from this experience, as an investor? It tells me to look for products in sectors I’m familiar with, and use the product myself if possible. And if a product solves a problem for me, it’s likely to solve it for others as well.

It also makes me want to read widely and keep up with current technologies as much as possible. The more familiar I am with the new technologies businesses are using, the more good shots at a great investment I will have.

I hope to have my own 6,000x bet some day!

For more on startups, venture capital and crypto, check out these posts:

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Business, Technology

Major Financial Firms Start a Bitcoin Lobby

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Fidelity Investments, Square Inc. SQ +1.30% and several other financial firms are forming a new trade group that aims to shape the way bitcoin and other cryptocurrencies are regulated.

The Crypto Council for Innovation will lobby policy makers, take up research projects and serve as the burgeoning industry’s voice in championing the economic benefits of digital currencies and related technologies. Crypto investor Paradigm and Coinbase Global Inc., which operates a cryptocurrency exchange, also signed on as initial members of the group.

More here.

These companies are serious financial heavyweights. Fidelity has $10 trillion in assets under management. Square’s market cap is over $100 billion. And Coinbase expects to IPO soon as a valuation of nearly $70 billion.

I suspect these corporate giants are trying avoid the possible banning of bitcoin anonymity that I wrote about here on March 5. A proposed regulation from the last days of the Trump administration could have removed one of bitcoin’s most appealing features, its untraceability.

A major lobbying group, a Fidelity ETF…bitcoin is really becoming institutionalized. Although I don’t trade cryptocurrencies myself, I view this is a significant positive for the technology. Every step towards establishment adoption and away from crippling regulation helps.

For more on bitcoin, check out these posts:

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Photo: Coinbase CEO “Brian Armstrong – Caricature” by DonkeyHotey is licensed under CC BY 2.0