Brian Armstrong’s conversion to bitcoin true believer started with the cryptocurrency’s anonymous mission statement. Satoshi Nakamoto, a pseudonymous inventor, published the vision for a new “peer-to-peer electronic cash system” in late 2008. Armstrong read it in 2010. He was in his late twenties and struggling to grow his start-up, which matched students with university tutors. Bitcoin seemed a big idea.
Armstrong, raised by engineer parents in San Jose, the heart of Silicon Valley, started coding software to make it easy to buy and store coins, a task that at the time was virtually impossible for non-technical people. He also took an early punt, spending $1,000 on bitcoin when each coin was worth only $9.
In 2012, Armstrong won a spot at Y Combinator, the renowned start-up boot camp, which injected his fledgling company into the Silicon Valley bloodstream. He was on the way to becoming a billionaire. On Wednesday, Coinbase, his cryptocurrency exchange, which makes it easy for people to buy and sell tokens, will float on Nasdaq in a “direct listing” — where a company does not issue any new shares.
The listing could be the biggest tech float since Facebook went public in 2012 at $104 billion. A recent private share sale put Coinbase’s value at more than $100 billion, and that was before last week when it reported a nine-fold jump in sales to $1.8 billion for the first three months of 2021. Profits climbed to more than $700 million, double its entire 2020 earnings, thanks to soaring cryptocurrency prices.
For many, it marks the dawn of a new era. Pete Flint, founder of prominent venture capital firm NFX, and not a Coinbase investor, said: “The Netscape IPO [initial public offering] marked the beginning of the dotcom boom. The Coinbase [float] will mark the beginning of the blockchain boom.” It will also mint a gaggle of millionaires and billionaires among Coinbase’s investors and 1,250 employees.
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Armstrong, 38, is poised to join the upper echelons of the super-rich through his 21 per cent stake in the company. Andreessen Horowitz, the venture capital firm, holds a quarter of the stock.
However, for others, the megafloat is an unsettling event that will lend undeserved legitimacy to cryptocurrencies, in particular bitcoin, which Warren Buffett has branded “rat poison squared”. The Sage of Omaha has predicted a “bad ending” for cryptocurrencies. He has yet to be proved right. Instead, values have swung violently, but generally climbed.
Since January, bitcoin has doubled to $58,088.12 and ethereum has tripled to $2,062.38. The bull run was a boon for Coinbase, which takes a fee on every trade. In a call with investors last week, Armstrong said bitcoin, the original of the thousands of cryptocurrencies, was “just the beginning”. He added: “The internet was created as a system of decentralised protocols to enable the free transfer of information. Crypto is very similar, but for moving value by democratising financial services.
“In the way the internet democratised access to information, crypto will increase economic freedom.”
This first phase of the crypto “revolution”, from 2009 to 2021, has not delivered on that promise. These early days have mostly made true believers extremely rich. The strategy has been: buy early, hold on through the price gyrations, and watch your wealth grow.
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Armstrong’s $1,000 bitcoin bet would today be worth $7.6 million, assuming he didn’t sell. The company declined to comment. The total market value of all cryptocurrencies combined last week topped $2 trillion for the first time.
The great promise of crypto, however, is in the underlying technology: blockchain, a decentralised digital ledger that no one person or institution can control or change. The bitcoin white paper envisioned this enabling digital cash that “would allow online payments to be sent directly from one party to another without going through a financial institution”. Imagine a cross-border money transfer, something that still takes days, being done in seconds, like sending an email.
That vision has faded, but because bitcoin is an innately scarce resource — there will only ever be 21 million bitcoin, and 18.5 million have already been generated — it has become something else: an instrument of speculation, or “gold 2.0”. Cathie Wood, founder of Ark Invest, predicted that bitcoin’s price could hit $500,000 as institutions start buying in.
Coinbase links to customers’ bank accounts and allows them to buy in and out of digital currencies in the same way that the app Robinhood allows stock trading. But its fortunes are tied inextricably to the price of assets many people either don’t understand or are certain will collapse.
The bitcoin bears, such as Buffett, argue that its value will, ultimately, be “zero” because it has little practical application.
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Countless other blockchains, however, have emerged to deliver on the original promise: a distributed system in which a powerful, secure technology allows peer-to-peer transactions and does away with middlemen that process transactions and extract fees. Ethereum is the most promising and widely used. It underlies a bewildering number of projects, most notably non-fungible tokens (NFTs), the one-of-a-kind digital assets that have soared in popularity.
For believers, the first industry to get upended will be finance. A blockchain that could handle transactions between two parties, for example, could obviate the need for banks.
The future, however, remains hazy. Prices remain volatile. Coinbase finance director Alesia Haas told investors last week that the company planned to be conservative with its cash to prepare for the next “crypto winter” — like the one in 2019, when bitcoin halved to less than $4,000.
She added: “To state the obvious, our business is difficult to forecast.”