Bits: Crypto’s Center of Gravity

Why Coinbase’s advantages are poised to grow

One of the most powerful and underrated advantages of being an early mover in a space is talent aggregation. First, companies become hiring magnets with interesting work, world-class peers and rising equity. Next, companies begin acquihiring groups. Finally, they start acquiring full businesses at their prime. Most importantly, they are able to unfairly compete to win those businesses and founders over with an unbounded story of the future post merger.

Facebook was perhaps the best at this in the last social wave. They parlayed early social foresight & dominance into prescient acquisitions of Instagram, WhatsApp and almost Snapchat. These companies were in their prime, but they saw unparalleled reach and opportunity if combined with Facebook so they took a deal they hadn’t intended to take.

Crypto’s decentralized and frontier nature has led to a proliferation and fragmentation of innovators. Coinbase is aptly looking like crypto’s Facebook — the clear dominant winner who is still more loved than feared. Founders who have weathered cycles in crypto see $COIN’s watershed moment and growing brand as the bellwether for crypto companies, spanning consumer and institutional reach. Thus, the pitch to sell to Coinbase has never been better.

And Coinbase is making good use of that advantage already. Garry Tan discusses Bison Trails recent acquisition (disclosure: we invested in Bison Trails as well):

TC: How do you think about its valuation and whether it’s sustainable? So much of the company’s revenue derives from transaction fees and invariably, competition is going to drive those down to potentially zero. Robinhood already offers commission-free trades on crypto [and is also expected to go pubic soon].

GT: In the short term, you think about it as an exchange. In the long term, you need to think about it as what is: a trusted on-ramp and user experience, and then [there’s] also the infrastructure.

We were actually the first seed investors and largest institutional holder of stock in Bison Trails [a firm that specializes in building blockchain infrastructure for banks and other companies] and was bought by Coinbase late last year [though the deal was announced in January for undisclosed terms]. This is a company that I think a lot of people should pay attention to even now, because all of crypto is switching from proof of work — [an energy intensive process] that is how Bitcoin and Ethereum currently get to consensus — to [a new way of mining called] proof of stake, which is far more efficient and pretty much all of the newer blockchains are shifting to [and that rewards miners with transaction fees].

So this was a huge strategic buy for Coinbase and sets them up to be like a cloud infra company the way AWS is. And if you spend time with Amazon’s annual report, you realize that [infrastructure] is a massively profitable space. So that is the way to think about Coinbase.

I could not agree with this more — Bison Trails amassed very unique talent, technical IP and protocol relationships which sets them up to become the AWS of crypto in this shift to proof of stake. I’m bullish on $COIN as I think about that business moat combined with Coinbase’s reach and brand.

I’m also intrigued to see what else Coinbase has up its sleeve from here. I imagine we see meaningful product and talent growth via acquisition in the coming year.