What happened in crypto over the last decade
It was December of 2010 when I first read the Bitcoin whitepaper, while at home visiting my parents for the holidays.
As we wrap up the decade, here are my quick thoughts on how things have progressed.
Note: this post is inspired by Fred Wilson’s post for tech more broadly. Tomorrow I’ll post a follow up on what I see happening in crypto in the decade to come.
- Bitcoin did not fail (as many predicted)
It’s easy to forget, but throughout much of the decade, it was a frequently debated question about whether Bitcoin would even survive. Maybe a flaw would be found in the protocol, maybe it would be outlawed, or maybe it would all go to zero since it had no intrinsic value (of course, we crypto folks were quick to point out that the dollar isn’t backed by anything either). There were over 379 articles written, prematurely declaring the end of Bitcoin. Not only did Bitcoin survive, it thrived, becoming the top performing asset of the decade. The naysayers were proved wrong and we learned an important lesson about human nature: most big breakthroughs are contrarian ideas that people dismiss and ridicule at the start.
- Coinbase did not fail (as many predicted)
When I was thinking about starting Coinbase, a few people told me I was crazy to try creating a custodial crypto wallet and exchange. The best hackers in the world were trying to break into crypto exchanges, and MtGox along with many others had suffered breaches. Through a combination of luck and skill, Coinbase managed to weather the barrage of attacks, and created many novel methods of key storage which improved with every passing year. We made cryptocurrency easier to use in the process and introduced tens of millions of new people to this new technology. This allowed us to build a cash flow positive company with 800 employees, weather the ups and downs of the crypto markets, and continue to invest in new products to help the ecosystem grow. For people who want to store their own keys, we even launched Coinbase Wallet as a non-custodial wallet as well, continuing to focus on trust and ease of use.
- Factions and civil war
For a new industry, there was a lot of infighting as protocol changes were debated and new coins were launched (via fork, or entirely new projects). Many groups became radicalized, and splintered off into their own echo chamber. I believe what made this more vitriolic than other technology debates I’ve seen (emacs vs vim, iOS vs Android, etc) is that once people own a particular coin they have an inherent conflict of interest and emotions take over. We stop trying to seek the truth, and start talking our own book. On the plus side, having a number of competing groups drove a lot of innovation vs having a monoculture or a one coin monopoly. The race is still very much on to see which blockchains will reach the next 100M or 1B users, and I would expect cryptocurrency to eventually see some consolidation, following a similar path to other industries.
- Bubbles (and crashes)
The industry went through a period of five bubbles, followed each time by a crash (settling at a higher point than the previous low). In other words, the industry kept growing in an upward channel, but it was a very bumpy ride. This meant that a lot of the discussion and media attention was on the price of crypto, and the day trading attracted short term thinking that bordered at times on gambling. At the same time, investors who took a long term approach (for example, by dollar cost averaging into a position over multiple years) saw incredible returns. Bitcoin was the highest performing asset of the decade, beating out even the top unicorns, growing to more than $100B in market cap. By the end of the decade, it became common place for astute investors to hold 1–10% of their net worth in cryptocurrency, as part of a diversified portfolio.
- Apps took longer than we thought
When I first read about Bitcoin, I figured what it would be no more than five years before we started to see real world utility take off (after the initial investment/speculation phase). Dapps started off seeing little initial usage, outside of small exceptions like CryptoKitties, until just the last year or so with Defi starting to really grow. This was primarily due to scalability issues, volatility, scripting language limitations of the blockchains, and usability issues with the consumer products. Defi seems to be one use case that has worked, even at the limited scale of today’s blockchains, because borrowing and lending requires lower transaction throughput versus say a game or social network. In terms of merchant acceptance, Coinbase made major investments here, along with BitPay, signing up merchants like Overstock.com, Dell, Expedia, Microsoft, Reddit, and Wikipedia. But the actual volume started off much smaller than many merchants imagined (it has continued to steadily grow each year though). This meant that trading and speculation were the predominant use case for crypto in the past decade, and the utility phase took longer than many expected.
We saw how much latent demand there was for startups to raise money from unaccredited investors when the Initial Coin Offering boom kicked off. All the previous crowd-funding records were obliterated, and now 8 out of the top 10 largest crowdfunding projects of all time are crypto related. The ICO trend attracted the ire and attention of the SEC, who slowly but surely started making enforcement actions in the space. A debate raged on about which crypto tokens were securities, and which weren’t. Organizations like the CryptoRatingCouncil (CRC) came out, with industry participation, to start to provide clarity. Finally, as often happens with startups that raise too much money, it can actually harm the company. Many ICO projects failed to ship real world products while sitting on huge piles of cash (some of them began to resemble investment firms over time, rather than real product companies).
- Exchanges captured most of the value
Perhaps with the exceptions of the protocols themselves, the best business models in the past decade in crypto tended to be exchanges and brokerages who sold shovels during the gold rush to trade this new asset class. Some crypto miners had decent outcomes as well, but the volatility of crypto prices made it very difficult for them to survive the whims of the market. A large number of high quality teams and startups entered the space in the past few years, and there is a lot of venture capital money still flowing into crypto startups (our own small fund, Coinbase Ventures, has invested in 60 crypto startups in the last few years, for instance).
One of the challenges holding crypto adoption back (in addition to scalability and usability) was volatility. While volatility is great for investors/speculators, it isn’t great for people who want to use it as a medium of exchange. Bitcoin volatility has trended down over time, which is a promising long term trend, but it seems people want stable cryptocurrencies sooner. Stablecoins saw a lot of adoption in the past few years. In part, this allowed the “blockchain not bitcoin” mindset that is more common amongst banks and governments, to find an outlet, with everyone from JPMorgan to China announcing efforts to launch stablecoins. It also allowed questionable stablecoins like Tether to provide trading pairs on exchanges without fiat rails, and crypto backed stablecoins like Dai to see increased adoption. Facebook’s Libra sparked the ire of just about everyone in DC, but with China doubling down on its efforts to digitize the Yuan and invest blockchain technology, the U.S. was caught flat footed and is scrambling to come up with their own approach to digitize the dollar. USD Coin, created by the CENTRE consortium, which is backed one-to-one by a dollar in a U.S. bank account, has grown to become the second largest stablecoin (after Tether) and I believe is likely to see increased adoption in the U.S.
Crypto started the decade with purely retail activity amongst hobbyists and early adopters, but by the end of the decade there was a clear trend of institutions starting to come on board. Not necessarily the large traditional institutions, although they all seem to have teams who are exploring it, but hundreds of smaller crypto forward institutions. A couple hundred “crypto funds” were created (fun fact: the big three, Paradigm, Polychain, and A16Z Crypto, were all founded by former Coinbase employees or board members). We also saw hundreds of institutional clients onboard to Coinbase Custody, which grew from $0 to $7B AUM in the last 18 months, making it the largest crypto custodian in the world for institutions.
The decade started off with cryptocurrency being totally unregulated. Coinbase was (as far as I know) the first crypto company to really take regulation seriously because we felt it would increase adoption long term. We started applying for money transmitter licenses in the U.S. starting around 2013. From there, we got an eMoney license in Europe, the Bitlicense in NY, registered as an MSB with FinCEN, and started pursuing additional licenses with other agencies. We have interactions with multiple regulators, all over the world, every week at this point, seeking to be an educational resource. At the close of this decade, I can confidently say that that cryptocurrency is a regulated industry (at least in first world countries), although it will continue to evolve rapidly. During this past decade, there was a big open question about whether crypto would be regulated as a currency, commodity, security, property, or something else entirely. As various times, the IRS, SEC, CFTC, NYDFS, FinCEN, and others all put out guidance (and this was just in the U.S.). Regulators in Singapore, Switzerland, and the Caymans all became quite sophisticated on crypto, and started to attract great startups to incorporate there. As it turned out, there was no one solution to how cryptocurrency was going to be regulated, because there were so many different types of cryptocurrencies! At some point, everyone realized we were recreating just about every portion of the existing financial system, and this would require many different types of regulators. At the same time, the more decentralized aspects of cryptocurrency have continued to evolve quickly, with non-custodial wallets, DEXes, Defi, and dapps seeing increased usage. While exchanges with fiat rails and custodial wallets will likely be regulated similar to traditional financial system, the more decentralized aspects of cryptocurrency will likely require a totally new regulatory framework (ideally with much less regulation overall that will lead to increased innovation).
Overall, being in the crypto industry was a hell of a ride in the past decade. There were a number of ups and downs, and it was a very volatile industry to manage through. I’m really proud that Coinbase has stayed financially healthy during this period, growing to more than 800 employees, and has helped build the infrastructure to enable the industry to keep growing. We’ve continued to focus on trust and ease of use with all of our products, believing this will help bring in the next 100M and then 1B users to cryptocurrency. We could not have done it without the help of our incredible employees, board, and investors who poured their heart into making it happen.
Tomorrow, I’ll make a post looking ahead to what we can expect in crypto in the decade to come.