This Week in Startups - Throwback! Coinbase CEO Brian Armstrong from November 2017

Episode Date: April 15, 2021

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Hey, everybody, I wanted to do a throwback episode for you. You probably missed this one when we did it back in November of 2017. And this was an episode of the podcast with this quirky startup that was helping people buy cryptocurrency online. The name of that startup was Coinbase. And of course, today, April 14th, 2020, they went public in the largest direct listing ever. In their first day of trading, Coinbase briefly topped 100 billion. market cap, a truly stunning turn of events. And they're making a lot of money and they're profitable and they're really printing money because so many people are going into cryptocurrency. At the end of the day, they closed around 86 billion or $328 a share. I expect that will go down by half and then start that slow ride back up. So be careful folks out there. If you're buying stocks, my best advice to you is to dollar cost average if you really love a Coinbase or a Roblox or even an Uber or an Airbnb or any of the SPACs coming out. If you were going to put $10,000 into it, maybe you buy in five times for 2K each over time. Maybe you do three purchases of

three or $4,000 because these things are very volatile in the first year. And they're not going anywhere. If you bought Amazon anytime in the first three years or Uber in the first three years, you'd feel pretty good about yourself right now. Coinbase is now, this is staggering, 55 times larger than it was in 2017. They were had a $1.6 billion valuation in 2017 and now an $86 billion valuation, proving once again that you need to hold and ride your winners, ride your winners, let your winners ride, and they're obviously the world's leading crypto platform. They currently store over $200 billion in crypto, which is about 11% of the crypto in the world, according to the street.com and CNBC and other sources. This happened back in 2017 when I interviewed the CEO

Brian Armstrong along with Tim Draper at the Draper Fisher-Jervitz Summit in 2017. They do this for their LPs and for their founders. As a tradition, I would go as a, as a, and I can get paid for it or anything. They just, I just did it as a nice thing for Tim, who's a friend. And I interviewed him. And it's really interesting because this was during the peak of the ICO craze. And I was livid at this time watching all of these scams happen. And I said to myself, you know, crypto was this really interesting early project. It went through the scam period. I wonder what's going to come out the other side. I wonder if there's an Amazon or a Google inside of the crypto space.

And it turns out we might, might, it's still a long way to go. Coinbase might actually be the Google of crypto or the Amazon, if you will. In other words, the big winner in that space. I didn't feature Tim Draper in this, but you might hear him chime in once or twice. We wanted to focus on Brian, obviously. And you can listen to the full episode if you like. It's episode number 779. You can just search for this weekend startups episode 779, and you'll find it in the Google.

And the link is in the description as well. let's do a little bit of context here. Again, this is a throwback episode to 2017, three and a half years ago. At that time, Bitcoin was about $8,000, $150 billion market cap. And it subsequently went down, I think, to $3,000. And then today, of course, it hit a record of $62,000. And their market cap is over a trillion dollars, eight times bigger than it was when we did this interview. And a couple of things happened along the way. We always ask in a startup, what could go right? Well, a lot of things went right for Coinbase. The number one thing that went right for a coin base was clearly that Bitcoin after crashing came back very strong. And there was a pandemic. So people couldn't go out so they had

discretionary spending. Then Trump and Biden decided to dump stimulus and free money on Americans. So they had nothing to do, no sports to bet on. And they started making investments in stocks. And we saw the stonk movement, the meme stocks like GameStop and AMC. And then, And then we also saw cryptocurrency and all kinds of wild behavior. Nobody could anticipate the pandemic would happen and that the pandemic would result in stimulus and then that that stimulus would wind up going into cryptocurrency and that after crashing down to $3,000, it would rocket back up or that Elon Musk would buy a billion dollars worth of crypto or whatever he bought.

So, you know, during this interview, Armstrong showed incredible foresight because he really thought there were a lot of dangerous to the ICO bubble. He even mentioned that he was expecting the SEC enforcement around ICOs. and a crypto correction. He was right about both of those things. Pretty smart cat. He was actually very accurate about the strong security that the blockchain has and that hackers haven't compromised the Bitcoin network.

Maybe on the nodes on the end, you know, they hack your password, but it's not like the servers that make up this distributed system or the blockchain have been to date crushed by hackers. And that says something with all the money that's at stake, the fact that it hasn't been actually compromised, it's just bizarre. It's such a big target. And it speaks to the brilliance of the architecture of Bitcoin. And as I know we're all getting really excited about what we're seeing today, the market will correct at some point. And then we will have another correction in all likelihood. And we'll see if Bitcoin goes back down to 3,000 or 5,000, what happens to Coinbase.

I think Coinbase, because they support other cryptocurrencies, they could weather, I think, another storm like this because people seem to hoddle and people like to hold onto their crypto. They don't like to let it go. We also talk about Ethereum's potential as a scalable, transactional currency, which also is true. Ethereum has become the standard currency for storing and trading NFTs. So Brian really is a smart cat. So go ahead and tweet about this episode. We cut it down. It's a short one, but you're going to love it and enjoy. And congratulations to the Coinbase team. Congratulations to Friend of the show, Gary Tan, my friend Fred Wilson and yeah, even congratulations to Indrice and Harowitz, my frenemies in the industry. My frenemies over at Indyston Horowitz did okay today.

And I'm actually happy for them because you know what? Capitalism is great. All this money gets made. All these employees get rich. All these investors get rich. And the first thing they do, they go invest in other companies and become angel investors. So congratulations to everybody on the Coinbase team. I know it's been a rough and rocky journey and it's not easy to make the chaos of cryptocurrency.

into something trustworthy, and you did it. So congratulations. Let's get to the episode. You started talking about Bitcoin and cryptocurrency in about 2012. If I remember correctly, you and I were on Hacker News and other places talking about it. Yeah. And people thought you were crazy. You leaned into it.

And your first project, if I remember correctly, was you wanted people to watch a video and get paid a fraction of a Bitcoin to watch the video. Wasn't this your first? first like little stab at how cryptocurrency might touch the public? Well, there was a lot of people in the early days that I wanted to get involved in digital currency because everybody did think I was crazy. And so I was just going around talking to anybody who would listen. And if they could do it on a video or in person or anything like that, I would send them a tiny

bit of Bitcoin. And I probably sent 10th of a Bitcoin to hundreds of people, you know, which later have come back to me and been like, wow, this is a ton of money. So you got to get, when you're in early stages, you've got to get out there and hustle and get traction anyway you can. That idea, if that existed today, I was just thinking, this could be a revolutionary idea. If people on YouTube were getting paid for their attention to something.

In fact, people are saying the next Facebook will be a cryptocurrency-based Facebook. Do you believe that? Well, I'm not sure if it'll entirely replace Facebook, but I do love this idea that all user-generated content today has basically been incentivized by things like upvotes or like buttons or stars or followers. Or you can think of it as karma. Or dopamine. Dopamine addiction, yeah.

I mean, even Wikipedia, right, is just people collaborating via karma. And so most of internet innovation has happened because of that, using that mechanism. And now a lot of internet innovation can probably happen with real monetary value being transferred. Every upvote on Reddit could be a bit of monetary value. And you could have people actually earning a living on Reddit all day long, moderating or submitting comment or answering questions. So that is a pretty exciting trend that could happen. Tell me, with Coinbase, and there's a lot of coins now, we've got CoinList, Coinbase, and everybody's using the coin term.

You started this before the ICO craze. Now, I've been studying this, and I'm an angel investor, and I interview people, and I met the Tezos people and a bunch of different of these ICOs, and I thought, wow, these are people who are doing their first startup, largely in some cases. They've not written any lines of code. They have written a white paper.

It's sometimes over 10 pages long. They're wonderful to read. Should we be giving those people over tens of millions to hundreds of millions dollars, people without track records with a white paper? And do you have a fear watching all these transactions occur that this ICO thing could wind up blowing up in the lapse of everybody in the crypto community and then tarnishing it? So is it a scam? And are you worried about the potential cratering of it?

Yeah. So I do think the ICO craze is exactly that. It's a craze. it's a bubble, and it's a little out of control right now. I would not be surprised if in the next six months or 12 months, there's some enforcement actions by the SEC. Some of these get slapped pretty hard, and there's a bit of a correction in the industry.

And honestly, we're probably due for that. Digital currency has gone through four of these cycles now where there's a big run-up and a correction back, but it's at a new plateau every time, and it kind of goes up and back and up and back. So the ICO trend underneath it, I think there's something real there, which is that there's,

a lot of people in the world who can't raise money easily. They can't get into a room like this in Silicon Valley or meet Tim Draper. They can meet Tim, actually. Yeah, well, he's pretty... Yeah, I just have to go to San Mateo. You'll meet Tim. He's kind of sitting in the front window of the Draper University. Yeah, but I mean...

Pretty accessible. There are lots of people who don't know any investors. I remember actually when I moved to Silicon Valley, I didn't know a single person who identified as an investor or an angel investor. And so I had to apply to Y Combinator, and that's how I got started to meet a few people. But many people don't have that opportunity. And so the ICO thing is real. That's going to help a lot of new ideas.

What's the real part? Explain to us as entrepreneurs in the room and investors, what is the real part for you? When you look at it, what is the part that makes you excited and say this is a sustainable technological innovation that could change what? I think of it as two things. One is it's crowdfunding. So it's globally crowdfunding. So now if you're a kid in India with a great idea, you know, you could actually have 17,000. thousand people put in 50 bucks all of the world in 30 minutes. That was never possible for

the legal paperwork was one reason. Like you never were going to be able to meet those people was another reason and they could never get you the $50 without spending less than $50 is another reason. So that is a by itself is a great innovation. The micro-transaction, fluidity, global, do it all in what signal or telegram chat room? Yeah. Well, the second piece is that there's people who are creating new protocols. Like the ones that I think are the most exciting are these kind of utility tokens, they call it like Filecoin and Gollum. And there are ways to essentially pay people for either storage or computing power all over the world. And it does make sense to me that those should have their own native token just because it allows, you know, essentially the early adopters

to turn them into evangelists. So it's a great way as an entrepreneur to create a network effect gifting these tokens to the early people and then they go spread the word for you. Do you know who your buyers are? Do you care? Is it your business to know? Yeah, so for better or worse, I mean, Coinbase is a very regulated business. Some of the things that Tim was mentioning, I mean, we are regulated as a money transmitter in all the states of the United States. We also have a bit license in New York. We have an e-money license in Europe. We're registered as a money service business at the federal level. So in any two or three-month period, we have some auditor on site from some regulator coming to check us out.

So one of the requirements of that is that we do know our customer. And so people are not anonymous on Coinbase. And the way I think of this is that exchanges like Coinbase where you can convert, you know, fiat currency or local currency into and out of digital currency, those are going to be regulated. But the crypto to crypto world, that's where people are largely operating unregulated today, kind of like, you know, you can imagine. Which is where the ICOs live.

Yeah. Crypto to crypto. So that's just peer to peer. It's like Kazah. It's like Napster. Yeah. It's actually even less like those because those had a central company or a brand publishing. It would be more like Nutella, I guess, back in the day,

where it was just an open source project. Anybody could make a client or a server. Yeah, it's like SMTP underlying email or TCP-I-P underlying the internet or something like that. How much of Bitcoin's surge in price could be attributed potentially to manipulation, Brian? I mean, I think of those as having short-term effects. So in any given week or something, you might see something being manipulated on one exchange or something like that. But the beauty of it is that,

You know, Bitcoin is so big now. It's well over 100 billion market caps. So there's fewer and fewer people who can try to move the whole market, right? And as Tim pointed out with this example with Bitcoin, the minute you try to do it, there's another contingent who wants to fight you the other direction. And so we have a pretty, we have a maturing market on our hands. could those original owners, because the original owners of Bitcoin or the original miners have some large double-digit percentage in a small handful of accounts, could they conceivably create, and this is just a crazy scenario, but thousands of accounts over the last five years, move currency between them in order to manipulate it, and we would not know about it? I don't think so. So one thing is that there is roughly 10% of Bitcoin is kind of locked up in the very early transactions, but the nice thing about the blockchain, as you can see if they ever move, and those funds have never moved. So they definitely aren't using it to manipulate the market, but, you know, the question is, does anybody still control the keys to those? My guess is no, because they would have moved by now. It's an incredible amount of money, and I'm sure the very first computer they were using

to do development work on Bitcoin, they would have moved the key at some point. And also, you know, there's people like Hal Finney, who some people think was one of the people who worked on Bitcoin, who passed away. So my guess is that those funds are lost to the histories of time. and they'll never be recovered, but nobody can say for sure. You're all in Ethereum now, and your Bitcoin love is faded? Is that fair to say? I own Bitcoin. I own Ethereum. I own light coin.

Yeah, but you don't love Bitcoin anymore. You love Ethereum. I'm talking about love right now. I'm not talking about... I'm not talking about history. Okay. You're asking what my heart feels for Ethereum. That's what I'm asking you about your heart. I see. I just noticed that's what you talk about. Yeah. Well, I know that you are right in a way. So I think Bitcoin was my first true love, but it did break my heart a little bit.

Go ahead. Tell us how. Yeah. Well, so the reason why I got really passionate about Bitcoin and digital currency is that I want the world to have an open financial system. So kind of like the internet, this global thing where all payments are fast, cheap, and instant and global, and it'll bring about all this innovation and great things in the world. And Bitcoin, you know, ended up not scaling. to be that. Right now it's ending up being a little bit more like digital gold. So people are using it to kind of flee in times of uncertainty or You know to hold a whole large amounts of it but the transactions are too expensive on Bitcoin right now and so what we're seeing is I thought it was free No, the minor fees are increased yes. So there was a scalability to people in the audience who may not understand this concept because we're the public perception is oh Bitcoin transactions are free explain the cost of a transaction fee in the minor clearing. Sure. Yeah, so there is an incentive that goes to the people who are keeping the network secure. These are the Bitcoin miners that are building out these data centers or, you know, stealing electricity in some cases.

They house the ledgers and they do the process. Yeah. So it's the people running the servers all over the world that are interconnected on this decentralized network. So I believe you could actually operate this, even at visa scale, for maybe two to three oil. orders of magnitude less than Visa is charging today. So it could be something on the order of, you know, one cent US or less to send every payment in the world. Per payment? Yeah. Not for all the payments.

Per payment, yeah. And so that's where we need to get. Bitcoin right now only can do about, you know, three to five transactions a second. Visa does about $4,000 a second. So we've got a couple orders of magnitude to go. But I think other networks like Bitcoin Cash or Ethereum, are all working on this. And so that vision is going to be realized,

but it was a little frustrating to not see the original Bitcoin and get there. The scalability on Ethereum is today better than Bitcoin. It's actually doing about double the number of transactions per day as Bitcoin already. And their scaling plans, their roadmap, in my view, is much better. Raise your hand if you've considered an ICO.

All right, so one third of the entrepreneurs have considered an IPO. I've got an answer. Let's hear Brian. I think if it's legal, you know, maybe they should. Okay. So talk to your attorneys. And it's a little unclear at the moment, right?

So I think this is what I would do. Explain the unclear part. Well, the regulatory environment. Are you issuing a security? An unlicensed security or are you doing something else? Great. Okay. Now go ahead and tell us.

This is what I would do. If I had access to good investors, traditional investors, I would do that first because starting a business is already super hard and risky. Like, why take another risk on top of it that the ICO 3? thing blows up and you get a nasty gram from the SEC in the next 12 months, right? But if you don't have access to traditional investors, part of being an entrepreneur is being scrappy and you beg borrow and steal and you make something happen regardless any way you can make it happen. Yeah. So then I would go to the ICO. And maybe in a couple years, this will be all more clear and like

90% of people will just, the ICO is the right route. But right now today, I'd go with traditional investors if you have access to it. This does seem to be, to me, Brian, one of the fundamental shifts that people are not paying attention to, which is, if there is an inherent value to the coin or the open source project, let's say, a developer working at Google making $250,000 a year, if they were to buy, you know, a position of $10,000 in a coin and then work on it and were to accelerate,

there would be an opportunity for them to work on an open source project and make much more money contributing as they go. What impact do you think long? term, the greatest developers in the world creating currencies or participating in currency open source projects to ride up the value of their own holdings will have on technology. I think that's a really great point. We haven't talked about that yet.

So this is one of the other innovations of ICOs. People working on protocols or foundational pieces of technology can now participate in the upside, not just the people building businesses on top of it. So if you look at the internet as an example, open SSL is this incredible, incredibly important technology. It keeps the entire internet secure. I think there was something like three or five maintainers of this protocol. And when the heart bleed bug came out, it was like this messy code base. Nobody looked at it. The entire foundation of the internet is running on this thing. So Google and a few companies like that have been really kind of essentially donating engineering

time to work on these fundamental protocols so they don't collapse. But the Ethereum and digital currency and ICO thing totally flips that on its head because if you, you are working on protocols, you can now participate massively in the upside. So I think it's a huge boon for open source. I would agree with that. 10 years from now, what will the price of Bitcoin be? I'll take the under or the over. I'm going to have a simpler answer. $100,000 Bitcoin. $100,000 Bitcoin? Yeah. Take the under. All right. I'll take the under.