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Coinbase IPO is the end of the beginning for crypto but new growth needs uses beyond trading

14 April 2021
SUMMARY SUMMARY
    • Cryptocurrency prices reached new all time highs this week ahead of the Coinbase IPO, which provides the industry with a much needed public company as investment in cryptocurrency reaches new heights, with $125 billion now spent to acquire 2.3 million bitcoin on-chain at prices of more than $50k.
    • On-chain data provides transparency beyond regulatory filings, showing that exchanges that facilitate the exchange of cryptocurrency for fiat currencies, as Coinbase does, currently receive over $1 billion of bitcoin per day via the blockchain from over 80k users, although 70% of this $1 billion of bitcoin is received by just the top ten users on each exchange in the group.
    • This data demonstrates that the bitcoin market is currently driven by the exchange of fiat currencies for bitcoin, rather than any other use case. To grow, exchanges will need new investors who believe it is not too late to get into crypto, or they will need to support uses of cryptocurrency beyond trading, such as DeFi and NFTs.

Cryptocurrency prices reached new all time highs this week, of $63,682 for bitcoin and $2,314 for Ethereum on Tuesday 13 April. Prices are still climbing today, Wednesday 14 April, as the industry awaits the Coinbase IPO this morning. Nasdaq’s reference price for the direct listing is $250 per share, an overall valuation of $65.3 billion.

The Coinbase IPO is a seminal moment for cryptocurrencies. It is a huge success for the company and was not predestined. If you’d like to learn more about Coinbase’s journey I highly recommend Jeff John Roberts’ Kings of Crypto. However, the IPO is a natural outcome of a maturing industry with ever greater adoption. Coinbase may be the first major crypto IPO but it will not be the last. 

And the Coinbase IPO is timely. The market has radically changed in the last six months with the entry of new, often very large, institutional investors, who have paid high prices for their cryptocurrency. There are now 2.3 million bitcoin that have changed hands on-chain at a price of more than $50k. That level of demand to buy and hold at such high prices puts a floor on the price. And support at even higher prices is getting stronger, with 608k bitcoin acquired at a price of more than $57k. It also demonstrates the level of investment in cryptocurrency: those 2.3 million $50k+ bitcoin cost $125 billion. Such levels of investment require large companies that can face the scrutiny of the public market.

The IPO comes after an extraordinary few months for cryptocurrency exchanges. Trading volumes have been at record levels. Exchange revenue is closely tied to trading volume, hence Coinbase’s estimated Q1 2021 revenue of $1.8 billion.

But exchanges are not just making money from trading volumes. They are also processing large amounts of cash from the sale of bitcoin and other cryptocurrencies. In recent months, exchanges have facilitated a huge transfer of wealth from new, often institutional, investors to earlier investors. The realised gain of bitcoin on all exchanges since November is $65 billion, which is 78% of the $84 billion realised gain made over the entire history of bitcoin. The realised gain is the difference between the price when bitcoin is received by exchanges and when it is withdrawn. It is a lower bound on the total gains made as it does not include gains made on bitcoin that remains on exchanges.

So exchanges are big businesses. For many, Coinbase’s quarterly reports will be their first view into the industry. However, blockchain data also provides transparency into cryptocurrency activity. At Chainalysis, we have mapped the bitcoin addresses of nearly 800 exchanges. This enables the calculation of metrics such as the realised gain, described above, and provides other insights into exchanges.

I’ll be sharing some of those insights to demonstrate that the type of business that Coinbase is in, facilitating the exchange of cryptocurrency for fiat currencies, is the biggest type of business overall. Such crypto-to-fiat exchanges can be contrasted with crypto-to-crypto exchanges, which primarily facilitate the exchange of cryptocurrency for other cryptocurrency. There are also derivatives-only exchanges, where cryptocurrency can be used as collateral for derivatives products, and there are a large number of exchanges with a range of business models that I have grouped into an ‘other’ category for this Market Intel Report.

The first insight from blockchain data on exchanges is that crypto-to-fiat exchanges receive the most bitcoin compared to other types of exchanges. As the chart below shows, this has been climbing since October, as the price started to rise. Crypto-to-fiat exchanges, as a group, now receive over $1 billion of bitcoin each day. This means they attract the greatest amount of the underlying asset, so are the greatest sources of liquidity in the market.

The second insight is that crypto-to-fiat exchanges have the largest number of users depositing bitcoin via the blockchain. At Chainalysis we can see this by counting the number of deposit addresses receiving bitcoin on each exchange. Currently, crypto-to-fiat exchanges, as a group, receive bitcoin to over 80k deposit addresses each day. As the chart below shows, this is significantly higher than the number for crypto-to-crypto exchanges, which, as a group, have around 50k active deposit addresses each day. This means there are many more individual users sending their bitcoin to crypto-to-fiat exchanges, suggesting they have the broadest market.

The number of deposit addresses is an upper bound on the number of users depositing bitcoin via the blockchain as a user may have multiple deposit addresses. It is also a lower bound of the number of users an exchange has. The vast majority of users never transfer bitcoin on the blockchain, instead they solely interact with an exchange’s website.

The third insight is that, while exchanges have tens of thousands of on-chain users making deposits each day, a very small number are responsible for the majority of those deposits. This is especially true for crypto-to-fiat exchanges, where 70% of inflows are received by just the ten largest deposit addresses on each exchange. This is compared to 45% for crypto-to-crypto exchanges, as shown in the chart below.


There are two implications of this. First, a small number of players control a large amount of the actual bitcoin flowing into exchanges, and second, that these players have greater power on crypto-to-fiat exchanges than they do on crypto-to-crypto exchanges. This suggests that very large traders and brokers are key to the crypto-to-fiat markets.

There is a caveat that some of these large deposit addresses are internal to an exchange, for example they are receiving assets from an exchange’s cold wallet, which would make this measure of concentration an upper bound. But the concentration would remain high, even with some room for error.

 So crypto-to-fiat exchanges have the greatest bitcoin inflows, deposited by the largest number of users, although a small number of these users control the majority of these inflows. This demonstrates that the bitcoin market is currently driven by the exchange of fiat currencies for bitcoin, rather than any other use case. Coinbase, as a leading venue for this, is capitalising on this fact. 

However, the dominance of this use case raises interesting questions about the future for exchanges. They thrive on trading volume and people cashing out. Maintaining current high levels of exchange activity is going to need new investors who believe it is not too late to get into crypto, or exchanges are going to need to offer new assets and products. I believe this could lead exchanges to greater experimentation at the frontiers of crypto, such as DeFi and NFTs, especially as other fintechs make it cheaper and easier to buy cryptocurrencies.

It has taken 12 years for bitcoin to be adopted, made safe, and to prove it’s worth. The public valuation of Coinbase suggests there is plenty of opportunity left in cryptocurrency. I would say that the IPO is really the end of the beginning for crypto, and the start of the next phase of adoption. As always, let me know your thoughts via marketintel@chainalysis.com

Philip Gradwell, Chief Economist

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