Brian Armstrong talked about institutional investors in the cryptocurrency space on Twitter earlier this week, saying the question of whether or not institutions will adopt cryptocurrencies has been answered. Coinbase is reportedly seeing hundreds of millions of dollars per week pouring in from legacy financial institutions.
The main issue cited by institutions looking to get into Bitcoin and cryptocurrencies is of custodianship. Getting a hardware wallet is a good idea for the average user with a few hundred dollars invested, but when it comes to massive financial institutions, they’re looking to invest anywhere from hundreds of thousands to hundreds of millions of dollars. With those kinds of numbers, extreme care needs to be exercised in the storage of coins.
Whether institutions were going to adopt crypto or not was an open question about 12 months ago. I think it’s safe to say we now know the answer. We’re seeing $200-400M a week in new crypto deposits come in from institutional customers.
Most financial institutions simply don’t have the infrastructure for a robust security system, equipped with the tools needed to properly safeguard any coins they are responsible for.
This issue paved the way for companies like Xapo and Coinbase, to offer custodianship to those firms looking for a safe way to invest big amounts in Bitcoin or other crypto-currencies.
Finance firms hopping on the Bitcoin Bandwagon
Coinbase Custody is currently the largest custodian of cryptocurrencies. Officially launching their services in July of last year, they slowly built their customer base up, reaching $1 billion in assets controlled in April of this year. With Bitcoin’s bull run seen earlier this summer, it prompted many fence-sitters to finally jump into the market and invest. Within just five months of reaching $1 billion, Coinbase now controls over $7 billion in assets, and that trend seems to be continuing.
The biggest issue with crypto adoption at the moment is the lack of infrastructure surrounding these payment networks. Companies like Coinbase that are building out the framework that will allow the legacy financial institutions to easily use cryptocurrencies will foster the next wave of adoption, allowing more and more people all over the world to take back control of their finances and enjoy more economic freedom.
How long until Bitcoin price breaks $20k again? Are institutional investors the answer? Let us know your thoughts in the comments down below!
Images courtesy of Bitcoinist Media Library, Twitter: @brian_armstrong
According to data from the Coinbase cryptocurrency exchange, the majority of large investors (10% of platform’s traders with the largest coin funds) in Bitcoin (BTC) and Ripple (XRP) keep buying the digital currency.
Most users on Twitter noted that the actual owners of the XRP coins are in “hodl mode”, and not ready to “dump” the cryptocurrency.
The Fear & Greed Index Reached An Extreme Fear
The Fear & Greed Index released by the Alternative.me platform is in the “extreme fear” range. It has reached the lowest rate (11 out of 100) over the last 244 days. The same figure was recorded on December 13, 2018, when the BTC rate dropped to $3,000.
On August 6, the index reached 66, which means intense greed. A sharp decrease in the index corresponded with a drop in the Bitcoin value, which is now trading in the range above $10,000.
The greed indicator designates the danger of a bearish trend, and strong fear, on the contrary, indicates a correction in the upward direction. According to Alternative.me experts, the current market situation provides unique opportunities for the acquisition of digital currencies, and the whales use this one.
It is indicated on the Coinbase website that over the past day, 71% of Bitcoin owners keep purchasing amid high volatility. This figure reached 83% among investors in XRP. Thus, money-bags started to increase the amount in digital currencies again.
Therefore, there are two scenarios:
The digital asset’s price will start increasing if the whales buy at a low rate on the principle of the outlook for the future;
The digital asset’s price keeps dropping if investors buy coins before the upcoming dump.
However, the XRP trade volume almost bisected between August 15 and 16 (from $2.1 to $1.1 billion), so tokens are not purchased in great amounts. Nevertheless, in December last year, these figures before the pump fell by about 25%. Thus, the probability of a reversal is remaining at the moment. However, a bearish trend line formed on the chart over three months and indicators indicate a further price reduction for XRP.
On August 15, the San Francisco-based digital currency exchange Coinbase announced that it had acquired the cryptocurrency custody service Xapo’s institutional branch. The business move puts Coinbase in the limelight, making it the largest custodial service for digital assets worldwide, with more than $7 billion under custody.
Coinbase Acquires Xapo’s Institutional Arm and Now Commands $7 Billion Worth of Digital Assets
As early as 2010, Bitcoin supporters such as Hal Finney predicted that someday most BTC transactions would occur between massive bitcoin-backed banks. Finney believed that if a digital currency like bitcoin was to gain mass adoption, the network would not be able to include every single financial transaction in the world. The renowned cryptographer said that large bitcoin-backed banks would fill the void and “work like banks did before the nationalization of currency.” Fast forward to today, where firms like Coinbase are holding massive amounts of digital assets in custody. On Thursday, the California exchange announced that it had acquired Xapo’s institutional crypto operation and established itself as one of the largest crypto custodians worldwide. Coinbase published a blog post in regard to the acquisition and stated:
In just over one year since launch, Coinbase Custody has grown to over $7 billion in Assets Under Custody (AUC) stored on behalf of more than 120 clients in 14 different countries, making it the largest, most globally recognized and most trusted institutional custodian in the world.
Coinbase Growth Since 2012: $8 Billion Valuation, $600 Million in Annual Revenue
Coinbase has come a long way since Brian Armstrong and Fred Ehrsam started the company back in 2012. That year Coinbase allowed users to buy and sell BTC using a bank transfer and quickly became one of the biggest BTC providers next to Mt. Gox. Throughout 2012 and 2013, investors and venture capitalists started seeing potential in Armstrong and Ehrsam’s company and began to invest. The founders participated in a Y Combinator startup incubator, received $5 million from Fred Wilson in May 2013, and $25 million from Andreessen Horowitz, Union Square Ventures (USV), and Ribbit Capital in December 2013. By 2014, Coinbase users grew to more than one million accounts and the assets under the company’s control continued to grow exponentially from there. The cryptocurrency community really took notice of how large Coinbase had grown two years later, when in February 2016, Brian Armstrong told the public that “[Coinbase is] now storing about 10% of all bitcoin in circulation.”
Coinbase is now valued at over $8 billion, after closing a funding round in 2018 for $300 million to “accelerate the adoption of cryptocurrencies and digital assets.” In 2019, despite stiff competition, the San Francisco tech company has estimated revenue between $569-650 million. Binance comes close to Coinbase, with The Block reporting in February that the exchange pulled in $446 million in profits. Kraken captures $150 million annually, Bitstamp $17M, Bitfinex $10M, and Itbit $4M in revenue. Coinbase has around 800 employees and the firm has made roughly 10 acquisitions since 2012. The company acquired startups like Blockr, Earn.com, Cipher, Digital Wealth, Keystone Capital, Blockspring, and now Xapo’s institutional arm. Coinbase has also made various equity investments like the recent cryptocurrency derivatives exchange Blade as well as acquiring Horizon Games, Textile, Near, and Dharma.
In 2017 Speculators Estimated Xapo Held $10 Billion Worth of Bitcoin With Keys Spread Across 5 Continents and a Swiss Military Bunker
Xapo started its business similarly to Coinbase, but did not offer its bitcoin wallet and cold storage vault services until March 2014. The Hong Kong-based company was founded by Wences Casares and Federico Murrone and quickly became a well-known crypto brand. In 2015, the company moved its headquarters to Zug and two years later the firm was granted a European e-money license in Gibraltar. That year, during the all-time highs of 2017, it was estimated that Xapo’s Swiss bitcoin vaults held billions of dollars’ worth of digital assets. Quartz columnist Joon Ian Wong reported on Xapo’s vault in Attinghausen, Switzerland when he visited the facility. The security was extreme and resembled a James Bond movie, Wong noted during his visit.
“[Xapo] won’t tell me how much bitcoin is stored in the vault, but he says he sometimes takes customers with “millions” of dollars worth of the cryptocurrency stored with Xapo to tour the vault,” the reporter wrote in October 2017.
Despite the company not disclosing how many coins are held in the Swiss vault, estimates from Bloomberg in the spring of 2018 said Xapo held more than $10 billion. By the summer of 2018, Xapo Inc. received the sixth Bitlicense and was approved to operate in the state of New York as a regulated Bitcoin business.
Over the last two years, Xapo has made around $4.2 million in revenue annually. Additionally, Xapo employs around 52 people and the company has raised a total of $40 million since its inception in 2014. Reports stemming from Xapo’s vault in Switzerland have made speculators believe the company’s institutional vault still has a massive amount of digital wealth under its wing. Moreover, during Wong’s visit to the vault three years ago, Xapo told him the vault operators can never unwind. “This is not a race. It is a chess game. You have to think about the opponent’s next movement. You can never relax,” the Xapo executive detailed.
Sure. Consumers won’t mind bitcoin banks, but that is a huge systemic risk. Say goodbye to all of the core benefits of Bitcoin. Inflation resistance, censorship resistance, Gone.
Members of the Crypto Community Discuss the Current Custodial Trend
Coinbase and Xapo have scared some cryptocurrency advocates who think that storing a vast array of coins in custodial services might not be a good idea. Digital currency pundit Jill Carlson tweeted: “The Xapo [and] Coinbase collaboration has me asking: ‘What happens if someday one entity just custodies all 21 million bitcoins? Aren’t we just recreating the same, broken financial system?’” Edge Wallet founder Paul Puey responded by saying: “You need more than just the option too. You need a majority of crypto held in noncustodial solutions. Otherwise, we run the risk of losing the ability to transfer funds without a third-party.” Puey continued:
Bitcoin then just becomes an overleveraged asset class like a gold ETF.
Using a cringe-face emoji, Monero developer Riccardo Spagni jokingly wrote: “A few months back a VC told me that ‘custody is the most exciting space in the ecosystem right now.’” The Block writer Frank Chaparro (Fintech Frank) said that no smart asset manager would custody all of their coins with one provider. “There is a need for multiple custodians – we see this even in the so-called broker financial system,” Chaparro insisted. However, Coinshares executive Meltem Demirors revealed that she believes “everyone custodies their coins with one provider.” “Did you know that everyone in the U.S. custodies their share certificates with one entity – the DTCC?” Demirors wrote.
Mega Bitcoin Banks Issuing Their Own Digital Bucks and Verifiable Proof-of-Reserves
The mega crypto bank discussion has many crypto enthusiasts wondering if the massive amount of digital currency custodianship is good for the environment. Coinmetrics executive Nic Carter sarcastically explained that he’s “waiting for a major custodian/exchange to implement proof of reserves” with a picture of a rotting skeleton next to a computer. It’s a stark cry from Hal Finney’s 2010 prediction, when he said that megabanks would be “the ultimate fate of Bitcoin.” “Most Bitcoin transactions will occur between banks, to settle net transfers,” Finney detailed. He also said that these banks would use the BTC to be “high-powered money,” which would serve as a reserve. Then these Bitcoin-backed banks could “issue their own digital cash,” Finney emphasized.
We have seen Hal’s prediction already start to occur within the cryptocurrency industry as large exchanges, which have silently become the largest crypto banks in the world, are starting to mint their own digital assets. Binance has created binancecoin (BNB), which holds the sixth largest crypto valuation out of more than 2,000 digital asset markets. Coinbase and Circle Financial have the Centre foundation, which controls the regulated stablecoin USDC. With a transparent blockchain system, a true “proof-of-reserves” type of scheme could transpire, unless people decide to trust these companies like the financial institutions today. If the community simply trusts these mega crypto banks without verification, then unsustainable banking techniques like fractional reserves could proliferate unchecked.
The way things are moving, with the recent Coinbase acquisition of Xapo and digital currency exchange providers becoming far bigger than traditional institutions, it begs the question: are mega bitcoin banks the shape of cryptocurrency custody to come? It may not be the future we chose, but it’s the one that’s fast becoming a reality.
What do you think about the Coinbase acquisition of Xapo? Do you think that custodial services will dominate the crypto industry? Let us know what you think about this subject in the comments section below.
Image credits: Shutterstock, Coinbase, Xapo, Pixabay, Twitter, Centre, Circle, Jamie Redman, and Wiki Commons.