Coinbase

Abstract

This paper is an evaluation and analyzation of a mobile application called Coinbase. Coinbase is an android, iOS, and web application where users can buy, sell, and store digital currency. This paper goes over the business model of the application, value proposition, revenue model, marketplace, competitors of the application and how the application is better than other similar applications, market strategy, and brief information about company's management team and organization structure. The paper is not trying to conclude anything. It is just an evaluation and analyzation for the mobile app.

1. Introduction

Digital currency is a type of currency which is only available in digital form. It does not exist in physical form. Like computers have hardware components and software components, in a similar way now currencies are available in physical form and digital form. There are many synonyms of digital currency like virtual currency and cryptocurrency. Digital currency can be used in a similar way as a physical currency. But, since digital currency don't have bigger market like physical currency does, it is not accepted everywhere. There are some online businesses which accept digital currency like overstock.com, Expedia, Newegg, and a few Shopify stores. Surprisingly, stores who accept digital currency sell product at a cheaper price than stores who don't accept digital currency. The reason for that is higher credit/debit transaction fees. Stripe is a platform for developers where developers can implement credit/debit card transaction to e-businesses and Stripe charges 2.9% plus 30 cents for each transaction and it's slower. With digital currency, transactions are faster and cheaper. So, stores who accept digital currency sell stuff at cheaper prices. Purse.io is a store that sells Amazon products at cheaper prices than Amazon, but you must pay with digital currency.

This paper evaluates and analyzes an app called Coinbase from where users can buy, sell, and store digital currencies. Since digital currencies are not accepted everywhere, people usually use it for trading and making money out of it. They buy digital currency at lower rates and sell it when the price of digital currency increases and make money out of it. For that, many people use Coinbase. They buy it from Coinbase and it is stored in a user's wallet and when the price of digital currency increases, they sell it from their wallets. Wallets are kind of like bank accounts. We need bank accounts to store our physical currency. In the same way, we need wallets to store our digital currency.

Outline

The remainder of this paper is structured as follows: In section 2, we talk about digital currency and its background. In section 3, we dive into the business model of Coinbase. Section 4 talks more about customer value proposition. Section 5 talks about the revenue model of the company, Coinbase. In section 6, we look at some of the good competitors of Coinbase. In section 7, we talk about competitive advantages. In section 8, we look some of the brilliant minds behind the company. We end in section 9 with the conclusion of the paper.

2. Background

Currency means a form of money used in a country for trading goods. For example, dollars are used in United States, Rupees are used in India. Before 2009, we just had one form of currency, i.e. physical form. In 2009, another form of currency came onto the market. This currency was in digital form or virtual form, which means it does not have any physical appearance. This currency was called Bitcoin. According to Bitcoin.org, Bitcoin is a general agreement network that introduced new way of money transaction and in digital form. It is a peer-to-peer payment system that means no middleman (bank) is involved in a transaction. From 2009 till present, many digital currencies have been released to market by different developers which use different technology which makes it better and faster than bitcoin. Today we have at least 1,132 different types of digital currency which use different technology.

When bitcoin came to market, it was difficult for users who didn’t have a higher computer knowledge to trade bitcoins. That’s where Coinbase came to the market with a brilliant idea which enabled normal users to trade bitcoins. Bitcoin.org came up with an app, but it was not reliable, and it was not letting users trade other digital currencies which was important for users in the growing market of digital currency. Coinbase let their users buy, store, and sell digital currencies. It also lets users transfer digital currency from your wallet to your friend’s wallet. Currently, Coinbase lets users trade three currencies which are popular in the digital currency market. They are: (1) Bitcoin, (2) Ethereum and (3) Litecoin. These three are different types of digital currency which use different technology.

3. Business Model

Coinbase is a company which owns an application on different platforms like Android, iOS and web which lets users buy and sell digital currency and host their wallets. Coinbase lets their users trade Bitcoin, Ethereum and Litecoin. It is free to register an account and host a digital currency wallet in Coinbase, but it charges for each transaction you make. They call this charge network transaction fees. This is one way Coinbase makes money out of their users. In addition to network transaction fees, Coinbase also charges their users with Conversion fees. Let's take an example: Suppose, I am buying bitcoins of $100. Coinbase will charge me a transaction fee and conversion fees and I will receive X number of bitcoins.

X number of bitcoins = $100 -- (Network Transaction fees + Conversion Fees)

Network Transaction fees + Conversion Fees = Income for Coinbase

This Network Transaction fees and Conversion Fees are revenue for Coinbase. Coinbase charges different amounts of network transaction fees and conversion fees and it depends on your location and the method of your purchase (Debit/Credit Card). Below given table shows percentage amount Coinbase charges their users for each transaction depending on their location. They do this in two ways. I have attached the fees table from their website below.

Network Transaction and Conversion Fees

Here, two fees are charged Variable fees and Fixed fees. Variable fees are 1% of your transaction amount, subject to a minimum fee of $1 and maximum fee of $10. Fixed fees are 2.49% of your transaction amount.

Network Transaction and Conversion Fees

Above given network transaction fees and conversion fees are applied when you buy digital currency and sell digital currency from Coinbase. The income source of Coinbase is Network Transaction fees and Conversion Fees. Further we will discuss where Coinbase buys digital currency from and what are other expenses to find approx. total revenue of Coinbase. In Section 4, we talk about Customer Value proposition.

4. Customer Value Proposition

Customer value proposition means how a company fulfills and satisfies the needs of customers. To understand the value proposition, we evaluated two points which are mentioned below:

1. Why do customers choose Coinbase to buy/sell digital currency?

2. What extra service does Coinbase provide that other companies in the same field don’t?

Let’s start with first question “Why do customers choose Coinbase?” There are many other digital currency wallets and exchange applications. But most people use Coinbase. The first reason is Coinbase is reputable and the first one of its kind. Experience in the business field means a lot. Coinbase knows all corners and ups and downs of the digital currency business. This gives trust and faith to their users to use their products. In some cases, digital currency market rates also depend on Coinbase. Last month, news was spread that Coinbase users will be able to trade Ripple, a new digital currency, which increased its rates from $0.90 to $3.00. Being in the market for long time, Coinbase has earned the trust and faith of the users.

Another reason is, Coinbase wallets are safe and secure. Coinbase uses Ruby on Rails on nginx server. Ruby is very secure if used in the correct way. Ruby can avoid vulnerabilities like buffer overflow since it checks for memory boundary for every access. Attacks related to cookies are very common. By manipulating cookies and session id anyone can access someone’s account. Since Coinbase is using Ruby this can be avoided. Ruby encrypts cookies and session ids and stores it so it’s impossible for attackers to manipulate it. Coinbase also uses Cloudflare. Cloudflare is a third-party company which protects and accelerates the performance of any application. All Coinbase network traffic is routed through the Cloudflare intelligent global network which automatically optimizes your network availability and blocks threats and bots.

Cloudflare

In addition to Cloudflare, Coinbase also uses Authy. Authy is a third-party application library which enables Two-factor authentication for any application. Whenever a user logs into Coinbase, Authy makes sure that a user is an authorized user of the account by sending an email and a text message to the account user’s phone number and email address with a 6-digit code which they must enter to login successfully. Coinbase has also collaborated with a company called Hackerone. Hackerone provides infrastructure solutions to companies and government agencies which avoids critical security vulnerabilities. All Coinbase sensitive data is stored offline and stays disconnected to internet until needed. When needed, GET request is verified and validated before data becomes live on internet. The concept behind this is if data is not available then it can never be stolen. In addition to that, all wallets are encrypted with AES-256 encryption algorithm. This list goes on and on. Customer service and security is most important for this company.

With security up to this level, Coinbase can never be hacked. Still looking towards the worst-case scenario, in case Coinbase gets hacked, their users won’t lose a dime. All digital funds held by Coinbase are insured. In case if Coinbase got hacked and customer loses funds, the insurance policy would pay out to cover any customer funds lost.

The main aim of Coinbase was to make digital currency trading more user friendly to users who don’t have deep computer knowledge. They achieved this goal by making their application interface more user friendly and easier. The best user interface is the one which accomplishes the task in few clicks. Coinbase's user interface is developed by keeping that thought in mind. In three clicks, you can buy and sell any digital currency that Coinbase has to offer.

Because of long experience in business, high level of security and simple user interface, many users prefer to use Coinbase over other applications which are in the market. I agree, Coinbase allows user to trade only three digital currency and there are other businesses which allow users to trade all of them, but users prefer security in this case. They want a firm which guarantees their users that no matter what your funds and transactions are safe and secure in their servers and network. I guess all the mentioned points above answers well to question [1] and [2]. In section 5, we talk about the Revenue Model of Coinbase and how it generates money.

5. Revenue Model

To know revenue model of Coinbase, it important to know where Coinbase gets digital currency from. The product which the business is selling usually buys that product from someone else at cheaper rates to make profit out of it. In the same way, Coinbase gets digital currency from different business called Bitstamp. Bitstamp is a company where users can buy digital currencies on rates which they decide. For example, if I want to buy 1 bitcoin at the rate of $50 and market rate is $55 than I will submit a request in Bitstamp that I want to buy 1 bitcoin for $50. Now, if someone is willing to sell his 1 bitcoin at $50 rate than he will make a transaction to me. In the same way, Coinbase have a contract with Bitstamp. In addition to Bitstamp, Coinbase has contracts with many other such companies. Coinbase also has their own reserves. These reserves come from people who are selling their digital currency. Moreover, Coinbase have contracts with digital currency miners. Digital Currency miners can be a company or an individual person. When a company or person provides their IT resources like computer CPU or GPU to make a transaction, very small amount of compensation is given to them from the transaction. A person or a company can make huge amount of money being a digital currency miner by setting up big infrastructure of computers. In short, Coinbase tries to get digital currency from anyone who can sell them in cheaper rates. Once they have digital currency which they bought on cheaper rates, they sell it to users on Market rate and make money out of it. Coinbase also make money from Network transaction fees and conversion fees as we mentioned in section 2. In section 6, we will talk more about potential competitors of Coinbase.

6. Competitors

Coinbase was first of its kind in 2012. They had their ups and downs. But since they didn’t have any competition, they had enough time to develop themselves. Now, they’re well developed and have many healthy competitions with other companies. Below are the lists of Coinbase competitors

● Bitcoin Wallet from company named Bitcoin Wallet Developers

● Blockchain from Blockchain Luxembourg S.A.

● Bitcoin Wallet from Bitcoin.com

● BitPay from BitPay, Inc.

● My Bittrex Wallet from Green Candle App

● KrakAPI from Benoit Basset

● Binance from Binance Inc.

● Bitfinex from Bitfinex

● Robinhood from Robinhood

Out of all the above competitors, Robinhood will give a tough competition to Coinbase. Robinhood is a stock brokerage company and an application which lets users buy and sell stocks for no fees and commissions. Robinhood was launched on April 18th of 2013. It has about one million downloads on play store. They are working to add a feature to their application where users can trade digital currency free of charge and no commission. According to stackshare.io, Robinhood applications are using many technologies but very few technologies are related to security. That doesn’t seem as secure as Coinbase, but will users be ready to compromise security for no commission trading? We will know the answer to that question by the end of March 2018. But current stats say that more than 1 million users sign up for early access to Robinhood’s new crypto trading feature. In section 7, we will talk more about competitive advantages of Coinbase.

7. Competitive Advantages

Currently, Coinbase's trust, service, reputation, and security is a big advantage for Coinbase. As we mentioned earlier, Coinbase has experience of each corner of the business and they use various technologies like Cloudflare, Authy, BlockScore, and HackerOne to make sure their users are safe and secure. They’re here to give best user experience to their users in a secured way. Robinhood is new in the market of digital currency. They have long experience of Stock Markets. Looking at Robinhood Stackshare.io profile, it doesn’t seem their infrastructure is as secure as Coinbase. This doesn’t mean their applications are not secure. We need to dig further deeper to find out the security parameter of both the applications. But if Robinhood successfully launches free digital currency trading by March, it will drastically reduce the market of Coinbase. I hope they have further plans for this. In section 8, we talk about the Coinbase management team and organization structure.

8. Coinbase Management Team

Coinbase's headquarters is in San Francisco, CA. It was founded on 2012. Company’s yearly revenue is about $100 to $500 million (USD). The company size is 51-200 employees. We have attached an image of 13 employees who are at high position at Coinbase. This are the people who changed the way digital currency can be traded for normal people. We hope they are ready with new challenges that Robinhood has to offer.

Coinbase Team

9. Conclusion

This paper was not trying to conclude any point or an issue. This is an analysis paper of mobile application called Coinbase. The paper discusses the background of digital currency and the role of Coinbase in digital currency market. The paper talks about the business model of the company Coinbase, revenue model, Customer Value Proposition, its competitors, competitive advantages and at the end we presented brilliant minds behind the company.

References

1. “Buy/Sell Digital Currency.” Coinbase, www.coinbase.com/.

2. “Coinbase Careers.” Glassdoor, www.glassdoor.com/Overview/Working-at-Coinbase-EI_IE779622.11,19.htm.

3. “Coinbase - Coinbase Tech Stack.” StackShare, stackshare.io/coinbase/coinbase.

4. “Robinhood.” Robinhood - Free Stock Trading, www.robinhood.com/.

5. Bitcoin - Open source P2P money, bitcoin.org/en/.