Bitcoin’s first billion dollar company: Coinbase

The 18 month old venture is the hot new venture you haven’t even heard of…yet

The jury is still out on whether Bitcoin, the much-ballyhooed and equally misunderstood decentralized digital currency, is in the midst of a bubble or another growth spurt on its long-term journey to transform international finance. However, one thing seems beyond dispute: the immense present value of America’s largest market maker, Coinbase. The Y Combinator and Union Square Ventures-backed Bitcoin exchange, consumer wallet and merchant services platform has been growing exponentially, and recently buckled under the weight of new consumer interest and skyrocketing transaction volumes, hitting its daily buy limits multiple times in recent weeks.

In light of such rapid growth and exposure, there seems to be little question that Coinbase will someday be worth multiples of the $6-7 million it raised from investors earlier this year. Instead, a new question has emerged: is Coinbase already Bitcoin’s first billion dollar company?

In February, the company announced it had processed $1mm buy/sell orders. In May, that number was $15mm. Since then, the Coinbase user base has quadrupled, the moving average value of the currency in USD has quintupled, and transaction volume in the U.S. has increased nearly ten-fold. At the same time, Germany has officially recognized bitcoin as a currency, China has recognized it as a legal commodity, and the U.S. Senate gave it a very warm reception in mid-November.

We know that these compounding growth drivers and regulatory wins have led to at least 10x growth in buy/sell volume since May, and it is possible that over $250mm in buy/sell orders were processed by Coinbase in November alone. Given their 1% transaction fee, that would mean $2.5mm in November revenue for Coinbase, a $30mm run rate. And this ignores all additional revenue streams that the company may generate from merchant services, buy/sell spreads and the appreciation of any bitcoin currency on their own books.

We know 20-30% of Coinbase revenue goes to the international exchanges through which the company submits user buy/sell orders. But that still leaves $20mm in annualized gross margin, which more than adequately covers salaries for their small team, rent, servers and legal. In other words, we’re talking about a company with real cash flow.

Even if you believe the company has just a 20% chance at continued exponential growth (and potential logarithmic growth in the near-term), and an 80% chance of going to zero, you could still get to a $1 billion valuation. (For the finance-oriented: I’m thinking of an investment at a PEG of 1.0 into a company generating ~$10mm in run rate cash flow.)

Imagine if you had been able to value an early internet pioneer on the basis of earnings!

Coinbase has a first mover advantage in a new economy which disrupts multi-trillion dollar financial services markets. They benefit from strong network effects, and have the only two-sided marketplace in Bitcoin right now — offering both consumer wallets and merchant tools on top of its exchange services (although it appears that Circle will be joining them shortly). They are also building a robust, open-source developer library, which is driving integration with their API. At Bitcoin 2013 (the industry’s major conference), the majority of the entrants in the hackathon (including the winner BitWall) built applications using the Coinbase API. That Android-like creation of an entire open-source ecosystem will only serve to funnel more consumers and merchants to the core revenue drivers — the Coinbase exchange tools.

Google has AdWords. Coinbase has its exchange.

Even when Coinbase is inevitably forced to lower its exchange fees due to new competition, it will come at a time when the team is in pole position to actually charge merchants for transaction processing.

So if you’re a competitor like Paypal, you’re paying close attention. If you’re a credit card company like Visa, you must be scared to death. Because 18 month old Coinbase may be the latest billion dollar consumer tech company that no one knows about…yet.

Expect investors to be champing at the Bit.

@twobitidiot

Update 12/14/13: This original post appeared on Reddit on November 19. I slightly modified some of the content for readability on December 9 and posted to Medium that day. On December 12, Coinbase announced a Series B round of $25mm from Andreessen Horowitz. When I asked Chris Dixon, the new AH board member, whether I was close on the valuation I outlined in this post he simply responded “☺”

I’m a bitcoin entrepreneur and former VC. I blog about bitcoin and work on projects that improve the health of the Bitcoin ecosystem. Tired of Bitcoin volatility? Check out my company, BDIC, which is the Bitcoin community’s privately funded, decentralized version of the FDIC.