Many fondly remember their first Bitcoin transaction. It likely took place on Coinbase, one of the first exchanges to serve the Western marketplace. Bitcoin became tradeable on Coinbase when the price of a coin was in the single digits and daily volume couldn’t match the population of a small country town. Since then, this exchange has helped Bitcoin gain traction and made it more accessible to consumers the world over. There’s no doubt that Bitcoin fans today have a soft spot for the exchange, and those who began trading early probably have Coinbase to thank for their riches.
The company wields its influence over the market quietly, but this power in the cryptocurrency world is undeniable. As a certain wise uncle once said, with great power comes great responsibility, and Coinbase currently sits in a precarious position. Some questionable behavior in the past is raising eyebrows inside the community and out, yet few seem to grasp just how thin a line the exchange walks.
Exchanging the Game
Bitcoin was originally a closed ecosystem, with those who mined it the only ones to receive the cryptocurrency as a reward. This is the unique “proof of work” algorithm that keeps the ecosystem running to this day, reimbursing miners with Bitcoin for verifying and processing transactions on the network. However, exchanges allowed trading between Bitcoin that had already been mined, and fiat money like Dollars, Pounds and Yen. In some ways, this was good: It put Bitcoin into the hands of those who didn’t want to, or couldn’t, mine it, but it also opened a whole new can of worms.
Exchanges are vital to the Bitcoin economy because they remain the primary way of obtaining value from one’s Bitcoins, since merchant acceptance of Bitcoin is still quite low. Though eCommerce is relatively eager to adopt cryptocurrency as a payment solution, like in the case of Alibaba or Overstock, brick and mortar is still slow on the uptake. Unfortunately, many people still patronize physical stores and shops where cash or credit cards are infinitely easier to use.
Naturally, a place to turn your Bitcoin into cash becomes an extremely in-demand service. Though it gives people an easy way to grasp the value of their Bitcoin, it also opens the market for speculation. Coinbase and other early exchanges created a relationship between fiat currencies and Bitcoin and changed the name of the game forever. No longer was it about creating a new banking system, or an easier way to trade. It was about hitting the “moon,” “hodling” and making the coin’s price its only measure of success.
The Power of Exchanges
Because exchanges are an avenue to Bitcoin trading, they also have a lot of influence on the price of Bitcoin itself. Many understand that when an exchange adds an altcoin for Bitcoin pair trading, the price of that coin is likely to rise significantly due to a new source of volume. Early buyers of altcoins like NEO have petitioned the world’s exchanges to accept NEO as a tradeable coin, and it’s largely working. In turn for listing popular coins, the exchanges profit from fees (if they even impose them) and the spread.
They can also take advantage of high volume in more sinister ways. Throughout the years, many have noticed that during times when the price of Bitcoin is falling rapidly, Coinbase goes offline. Though the company says it’s because of an influx of new customers, unmanageable trade volume, insufficient server capacity and the like, many suspect Coinbase of front-running.
During these times, an exchange could theoretically fill their own buy and sell orders before clients’ and make a great deal of money. In fact, US watchdog organization the Commodities and Futures Trading Commission is currently investigating Coinbase’s GDAX exchange for potential margin trading violations following Ethereum’s flash crash this summer.
Any exchange that has so much influence and goes mostly unchecked is troubling. The US has mostly let cryptocurrency flourish in the country, but should a rogue politician get scared and encourage restrictive measures like those imposed in China and South Korea, Coinbase might have something more to worry about. Should it ever be ordered offline like some others, it will surely cause a sizeable crash in the price of Bitcoin.
On the Bright Side
Coinbase might have to get its story straight for when regulators come knocking and wish to poke around more thoroughly. However, it will also have a lot of good on its record. It’s currently insured by the FDIC and is largely compliant with all the guidelines established thus far in its home country, Coinbase is based in San Francisco. As more time passes, and more governments, central banks, and financial institutions realize the good that cryptocurrency and Blockchain can do, they may take a less harsh stance on those already operating within their borders. For Coinbase and their customers, this is welcome news.