The Coinbase Curse Revisited: Deadcoins Are a Harsh Lesson

looking back with a full cycle in the rear view

Last year, I wrote about Coinbase’s lack of transparency in a crypto ecosystem that promised so much of it. Big claims about ‘democratizing finance’ turned out to be money losers, and regular investors didn’t know that Coinbase’s buddies like Marc Andreessen had big stakes in many of these coins. 

A year later, has anything changed? I went back to see how those Coinbase listings are doing now, and if Coinbase learned anything by changing its policies around disclosure. 

This matters because Coinbase is now at war with regulators. In 2021, Coinbase pushed to list everything it could, on the premise that opening up startup investing to the “average investor” was valuable. But the SEC believes many of these are actually securities, and that these listings were illegal.

When I went back, I was actually surprised at how poor things had gone over the last year - tons of these coins were down more than 90%, including four that the SEC had specifically called out. Not only that, but Coinbase seems to be less transparent about its new listings than ever. 

And on the VC side, things were worse: a16z coins significantly underperformed on any measure, and Coinbase Ventures was a major investor in Luna. This is a great case study for one of the intriguing questions of the last decade: how do VCs get such great returns? Unlike regular startup investing, where VCs get special deals, in crypto VCs invest like the rest of us. The story from the new data says without those special deals they are in trouble.

Reloading…

Let’s address the obvious: when I wrote the “Coinbase Curse” article a year ago, I said coins trading on exchanges were money losers. This was likely due to VCs with early access dumping their holdings once the coin was listed, pushing prices down.

But there was one clear explanation I never alluded to - insider trading. I wasn’t really interested in getting sued. Turns out, a couple shameless insiders were buying up coins before listings with their advance knowledge. This was probably a major factor in Coinbase listings’ underperformance. 

I re-ran the data to analyze the same 130 coins as last year. If the bad actors have been driven out, perhaps the numbers might look better. 

A year long bear market has pummeled BTC and ETH by about 45 to 50%. But coins on Coinbase have done much worse - turning from an over 100% return on average to -24.3%, an implied loss of over 75%. 

Note: The data for last year’s post was up until 1/9/22. I re-ran the data on 2/23/23.

Last year, the silver lining was that Coinbase listings overall made money in dollar terms, even if they did not fare better than BTC or ETH. But now Coinbase’s listings lost money in every measurable way - against USD, BTC, and ETH. 

No alpha for Andreessen? 

It’s hard to benchmark VCs - there’s not much data, nor any reliable index like the S&P 500 we can compare them to. How do we figure out if they’re any good?

The data says they’re not. The low bar a16z set from last year is even lower. The “best investor in the space” has seen a 50% loss on average since listing.

Moreover, now 100% of their investments underperform BTC and ETH. What’s the point of these coins, again?

That also opens up some real questions. VCs don’t normally invest like us schmoes. They get the top of the cap table - preferred equity, liquidation preferences, and more - special protections that make it easier for them to make money. And without those, the returns look pretty bad. 

So who owns web3? The answer is you do - because the only explanation the VCs have been selling to the public.

Coinbase’s Saving Grace Was…Luna

Last year, Coinbase Ventures’ investments didn’t look so bad, thanks to massive gains on two investments. Only problem? One of those was Luna, which is now a 100% loss, flipping CV’s positive returns to negative. 

How did Coinbase not get more grief for investing in a literal Ponzi scheme, then making it available to the public? That might explain why the SEC is angry enough to send them a Wells notice, a warning for violating the law.

That wasn’t their only catastrophic investment. I wrote last year how Coinbase pivoted in 2021 from being cautious to listing every token it could get its hands on. Coinbase listed 95 tokens in 2021 alone, compared to a dozen or fewer in years prior. 21 of the 95 tokens Coinbase listed in 2021 have lost more than 90% of their value. Seven of the 95 were deemed securities by the SEC last year, and the average loss on those was 78%! So maybe that explains why they’re so upset. 

Putting these two investors together makes things worse. The explanation I gave last year seems pretty sound: most of these coins were pretty centralized, with huge allocations to investors and founding teams. These coins were also extremely illiquid small-caps, which means they got obliterated in the bear market.

FTX, Hiding in Plain Sight

In retrospect, FTX  was particularly brazen. They didn’t list their venture investments anywhere, so I could only review their publicly announced rounds.

They also worked at lightning speed: they would invest in a seed round for a new coin, and then make it tradable barely a couple months later. Rushing yesterday’s seed investments to public trading led to spectacular blow ups like Ronin, a gaming sidechain that was hacked for $600 million. I’m sure the hackers appreciated all that liquidity.

Moreover, FTX were in bed (literally) with their market maker - Alameda. This opened the door to market manipulation - something I would say the media hasn’t analyzed thoroughly for coins other than FTX’s own token FTT. FTX could lead a seed round for any shitcoin, list it, and then put a thumb - or a hammer - on the scale for prices in the market, as investors hoping for a “pop” piled in. 

My bet is the “listing” pipeline was probably a major piece of how FTX stayed liquid (and keep funding its growing venture portfolio) when they were losing money and embezzling funds left and right.

Meanwhile, Binance seems to have had proprietary trading teams working on its own exchange - “approximately 300 “house accounts” that are all directly or indirectly owned by Zhao” says the CFTC complaint - yet another example of an exchange likely trading against its customers. 

Lack of alignment

Last year, Coinbase’s Chief Legal Officer wrote a blog post responding to some of my points. Some of the promises he made included:

“We are continually looking into additional mechanisms to align ourselves even further with our customers, starting with enabling users to track Coinbase’s own portfolio of digital assets for informational purposes.”

A year later, it looks like Coinbase is actually less transparent: 

• Coinbase didn’t like me poking around, so they stopped blogging about new coins. However, these announcement posts used to contain a disclosure that CV might be an investor.

• Their asset pages, which used to note if CV was involved, no longer appear to show any disclosure.

• They’ve even added “How to buy” pages, which includes multiple CV investments, without any reference to their ownership.

• Their 10-K notes pretty clearly: “During the years ended December 31, 2022 and 2021, the Company invested an aggregate of $13.8 million and $203.1 million, respectively, in investees in which certain related parties of the Company held an interest over 10%” - aka, CV invested a lot with its management. Which ones? I wish I had the time to investigate.

You know what there are lots of disclosures of, though? The C-levels selling stock, which they still do all the time!

Conclusion

So what’s the future of crypto? These days, it seems to hang from a pretty thin thread, as US regulators work to cut off crypto’s access to the banking system. Given the damage to investors, the data gives a strong case for regulators to cut off anything other than Bitcoin and Ethereum - the only cryptocurrencies with reason to be considered a commodity rather than a security.

a16z and Coinbase Ventures’ performance also doesn’t say much for VC’s god-like foresight. Stripped of their usual access and downside protection, it doesn’t seem like they fare very well. Maybe the ability to make billions investing into Airbnbs and Ubers came because they could afford more risks than a common equity investor.

Lastly, it doesn’t seem Coinbase learned any lessons. The era where crypto exchanges listed every coin as soon as someone published the code led to a ton of liquidity for a few people, but eventually broke the market. 

The best strategy for Coinbase going forward is likely to narrow the focus back to the four or five coins that aren’t pump and dumps. Ironically, Bitcoin and Ethereum dominance is at all time highs, as investors run away from shitcoins that were mostly hype, still have years of lockups left to dump, and regulators closing in - so a pivot to conservatism might save them headache and money. But in 2023, the curse seems stronger than ever.