What does the world’s most active crypto and blockchain investor make of the spectacular collapse of the cryptocurrency exchange FTX?
In the wake of FTX’s disintegration, we spoke with Shan Aggarwal, head of corporate development at cryptocurrency exchange Coinbase and head of its venture investment arm, Coinbase Ventures, on what the collapse means for his firm and the industry’s future.
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Coinbase Ventures has amassed a portfolio of more than 400 companies since 2018. That includes FTX, which it invested in during its $900 million Series B in 2021, along with 59 other investors.
We had an extended conversation with Aggarwal about the investment outlook for Coinbase Ventures, the impact of the FTX fallout on his firm’s portfolio, the wider ramifications for the crypto industry, and the strongest use case for crypto today.
The following transcript has been edited for brevity and clarity.
What is Coinbase Ventures’ outlook on the industry in relation to the collapse of FTX?
Aggarwal: I think the collapse of FTX is very much a seminal moment in crypto, probably one of the largest cases of corporate fraud that have existed in business anywhere. As you’d expect from my perspective, we’ve seen the venture funding conditions tighten quite a bit as a lot of investors are looking to figure out the true extent of the fallout.
The silver lining we look at is that the FTX collapse actually motivates a lot of individuals to learn about and explore decentralized technologies, which are exactly the types of things that we are investing in. Ultimately, the goal and the mission of Coinbase is to create more economic freedom in the world.
Post-FTX, you saw a significant spike in volumes on DEXes, and Ledger recorded a record number of sales for their self-custodial hardware wallets.
I think our general outlook is: It’s a pretty jaw-dropping and eye-opening display of corporate fraud. It shakes consumer confidence in a lot of ways, and likely contributes to some of the negative narratives that have existed around crypto in the past.
But at the same time, in many ways it’s very validating for the technology and for the core ethos of why decentralized technologies need to exist in this world.
How does it impact your investing strategy going forward?
Aggarwal: It doesn’t impact or change our investment strategy too much. We have been investing actively in the space since 2018.
Our viewpoint, and our focus, has always been investing in the best and the brightest founders who are building the future protocols and applications that we believe are going to be consequential in the future of this space. I think what it has done is created more of an emphasis on understanding corporate governance — the ways that a lot of the startups that we are investing in are managed.
Are there other sectors which are weakened in crypto, based on the current environment — like the crypto lending space?
Aggarwal: First and foremost, we think about the dichotomy between centralized platforms and decentralized platforms. So the biggest category of companies that have been negatively affected are centralized platforms — that includes centralized exchanges, centralized custodians and centralized lending desks. Those businesses are largely based on trust. And a lot of trust has been shaken across the industry. And it’s a shame to see one actor and one entity have this type of a ripple effect, because it’s not indicative of the overall industry.
What conversations are you going through with portfolio companies to support them at this point?
Aggarwal: We’re checking in with all of our portfolio companies, obviously, to get a sense of who has been directly impacted, who has not been directly impacted.
Regardless of the companies who have not been directly impacted, given the size and magnitude of FTX and the collapse, most entities in the group or space had some indirect exposure. Maybe they had some clients that had funds that were tied up on FTX, or they did business with FTX in some capacity.
So there’s going to be some adjustments that firms potentially need to make on how they operate their business.
Have you gone through a revaluation based on the market correction of your portfolio companies?
Aggarwal: We do it on roughly a quarterly basis. We don’t disclose the valuation results or exercises publicly. So we haven’t done one as a direct result of the FTX fallout. We will, as we enter the end of December and look into the end of Q4.
In your Q3 update, you said you might be reducing your position in certain companies or projects. What does that mean?
Aggarwal: Coinbase Ventures was born in the last bear market. We started the firm in the first half of 2018 right as the crypto cycle turned. We now maintain a portfolio of nearly 400 companies. Many of those companies have gone on to launch tokens.
We’ve always said we are long-term holders and we’ve continued to be supportive of all those companies. But next year will be our 5-year anniversary. In that period, we have never once sold a single token position. Some of our portfolio companies have been acquired that did not have a token, and so obviously we’ve exited those positions.
But as we look to the next phase of Coinbase Ventures’ lifecycle, we may selectively choose to sell certain of our positions, if that opportunity becomes available to us, to realize the return. But then also to have more capital available that we can recycle to future innovations in this space.
Have you written down FTX to zero?
Aggarwal: Yes, we have.
Coinbase Ventures is the most active investor in crypto and blockchain, based on Crunchbase data. Does this mean you’re in a place where you’re slowing down in the shorter term, or is this the time to invest more?
Aggarwal: We look at this as a generational opportunity to invest in crypto startups right now. And I am very excited in a lot of ways, because when these moments happen, a lot of the noise and a lot of the excess in the space gets flushed out.
And what you’re left with is missionaries — not mercenaries — and founders who were really investing in the space for the right reason. They’re building products for the right reason. And ultimately, when we take that longer-term view, those are the exact individuals that we want to align ourselves with. Those are the exact individuals that we want to invest in.
Do you think we are going to see a house of cards with the collapse of FTX?
Aggarwal: I do think that you’ll see the failure of future firms that we have not seen rise up into the mainstream media as yet. And I think a lot more will come out around other businesses that had business endeavors with FTX, and they may be in a predicament now where they’re unable to recoup some capital or have been affected.
I think we will continue to see other firms rise up and become public that are struggling, and will ultimately be dominoes that fall as a result of it, and I think you’ll see that for the next few quarters.
Candidly, it’s not something where you’ll have a secular washout and then everything is great. It’ll be sort of a slower drip.
Is it responsible to have a venture fund investing money from Coinbase, if it’s not a profitable company?
Aggarwal: I think about them as two separate relationships. When you say profitable: I think of the P&L, the income statement, and that’s on an annual basis. We’re not profitable today. We haven’t been for the past few quarters. We were very profitable last year, but those are points in time.
We also have a large balance sheet. And that balance sheet gives us flexibility to invest in the core business. It also gives us flexibility to acquire other firms or to invest in other firms, because we believe that as a strategic initiative that is gonna provide capital appreciation back to Coinbase, and/or help us enter new business lines or geographies.
And Coinbase has custodial accounts?
Aggarwal: You can think about us as a diversified crypto platform: an exchange, brokerage and custodian. And then we also have a suite of purely software-based products that largely are oriented around and toward developers. So in some ways the businesses were similar in terms of what we did, facilitating the buying and selling of crypto assets. In many ways they were very different.
An example of the ways that our platform is very different is we do not allow our customers to take leveraged positions in any way, shape or form. FTX enabled their customers to take up to 100x leveraged positions. So, for example, if a customer only had $1 they could take on a position that gave them $100 of exposure. That type of trading tends to be riskier in general. There is a chance for significant growth and capital appreciation, but also a high chance for significant losses. So we’re very different from that perspective.
Another way is Coinbase is based in the U.S., is a public company that has financials published on a quarterly basis, detailed financials that are blessed by our auditors. If you look at those financials, you will see a corresponding asset and a corresponding liability that show our customer assets and our customer liabilities held one to one. You can always verify that. So it is very, very transparent, and fully disclosed and verified by third parties that are blessed by our regulators. So there are certainly similarities between the businesses. There are quite a few differences as well.
Does that mean people are moving away from custodial counts overall? Are you seeing that trend?
Aggarwal: It’s hard to say in the aggregate. We have noticed a spike in interest in decentralized technologies and self-custodial services. The good thing about that for Coinbase and Coinbase businesses is, we offer self-custodial services. We have a Coinbase wallet product, which is a purely self-custodial wallet product where the user owns and controls the private keys to their crypto. And we have a range of other products that are custodial in nature as well, but customers have greater trust in.
We’ve seen that the narratives we have been preaching about Coinbase since the moment it was founded, is that we consider ourselves to be the safest and most trusted exchange for a number of reasons. And that narrative is largely being reinforced in many ways by the events of the past month or so.
What’s the strongest use case that you see for crypto?
Aggarwal: One of the areas that we’re very excited about investing in now is actually crypto-based rewards programs.
So you might have noticed, even just today that Starbucks launched its Odyssey program, which is Starbucks’ loyalty program launched with crypto-based rewards. I don’t know how many millions of users use Starbucks or have a Starbucks loyalty app, but I know it is a very significant population and that Starbucks is a globally recognized blue-chip brand that many other brands will take a lot of inspiration from.
And you need these small sparks to expose people to crypto to understand what it is. Once you understand what it is, the fear factor, the natural human response of engaging and or doing more with it, goes down.
Then beyond that, we’re seeing very interesting behavior and activity in things like Web3 and consumer social platforms, particularly with what’s unfolding with Twitter. People are thinking, “Is there an alternative platform where maybe I, as a creator, own my own data, I own my own audience?” There’s some platforms that we have invested in that are in line with that thesis, like Farcaster.
Is there anything we didn’t cover that you’d like to?
Aggarwal: These types of volatile periods have existed before, and the technology has always risen and continued to exist, and it’s risen to new heights.
In the near term, what we are focused on is building amazing products that abstract away the complexity of crypto and can get consumers invested in crypto. And then from an investment product, we believe that some of the best founders who are in it for the right reasons are starting companies today. So we’re very excited to partner with and invest in those companies.
Illustration: Dom Guzman
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