Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: Coinbase’s crypto correlation, another tech IPO, consumer borrowing stalls, and a look back at the Bitcoin white paper. To sign up for the Capital Note, follow this link. Coinbase: A Bet on Crypto? The basic value proposition of Bitcoin and similar digital currencies is: They are not controlled by a centralized, trusted authority, so crypto transactions are immutable and open to anyone. They can’t be devalued by a central bank or some other government entity. Which is awkward for Coinbase, a centralized corporation that listed on the Nasdaq yesterday with the blessing of the Securities and Exchange Commission. The exchange’s $60-some billion valuation is a result of a fantastically profitable exercise in centralizing decentralized assets. Coinbase makes money because its users trust it to buy and store their Bitcoin in the same way that a depositor trusts Chase to hold his money (although the latter has the advantage of federal deposit insurance). The Coinbase listing is the apotheosis of the past year’s much-heralded “institutional adoption” of crypto — PayPal and Mastercard adding Bitcoin to their offerings, Tesla adding it to its balance sheet. While many see the Coinbase listing as a vindication of crypto, it underscores a paradox: Bitcoin, devised as a tool to emancipate the masses from corporate and state power, now depends on the imprimatur of the institutions it is meant to take down. If Satoshi Nakamoto invented Bitcoin as an alternative to the corporate financial system, Wall Street’s embrace of a crypto exchange should be a damning rebuke of the currency’s raison d’etre. And Coinbase joining the ranks of Tesla and SPACs in stock-market hype cuts against the austere, Austrian economic philosophy of most of its proponents. There’s also the question of competition. Coinbase gets away with charging gargantuan fees because there are few alternatives. As Matt Levine points out, the trading volume on Coinbase is miniscule by Wall Street’s standards: Coinbase users have traded about $456 billion of cryptocurrencies, or a bit less than people trade on an average single day in the U.S. stock market. “$90 Billion Assets on Platform,” boasts Coinbase; it also notes that that represents about 11.1% of the total value of all crypto assets. Goldman Sachs’s earnings presentation notes that it has about $2.2 trillion of assets under supervision just in its asset management division; JPMorgan’s earnings supplement notes that it has almost $3.7 trillion of assets on its balance sheet. Coinbase makes far more per transaction than Goldman could ever hope to. Increased institutional adoption means more competition for Coinbase from platforms that will undercut its margins. Good for crypto, bad for Coinbase. It is unsurprising, then, that Bitcoin’s dollar value dropped yesterday as Coinbase shares rallied. MicroStrategy, a stock that has effectively become a Bitcoin proxy, lost 16 percent, too. That decline is due in large part to an increase in the supply of publicly listed Bitcoin proxies. If you were getting exposure to Bitcoin by owning MicroStrategy shares, now there are 186 million shares of Coinbase that offer directionally similar exposure. What all this says is that Bitcoin might not be the asset its evangelists claim it is or want it to be. Not a currency that will topple the state, but a consumer product that people like to gamble on, more akin to DraftKings than digital gold. If so, Coinbase’s valuation may be justified. But if Bitcoin is still what Satoshi envisioned, institutional adoption should worry the HODLers. Around the Web Another big IPO this week, KKR-backed AppLovin, got less love from investors Shares in AppLovin, the mobile games company that owns hits such as Matchington Mansion and Wordscapes, slid from their offer price on Thursday, taking the shine off one of the biggest public market debuts of the year. The company, backed by private equity group KKR, raised $1.8bn in an initial public offering that gave it a market capitalisation of $28.6bn, but the stock opened some $10 below the $80 offer price and slid further in early trading. Consumers are borrowing less, hitting banks’ bottom lines The good news for banks is that consumers are flush with cash and less likely to fall behind on their debts. But this also means it will be that much longer before they need to borrow more. Banks really need loan growth to offset the effect of low interest rates and the drag of huge deposit inflows sitting in cash on their balance sheets. Many banks’ credit-card portfolios plunged during 2020 as consumers spent less and also paid down debt. In theory, the economic growth that is anticipated for this year would imply a greater use of credit by consumers and businesses to fund more activities. A Singaporean 33-year-old’s $740 million fraud Ng’s purported investment strategies that are under the spotlight were linked to nickel, a key ingredient in many electric-car batteries. The metal has become a popular speculative bet in recent years amid soaring demand for Teslas and other EVs. In one transaction described in charge sheets, Ng was involved in raising money from investors claiming he would use it to buy nickel from an Australian company called Poseidon Nickel Ltd. He never followed through with the purchase, prosecutors said. Poseidon’s chief executive officer, Peter Harold, said in an email that the company has had no engagement with Ng or related entities. Ng was involved in deceiving investors into buying supposed forward contracts that were purportedly with French lender BNP Paribas SA, but those contracts didn’t exist, according to the charge sheets. BNP had no account or trading history with Ng, Envy Asset Management or Envy Global Trading, a person familiar with the matter said. Random Walk If you don’t buy my argument that Coinbase is antithetical to the crypto project, take a look at the Bitcoin white paper: Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for nonreversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party. What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. In this paper, we propose a solution to the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions. The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes. If Bitcoin depends on Coinbase, Paypal, Mastercard, etc., it depends on trust. — D.T. To sign up for the Capital Note, follow this link.