Note: This is not investment advice and my investment disclosures are below.

Special thanks to my Ali Khan for running the scripts to grab and analyze pricing data. He’s looking for an internship so if you need a finance-y engineer, reach out!

Marc Andreessen’s been a bit thin skinned lately.

Is he worried that the jig is up?

Jack Dorsey has been all-in on calling out VCs for profiting from altcoins, even as they claim to push “decentralization.” That got me thinking: Marc Andreessen actually has a seat on Coinbase’s Board of Directors. Meanwhile, Coinbase lists his coins to the public. Isn’t that a conflict of interest?

I started to wonder what these coins’ performance really looked like long term, especially stacked up against Bitcoin and Ethereum - benchmarks that are hard to view and calculate. 

If coins, especially VC-backed coins, consistently underperformed Bitcoin/Ethereum after listing on Coinbase, that says to me that insiders were waiting for a big, dollar-based exchange to list so they could sell - VCs taking profits at the expense of retail. Those insiders include venture capital firms like a16z and, incredibly, Coinbase’s own venture arm, which has a number of investments listed on Coinbase. Other exchanges like Kraken, FTX, and Gemini are also all active in venture, and have listed their own investments.

Why is this important and not just nerdonomics? First, Coinbase is like the New York Stock Exchange of crypto - a listing there is a huge deal, and usually leads to massive profits for everyone involved. But unlike the NYSE or NASDAQ, Coinbase gets to choose whatever assets they want, using their own process.

Second, a16z and Coinbase’s own returns are particularly interesting, given a16z is supposedly the best investor in this space, and there’s a potential for conflict of interest. Is the game rigged?

Third, Coinbase pivoted its strategy last year to go from being cautious to listing as many coins as they can. That raises the ante even higher for them and their users.

So I started to dig in, and what I found surprised me: most coins underperformed, returns got worse over time, and VC-backed coins did worst of all.

But I was able to do one better - for the last few years, Coinbase put out the names of coins they were thinking to list, but never did. I analyzed those coins - and found they did even better than the ones that made it, and the VC-backed ones didn’t show any of the same underperformance. 

Let’s dig in. 

Coinbase Effect or Coinbase Curse?

For years, being listed for trading on Coinbase has been the holy grail of crypto - the equivalent of an IPO on Wall Street. And like an IPO, that seems to come up with a “pop” - Messari, a crypto research firm, documented in a report that the average Coinbase listing leads to a 91% gain in 5 days, on average.

But I think there are two flaws with that analysis:

1. This is an extremely short time frame. If you believe, as I do, that the returns for most coins come from illiquidity rather than fundamental value, the sudden rush of buyers after a listing will create a pop but eventually turn negative as insiders’ lockups end.

   What do I mean by illiquidity? Basically, many have a large amount of the supply immobilized, or “locked” in Defi protocols, with incentives not to sell. Project developers and investors will hold a significant amount of the coins, but over time, the supply gets released.

2. Showing returns on an absolute basis is meaningless. If you’re a hedge fund, you have to beat the benchmark. The benchmark for any cryptocurrency should be Bitcoin (BTC) and/or Ethereum (ETH). In my opinion, Ethereum makes sense as the majority of these “web3” tokens are built on Ethereum’s vision, rather than Bitcoin’s.

   For example, the Coindesk article above cites a “six fold” return on Filecoin. But investors who chose to buy Filecoin instead of Bitcoin at Coinbase’s listing on December 10th actually did poorly on relative terms, with a rapid decline (yellow line) in the first month. 

Note: The yellow line is performance against Bitcoin, and green in USD terms.

Most of that return they cited was Bitcoin going up, and Filecoin has actually severely underperformed Bitcoin in the time since - by 55%!

I’m not alone in this. Most people who have experience trading crypto look at the prices in BTC or ETH, not in USD, to make assessments.

How do Coinbase’s listings stack up? I took 128 listings from Coinbase (removing stablecoins and pegged coins) and separated listings by year. 

Note: For the most part, I used the official announcement date by Coinbase for Coinbase Pro. Trading for most coins usually began within 2 days and often on the same day.

The results largely confirm my thesis in my view. Coinbase and VCs will likely trumpet the USD returns as proof that crypto allows retail investors (the “community”) to partake in the growth of these networks. But the reality shows that most of the return comes very early after the listing - the 2021 coins are doing great, but everything from 2020 and earlier is underperforming! The 2021 return is also below the 91% pop cited by Messari, which suggests after the pop they all lose value.

Once a coin has been on Coinbase for a year, it appears to lag Bitcoin and Ethereum pretty soundly.

I also looked for coins where I could find the return for the one year (68 of the 128) prior to listing, just to show that the coins were not performing badly since inception:

If we split up the coins listed in the last year, we still see the same pattern: the coins in the last six months (65 coins) do better than those in the previous six months, and the last six months also lag the average 91% pop. If you take out only 2 coins (Polygon and Solana) from those 63 that are over 6 months old, Coinbase’s returns also turn negative (-10.5% against Bitcoin, and -55.0% against Ethereum).

Looking at the hit rate, out of all the coins listed, 91% lagged Ethereum when listed more than a year ago and 70% lagged Bitcoin. These numbers likewise get worse the farther you go back.

Thirsty for Liquidity

Surely if we filter for a16z’s listings on Coinbase, we will get better results? Au contraire…

A16z’s returns are much worse than Coinbase’s listings overall! This to me smells of insider selling. These should be the best coins there are, given a16z’s access, but instead 100% of those older than 12 months and 90% older than 6 months lag Ethereum:

“It’s a hits business,” Andreessen might retort. But: 

1) Retail investors are not creating a full portfolio like VCs 

2) This is a public offering, so returns should be more like stocks with a positive average return

3) The “hits” in VC are supposed to be “100x” returns to make up for dozens of failures, but of a16z’s listings only one (Solana) managed to at least double in BTC terms.

Back in 2018 when I used to trade coins for fun, looking at the cap table for big name investors like Andreessen Horowitz was the best way to avoid getting stuck in a “rug pull” - when a coin suddenly turns out to be a scam. It worked pretty well, I will say.

When I tried to deploy a similar strategy in 2021 on Coinbase however, I kept losing money. I think now I have an inkling why.

I also took a look at Coinbase Ventures’ investments. They seem to do better - although again the older coins underperform. Coinbase’s portfolio is younger, and the outperformance is entirely driven by two coins: Polygon and Wrapped Luna. Without those two the Coinbase Ventures portfolio of 15 other coins averages a -6.0% BTC and -42.6% ETH return.

My favorite angle is looking at when Coinbase and a16z invest together. This would seem to be the darlings of the industry (darlings of DeFi?), but in fact are the worst performers of any grouping! (If you’re curious, the five are Uniswap, Celo, Keep Network, Rally, and Compound).

There’s also good reasons to sell on Coinbase as a US based VC investor: (1) You do not want to be double taxed, which trading into a non-USD pair would result in (2) You are a US entity and cannot open an account on Binance or other exchanges that list these coins first (3) It’s more secure to custody and transact on Coinbase, as on other exchanges you might have to use hardware wallets, collate your transactions across exchanges, etc.

I also looked into why Coinbase’s investments might have outperformed. One thing I noticed was that Coinbase seems to list its own investments at much smaller market caps (see below). For 7 of the 18 Coinbase-backed coins, I looked up whether Coinbase or Binance (an exchange that tends to be far more aggressive with regulations) listed first, and in five out of seven cases Coinbase had moved first - a much higher percentage than normal. One is left to wonder if Coinbase knows that a Binance listing will hurt their profits by sucking away returns!

(And if you’re wondering if a16z’s poor returns are explained by the larger listing market cap, the answer is no - theirs seem larger only because Internet Computer debuted at roughly $52B, otherwise they’re fairly in line with the rest.)

Proof-of-Pudding

Those numbers alone don’t prove anything about Coinbase or a16z, their spokespeople will say. Newer cryptos have done better because of better technology! And those returns have faded for all exchanges, not just Coinbase. Now shut up before we sue you!

But lucky for us, we have what in economics they call a “natural experiment.” Up until 2020, Coinbase would announce they were considering a group of coins for listing. Some got the green light (included in my analysis above) and some didn’t.

The returns for those unlisted coins? Many of them are exploding. Non-listings significantly outperform listings on a USD and BTC basis all-time, and underperform ETH slightly (keeping well with my position that ETH is the best benchmark).

Importantly, the returns also get way worse as a coin gets older - even worse than Coinbase’s coins. This is for a couple reasons I believe: (1) Coinbase’s selection criteria probably exclude the shittiest of shitcoins (2) The non-listings are much older, meaning there has been more time for degradation.

If we look only at 2020, where we have a fairly even comparison (17 Coinbase listings against 13 non-listings), the return difference is damn near astronomical. And this is not a product of one winner - 4 of the non-listings are positive against ETH, while only 1 of the 17 actual listings is! 

This negative effect seems so strong enough that in 2019 and 2020 your odds of beating BTC or ETH were significantly higher if you picked what Coinbase didn’t list - for 2020, as much as five times higher against ETH (94% of Coinbase’s 2020 coins underperformed, vs 69% of the Coinbase rejects). That strongly suggests the availability of liquidity in USD seemed to outweigh the “halo effect” of Coinbase…or that people were selling. 

My conclusion: So much for the “Coinbase effect”: letting people sell coins in USD seems to hurt way more than it helps. If anything, there seems to be a Coinbase curse.

This feels like good support for both of my theses: (1) that most coins appreciate due to illiquidity, not value (as both listings and non-listings suffer degradation over time) (2) that the liquidity on Coinbase causes these coins to underperform, perhaps in part due to insider selling.

Insider selling? You didn’t say anything about that part….

Locked In

We already took a look at a16z coins and saw they underperformed BTC, ETH, and the average Coinbase listing.

What about the non-listed tokens? There’s a much smaller sample of four coins, but the results are pretty stark:

Returns for a16z coins that didn’t get listed actually manage to outperform Bitcoin, something the listed coins did not even come close to. Arweave had investments from both a16z and Coinbase Ventures, but never listed - and had the strongest performance by far, a full 10x since Coinbase said it was “evaluating” whether to list!

We can basically tell our story in 3 coins from the “DeFi summer” of 2020: 

These coins have all been through the same “macro” environment. The never listed coin is the best; the listed, non-VC coin is better; and the listed, VC-backed coin is the worst.

What Does It All Mean?

My first thought on viewing this is I myself won’t buy anything listed on Coinbase, especially after the initial pop, and to stop trusting VC-backed coins. Turns out I didn’t lose all my trading skills after all..

The logical inference would be to only buy BTC and ETH, although those returns have also come down on an annual basis (including the last year), although are still far less risky than these smaller coins. Overall, they seem like a better shot than buying “web3” tokens. (Please re-read the disclaimer at the top.)

I think it also has important implications for some of the big debates in crypto:

• A counterpoint to the “Balaji” thesis. Balaji likes to repeatedly make the point that a major value proposition for “web3” is to help the “little guy”: letting users participate in value creation (e.g., have some ownership in a project). However, the vast majority of users are buying on Coinbase and so are simply underperforming Bitcoin.

• Support for the “Jack” thesis. Jack’s contention is that most tokens are owned by VCs, and that they are ruining Bitcoin by using the “web3” narrative to siphon off liquidity created by the demand for deflationary assets. Jack is something of a Bitcoin maxi, so this is self-serving, but so far it looks like he might be onto something.

Other thoughts: Coinbase might also be throwing away its brand here. They might need new assets to encourage trading, but others think the pivot away from the cautious approach may be the influence of Balaji - which makes sense given his thesis about “helping” investors, but he might be wrong looking at the data. Also, Balaji used to work at a16z and Coinbase - so no one can really say his motives!

Lastly - do I think there’s something nefarious going on at either company? I actually don’t think so - it’s possible they haven’t even looked at the numbers themselves. They might just be the most transparent, since it’s hard to get data on other investors and exchanges. But they also have the most influence by far. And as Uncle Ben said, with great power…

Rather, I think this is a microcosm of how bad the incentives are in crypto - VCs and private investors that used to have to wait ten years for liquidity can now get it within one. The last time that happened was 1999, and we know how that ended. It’s a recipe for risk taking that is then quickly passed on to the public.

Addressing Likely Objections To My Analysis

• You’re a nocoiner. Nope, I’m long BTC, ETH, and NEAR, with March ‘22 $26 puts on BITO to hedge some of the recent volatility.

• You’re a Bitcoin maxi. Nope, I worked for Joe Lubin and ConsenSys for three years.

• You didn’t look at other exchanges. Given Coinbase had the largest “pop” by far on exchange listings, I would imagine the liquidity fade would be the strongest there too. I also think the a16z-Coinbase nexus is the best one to study, because a16z and Coinbase are tied at the hip and have the most influence. I also doubt a16z has accounts at Kraken or Gemini, given their vested interest in Coinbase, so I wouldn’t imagine a relationship there. I would be interested to do an analysis versus Binance, so that might be a future analysis.

• These aren’t bad returns. The returns for coins listed in the last year (basically 2021) are still good, and the USD returns are all positive. That’s fine, but I would say if these coins only went up because Bitcoin did, what’s going to happen when Bitcoin has a bad year? And if you just lose to Bitcoin, what’s the point of Coinbase? 

• You did this during the bloodbath so it looks worse. Nope - I ran the original numbers in December (BTC around $50k) before I wrote the piece, and all the same trends held.

My Suggested Solutions (Hello, Gary Gensler)

The first question I would ask is Should This Be Legal? NASDAQ and NYSE have venture funds, but the SEC has to approve their investments before they can be listed publicly! No regulator checks each Coinbase listing. Sure, maybe they have processes and act in good faith, but would you trust any old company’s financial statements if no one was auditing them?

Think of it this way: it’s like if Google invested in Goldman (Messari in this case), which then published research reports about Google’s work, and then Google ran IPOs of its own investments. And no one has to disclose what they’re buying or selling. Would you get any good information in this clusterfuck of bad incentives?

Here’s some solutions that I think are necessary to better protect investors and correct some of these bad incentives:

1. Fund disclosures. Hedge funds and mutual funds are regulated by 13F and 13D: for 13F, they have to disclose their holdings every quarter, and for 13D, anytime they acquire more than 5% of a public company. My view is that VCs and other crypto investors should have to do the same for crypto. Want to sell to the public? Play by public markets rules. Otherwise, it’s not fair to mom and pops who are clicking on their billionth YouTube ad for Coinbase.

   Some will say 13F and 13D don’t do much and might not help small investors who won’t read filings. But I say it will allow professional investors to evaluate tokens that have taken on investors who liquidate quickly, and that will allow for reputations to be earned/lost.

2. Fix accredited investor rules - but not just by deregulation. Populists will say “get rid of the accredited investor rules! That’s holding back people’s participation in economic growth!” And I say absolutely. But do you know public companies (you know, “permissionless” investing) also are subject to regulation and disclosure rules? These advocates want the deregulation of VC (necessary) without the rules of public markets (also necessary). That means S-1 style public filings. S-1s typically disclose the relationship between investors and directors, risks, and importantly, ownership by management and major investors. 

   I’m sure the Balaji’s and Ryan Selkis’ of the world would say this idea would “kill” innovation: Contrary to popular opinions, I don’t believe companies are staying private longer due to the onerous rules (although they are onerous), but that public markets became more forgiving of losing money, which meant you could go public at bigger and bigger scale of losses. If you could avoid dilution and get a bigger exit, as a founder or investor, why wouldn’t you?

3. Close the utility and governance coin loopholes. The SEC accidentally created a massive loophole when it said Ethereum was not a security, because Ethereum’s coin has utility. 

   Let’s say you’re a deli, and you decide to sell sandwich coupons online (utility!). If people on the Internet seem willing to pay for them, why would you not issue a billion sandwich coupons? Sure, your little deli won’t sell a billion sandwiches in the next ten thousand years, but that’s not your problem. 

   Most DeFi coins use a “governance token” model, where one token is one vote. That falls into a very similar “how many votes?” gray area. 

   Let’s look at Celo as an example: between “2018 and 2020, Celo raised over $46.5 million by selling roughly 120 million CELO tokens.” It has stated since that the total supply of tokens will never exceed 1 billion, with only 6% (60M) of that circulating at launch. Since then, it was listed on Coinbase on September 3rd (Coinbase and a16z invested) with approximately 12% of the coins in circulation, and in the 15 months since that has increased to 37% today!

   This coin is valuable for its ability to “vote on the creation of stablecoins,” so of course we need a billion of them.

   If utility/governance coins remain an open loophole, the issuing company needs to provide a fair estimate of how many tokens will actually be needed by users in a disclosure - so investors can hold them accountable.

   Look at how the performance flatlined since the release schedule accelerated significantly (to 1.2% per month) in April 2021:

1. Stricter (de)listing rules. Coinbase has no rules currently around minimum market cap, minimum number of shareholders, or minimum trades per day. That means shitcoins can go down, and down, and down. The NYSE and NASDAQ have many such rules, which is why they have the best reputations in the world. These also include rules about how much stock can be controlled by the management team. If crypto exchanges have to repeatedly delist their coins due to lack of liquidity or price drops, that will hurt their reputation - giving them an incentive to require good quality.

Conclusion

In Urdu, we call a lackey a chamcha, “spoon” - because they feed you what you want. At the end of the day, I’m some guy on Substack - but sadly, I think the state of crypto investing today is that all the “research” you get is from someone’s chamcha. 

I don’t know whether Balaji or Jack will be proven right in ten years, but all of this supports what I call the “Charlie Lee” (creator of Litecoin) thesis: there may be huge demand for deflationary assets like Bitcoin, but the biggest problem is anyone can create another, similar cryptocurrency, so it’s not really deflationary at all.

What will Coinbase’s returns for 2021 coins look like next year? I’m willing to bet the same pattern continues, where coins pop and then fade away to sub-Bitcoin returns. At a minimum, I hope Coinbase users can eventually see that - the same way you could for an ETF or mutual fund. Given Coinbase is giving access to riskier and riskier assets over time, it’s only right.

At best, the investors and exchanges are people who want to reinvent finance but are underestimating its complexity. As Matt Levine says, a lot of crypto is simply repeating financial history’s mistakes. At worst, it’s rich guys teaming up with their buddies to exploit a bubble and help them buy $100 million dollar mansions. It’s time these big companies and regulators stepped to make sure the same standards and data are available to everyone. Until then, buyer beware.

Notes:

1. In 8 cases, the unlisted coins were not trading at all before Coinbase’s evaluation. In that case, I used the earliest market data available on Coingecko. Interestingly, 5 out of the 8 that had yet to trade anywhere and were being evaluated for listing had investments from a16z or Coinbase!

2. I used a16z and Coinbase Ventures own listings of their investments, but in one case (Livepeer) I found an outside source that noted Coinbase had invested, but no record on their website (it’s possible they have divested the position since).

3. For the market cap comparison of Coinbase backed versus not, I could not find listing market cap amount for the following: Braintrust, Clover Finance, Jasmy, Kyber Network, Loom Network, Moss Carbon Credit, Voyager Token, Wrapped LUNA, Orchid-protocol.

References:

1. All my data analysis and source data can be viewed here

2. Coinbase provides all its new listings on its blog

3. Coinbase lists its investments on its website

4. A16z has two listings for its portfolios: crypto and all.

5. Messari also have Coinbase and a16z portfolios, though I cross referenced for accuracy

6. All prices from Coingecko.com. Returns based on January 9th 2022.