Coinbase was founded by Brian Armstrong and Fred Ehrsam in 2012 and has its headquarters in San Francisco, California. The platform was first launched as a digital wallet for users to store their bitcoins online, before venturing into the brokerage space where users can buy and sell bitcoins. As of 2017, Coinbase is the largest bitcoin broker in the world and serves users in 33 countries.
Any cryptocurrency trade requires a buyer and a seller. The buyer and seller need to be registered with a broker in order to carry out a transaction with each other. To ensure fair trade practices between both parties, an exchange is required to monitor all transactions. However, neither party can trade directly with the other using an exchange; that’s the purpose of a broker. Like a stock broker, Coinbase brokerage acts as an intermediary between the transactors and the exchange and provides an online system whereby buyers and sellers can conduct trades with each other, regardless of their geographical location.
The exchange platform for Coinbase is called GDAX – Global Digital Asset Exchange, formerly called Coinbase Exchange. GDAX records every transaction including volume and price levels of not only Bitcoin trades, but also Ethereum and Litecoin. GDAX allows users to quickly engage in multiple trades without having to initiate bank transfers for each trade which could be delayed for a couple of days. The cryptocurrency exchange also has margin trading as an additional feature for institutional investors.
Buyers and sellers on GDAX are referred to as either makers or takers. Makers, the users who set a limit price on their orders, usually have their limit orders added to the order book. The order book retains the order until another trader matches the price; this trader is called the taker. For example, a trader (maker) who places a sell order for 10 BTC and sets a limit price of USD 2300 will have his order stored into the GDAX order book, until a buyer (taker) creates a market order which is matched to USD 2300. Makers have no transaction costs applied to their orders, while takers are usually charged 0.25% of the trade amount.
Coinbase provides a mobile wallet and web wallet app, both of which sync with each other. By having a wallet and exchange under the same umbrella, users of Coinbase can conveniently transfer bitcoins between both platforms, which are initiated instantly and with no additional cost to the user.
While Coinbase is frequently referred to as an exchange, it is important to note that Coinbase operates more like a broker and wallet that tailors to retail and non-technical clients who want to buy, sell, and store cryptocurrency. GDAX is the exchange component of Coinbase that serves sophisticated and professional traders looking to trade digital assets.
If you want to trade in digital currencies, you are going to need a platform on which to trade them, and an intermediary to communicate with the network. Most of us do not have the technological wherewithal to communicate with the blockchain, or to store our digital currency. That’s where Coinbase comes in.
Coinbase is a global digital asset exchange company (GDAX), providing a venue to buy and sell digital currencies, as well as send information about those transactions out to the blockchain network in order to verify those transactions. Coinbase serves as a wallet, too, where the digital currencies can be stored. The application operates exchanges of Bitcoin, Ethereum, Bitcoin Cash and Litecoin, as well as other digital assets with fiat currencies in 32 countries, and Bitcoin transactions in many more countries. According to their website, Coinbase has served over 10 million customers, and facilitated the exchange of more than $50 billion worth of digital currency.
Essentially, if you are interested in trading in digital currencies but don't want to get bogged down in the underlying technology, products like Coinbase are a way to begin a foray into a new form of currency speculation and investing. You do, however, lose some of the advantages of trading in a cryptocurrency and through the blockchain. On Coinbase, you have no psuedoanonymity - your name is attached to your Coinbase account and so is your bank account, so transaction history is relatively easy to track down. And if you're not working on the blockchain, there's not much you can do to ensure that the verification of your transaction history or your account is taking place on the blockchain. You are, instead, placing trust in the intermediary; in this case, Coinbase.
Buying and Selling Cryptocurrency
In order to purchase cryptocurrencies, Coinbase requires you to link a bank account, or credit or debit card to your Coinbase account. Using a bank account allows for higher limits ($100/transaction, $2,500/week), but it also takes longer to verify transactions, so you will not see money in your Coinbase wallet for two to four days (depending on your bank). And when selling Bitcoin, once the sale is confirmed, it takes two to four days for the proceeds of that sale to show up in your bank account. With a credit or debit card, limits are lower ($200/week), but you can purchase digital currencies by simply transferring funds from that bank account to the site. For these transactions, Bitcoin shows up in your Coinbase wallet instantaneously. You can also sell Bitcoin to your PayPal account, effectively cashing out, as your Bitcoin will be exchanged for local currency. This transaction, too, is instantaneous.
Despite the intricate technology associated with and necessary for cryptocurrency investing, speculation and possession, Coinbase has created an apparatus that makes this process remarkably easy and familiar, almost like buying and selling stocks. This screenshot from the Coinbase site shows real-time cryptocurrency prices, and doesn't look too different from your ordinary online stock tracker.
Coinbase charges transaction fees for both the purchase and sale of cryptocurrencies on their platform, in their marketplace. These rates vary country to country, but the base transaction rate in the United States is 4%, with various percentages added on, depending on payment method (for more info on transaction fees, look here). Generally speaking, instantaneous transactions incur higher transaction fee rates.
Security and Insurance
To ensure the security of your cryptocurrency assets purchased and stored within Coinbase, the platform stores 98% of customers funds offline. On their website, Coinbase assures customers that "sensitive data that would normally reside on our servers is disconnected entirely from the internet". Data is then encrypted, and transferred to USB drives and paper backups, and distributed in safe deposit boxes vaults all over the world.
The other 2% of customer funds, held online, are covered in the event of a breach of Coinbase's online storage. Also, Coinbase holds all customer fiat currency in custodial bank accounts, on behalf of customers. So, if you have fiat currency in Coinbase, in a USD wallet, it is covered by FDIC insurance up to $250,000 (just like a "regular" bank). This protects customer assets (so long as they have been converted to fiat currency) even in the event of Coinbase becoming insolvent.
If you do have this much money tied up in Bitcoin, though, you may want a more secure space to store it. If this is the case, Coinbase offers a Coinbase vault, which has time-delayed withdrawals (giving you 48 hours to cancel a withdrawal) and the option of multiple approvers, increasing security by ensuring that all withdrawals are approved by multiple people. They also offer a multisig vault, which is basically an even more involved and more secure vault, requiring multiple keys to unlock.
Word of Caution
Because the blockchain works by verifying transaction history, and this verification process is labor-intensive and slow, only so many transactions can be verified in a certain timespan. So, if you sell your Bitcoin, but the purchase isn’t confirmed by the blockchain network, and the price of the currency changes, the sale won’t process. You'd have to sell your Bitcoin at whatever the new rate is (if you so choose to sell). Also due to the reality of blockchain, as well as for other reasons thus far unidentified, the Coinbase payout system can sometimes be unreliable. There have been reports of extensively delayed payout periods, and bugs sometimes keep the site from running as efficiently as it could or should. A word to the wise: if you are going to invest in and speculate on cryptocurrencies, do so carefully.