With Coinbase Exchange, US Bitcoin users get a fully-licensed, insured, and domestic trading option

By Michael Carney , written on January 26, 2015

From The News Desk

As first reported late last night, Coinbase has launched the first regulated, US-based bitcoin exchange. The company crossed this milestone in part through a new partnership, and accompanying investment, from the New York Stock Exchange.

In the hours since the WSJ first reported news of Coinbase’s latest bitcoin venture, the company has revealed additional details of how the exchange will operate and why, it believes, it offers “a better way to trade.”

We now know that the Coinbase exchange offers its customers insurance against “employee theft and hacking in an amount that exceeds the average value of online bitcoin it holds at any given time.” The company goes on to explain that this is the same A+-rated insurance that it has held on its wallet accounts since November 2013, and that the coverage is limited in the event that a user’s login credentials are compromised due to their own actions.

Coinbase also reiterates its significant security measures, including storing 97 percent of all customer funds offline, in so-called “cold storage,” using redundant, encrypted, and geographically distributed data storage. The company also requires two-factor authentication upon account login, and commits to undergoing regular IT security and financial audits. Where Coinbase differs from other exchanges making similar promises, is that the company has obtained relevant regulatory clearance to operate in 24 US states, including the finance and technology epicenters of New York and California. No other exchange company can claim the same.

But, despite the above protections, trading any security retains some risk. The company warns new users upon their first use of the exchange:

There is a risk of loss when you trade bitcoin. All trades are final. Please carefully consider whether trading bitcoin is suitable for you in light of your financial condition. Coinbase does not provide you with investment advice. [Bolding original]
Coinbase will charge a commission of 0.25 percent on all trades made on its exchange, however the company will offer a no-fee trading promotion through March 30 of this year.

The price of bitcoin has been in flux in recent weeks, falling to a 12-month low of $177 on January 9th, following a string of negative news events – including the BitStamp hack and the Silk Road trial – and subsequently rebounding to a high of $272 yesterday preceding to Coinbase exchange announcement, in part due to last week’s news of the Winklevoss twins’ planned Gemeni exchange and the Coinbase funding announcement. Prices shot up another 5 percent shortly after the WSJ report, reaching a high of $287 overnight, but have since settled again in the vicinity of $272.

With Coinbase now offering both its legacy wallet and brokerage service and its newly launched exchange, it’s possible to observe in market behavior on the two platforms. For example, while the price of purchasing a new bitcoin on the wallet platform at 7:55am PST was currently $273.08, the last trade on the exchange at the same time was $269.32. This spread is not altogether unexpected, and may represent a difference in the demographics and psychographics of the customers for each Coinbase platform, but it should not be overlooked as a window into the real-time psyche and shifts thereto of the market as a whole.

Coinbase Exchange is just a few hours old, but the company already has plans for expanding this platform across the remaining US states and eventually to serve the global market. Coinbase’s wallet platform currently operates in 18 countries and has set a goal of increasing that number to 30 by the end of 2015.

This big prize for Coinbase and its US exchange competitors like the forthcoming Gemeni and SecondMarket offerings is to see who can become the exchange of choice for the billions in institutional capital which has long been sitting on the sidelines waiting for an opportunity to enter this market. Some companies, like Gemeni, have aimed their offering squarely at attracting this capital, seemingly at the expense of winning retail traders. Coinbase has not gone to this extreme. It’s not yet clear whether the market will bifurcate itself into institutional and retail, or will follow the pattern of Wall Street where the major exchange serve both classes of demand.

As I said last night, “for those who view bitcoin as the ‘internet for money,’ and expect the technology to have a similarly transformative impact, [the arrival of a regulated domestic exchange marks] a big day indeed.” The animated “Lunar” rocket ship that was cruising across Coinbase’s website has reached its destination. Whether the company has delivered bitcoin to the promised land will become clearer in the coming months and years.