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The Daily Dive #047 - Coinbase Announces New Reserve Policy

The Daily Dive #047 - Coinbase Announces New Reserve Policy
“We have committed to invest $500 million of our cash and cash equivalents into a diverse portfolio of crypto assets. Going forward, we will also allocate 10% of quarterly net income into this same portfolio.” - The Coinbase Blog

In a tweet from Coinbase CEO Brian Armstrong on Thursday night, it was announced that Coinbase was going to be purchasing $500 million in a “diverse portfolio of crypto assets,” and an interesting note is that the portfolio allocation will be decided based on the custodial balances of the assets held on Coinbase by its consumers.

“Our crypto asset investment allocation will be driven by our aggregate custodial crypto balances — meaning our customers will drive our investment strategy. Our investments will be continually deployed over a multi-year window using a dollar-cost averaging strategy.”

Digging deeper, we can make some estimates on the size of the bitcoin allocation that will be made by Coinbase using exchange balances and the numbers reported in the company’s recent Q2 earnings report.

The Q2 report which was just released on August 10, 2021, and reported numbers ending on June 30, 2021.

The company reported having $180 billion worth of assets held on the platform at the conclusion of the second quarter, and using data from Glassnode, we can see that there was approximately $90 billion worth of bitcoin held on Coinbase at the same date.

While this number is most definitely dynamic, this would mean that Coinbase is going to be allocating 50% of the committed $500 million into bitcoin, and 5% of the quarterly net income into bitcoin quarterly.

Last quarter, Coinbase pulled in $1.6 billion in net income, which would translate into approximately an $80 million purchase.

Significance of the Move

While the announced move to dollar-cost average into “crypto” should be somewhat expected by the industry leading crypto exchange, this move by a publicly traded company sets a strong precedent for others. In the words of Coinbase,

“Our investments will be continually deployed over a multi-year window using a dollar-cost averaging strategy. We are long term investors… We may increase our allocation over time as the cryptoeconomy matures. We believe that in the future, more and more companies will hold crypto assets on their balance sheet.”

Moves by companies like MicroStrategy, Square, and Coinbase are just the start, as every institution and corporation will come to understand that holding fiat dollars or dollar-denominated cashlike instruments like Treasury bills are guaranteed to lose money in a zero-interest rate policy environment, and increasingly highlights the need for a global, decentralized monetary asset with a hard-capped supply.