Tons of Coinbase users fled the platform after it rejected bitcoin cash — now the $1 billion startup is in the center of a raging storm

The digital currency startup Coinbase saw an exodus of users this week after announcing that it wouldn't support bitcoin cash, the new digital currency established Tuesday.
Bitcoin cash is a bitcoin offshoot created as a means of dealing with disagreements in the community over how the technology behind the currency should run.
But investors don't seem worried about this exodus harming Coinbase's potential unicorn status.

The world of cryptocurrency is not exactly a calm place. And for Coinbase, one of the hottest and most valuable startups in the sector, this week's remarkable news around bitcoin put the company in the center of a raging storm.

The big offense for Coinbase, which operates a platform for buying and selling cryptocurrencies like bitcoin, was its decision not to support bitcoin cash — the new cryptocurrency that was spun out of bitcoin this week.

Many Coinbase users unleashed their wrath, accusing the company of being everything from a scam to a tool for the National Security Agency. Some threatened to sue. The $1 billion startup also lost users in droves, with 12-hour wait times over the weekend as users scrambled to transfer their bitcoins to competitors that would support bitcoin cash.

The angry reaction, and the risk of a big loss of customers, raised questions about the future of what has been one of the crypto world's biggest success stories.

For now, though, Coinbase's backers aren't sweating it. And they say they don't anticipate the drama having much of an effect on the startup, which has been raising money on terms that would value it at roughly $1 billion.

"There's no one on the board or any investor who doesn't completely back the point of view that we should err on the side of safety and trust," said Barry Schuler, a partner with DFJ, an investor in Coinbase.

"From an investor's point of view, we invested in Coinbase because they have made a voluntary commitment to be regulated," Schuler said, "and to focus on being trusted and safe — as safe as you can be in an experimental environment like this."

Though Coinbase didn't participate in Tuesday's currency launch, Schuler said Coinbase could change its policy as early as next week, depending on how bitcoin cash matures.

Another Coinbase investor, Fueled founder Rameet Chawla, even suggested that Coinbase may increase the strength of the original bitcoin down the line by establishing faith in the legacy currency.

That's because Coinbase's conservative approach may make cryptocurrency more accessible to potential users who are afraid to dabble in technologically complex digital currencies.

"They're a huge net positive on bitcoin, making it really easy on people who are not early adopters," Chawla said.

Mass exodus of coinbase users

With 9 million users and $20 billion exchanged, Coinbase has its hands on a lot of the digital currency floating around. And while investors support Coinbase's decision to sit out the initial bitcoin split, many customers felt betrayed by the company.

A scan of the Coinbase community forums shows a host of angry topics such as "What if Coinbase is NSA tool to destroy BTC (bitcoin cash)?" and "Dear Coinbase, if you not release my funds in 1h I am going to sue you."

Coinbase wouldn't disclose how many users withdrew bitcoins in anticipation of bitcoin cash's arrival. But things looked rough. Coinbase users experienced delays of about 12 hours on withdrawals over the weekend because of the number of people moving bitcoins.

Despite this, sources close to the situation said the company expected to see many people return to Coinbase while simultaneously storing newly acquired bitcoin cash in a different digital wallet.

"Ultimately, Coinbase is an exchange for buying bitcoin, but people are free to use their own wallets and take control of their wallets anyway they want," Chawla said.

The hard fork

The introduction Tuesday of bitcoin cash was known as the "hard fork." It resulted in a cloned currency with different technological protocols from those of the original bitcoin. The fork was a means of dealing with disagreements in the bitcoin community over how to evolve the technology to handle increased demand.

The hard fork followed a process similar to cell division in biology, in that the two currencies were the same at the point of division but will pursue different paths moving forward.

Users storing their bitcoin in a digital wallet that accepts bitcoin cash on Tuesday found themselves with a bitcoin cash coin for every bitcoin they had at the time of duplication. Bitcoin and bitcoin cash do not have the same value, however, so duplication is not the same as a doubling in worth.

Why Coinbase sat out on bitcoin cash

In a statement on Twitter on Tuesday, Coinbase CEO Brian Armstrong wrote that the company was agnostic to which currencies its users trade and that it was not opposed to adding new assets in the future.

"Our goal is to be the safest, most trusted and compliant, and easiest to use," Armstrong wrote. "Not the first to market with new assets. Especially at scale, it takes time to ensure any new asset we add is well tested and secure."

Generally speaking, Coinbase isn't quick to take on new currencies. Founded in 2012, the exchange still trades only bitcoin, ether, and litcoin — all digital currencies the team has deemed stable and technically secure enough for an amateur investor to put money into.

We have made this decision because it is hard to predict how long the alternative version of bitcoin will survive and if Bitcoin Cash will have future market value.

So it was of little surprise to those close to the company when it issued a statement last week advising that customers who want to access both bitcoin and bitcoin cash would need to withdrawal from Coinbase by this past Monday.

"We have no plans to support the Bitcoin Cash fork." David Farmer, the director of business development at Coinbase, wrote. "We have made this decision because it is hard to predict how long the alternative version of bitcoin will survive and if Bitcoin Cash will have future market value."

Users were irked because Coinbase's decision not to accept bitcoin cash meant that anyone with bitcoin stored in Coinbase's digital wallet would not receive what many saw as free bitcoin cash.

Others were concerned that Coinbase would secretly keep the bitcoin cash that was generated Tuesday. In a statement last Friday, however, the company denied that this would happen.

"Coinbase would not keep the bitcoin cash associated with customer bitcoin balances for ourselves," the company posted on Twitter.

Investors like Schuler, however, saw the Coinbase's trepidation as part of its core business strategy.

"The whole cryptocurrency-blockchain space is a bit like the Wild West right now — just like the beginning of the internet," Schuler said. "But slowly and surely, it's becoming institutionalized. Coinbase represents that — being legitimate and offering as much trust and safety as possible."

Tons of Coinbase users fled the platform after it rejected bitcoin cash — now the $1 billion startup is in the center of a raging storm

Mass exodus of coinbase users

The hard fork

Why Coinbase sat out on bitcoin cash

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