Will this startup go to the moon? Or will it crash and burn?

The dilemma of CoinDCX

Aug 22, 2021

When I was in Kota, our teacher used to say: "IIT jao, fir life set hai". Spoiler alert: this is a myth.

The startup world has a similar myth: "Unicorn ban jao, fir life set hai".

CoinDCX breaks this myth.

At first glance, it looks like their "life is set". Their revenue is growing like crazy and their business model is very profitable and they have a huge Indian crypto market in front of them.

But look again, and you'll see a completely different picture: the very real danger of crypto ban in India. Even if crypto isn't banned, people are expecting tough regulations on crypto soon. This means a big part of CoinDCX's business could get wiped out tomorrow.

You see the dilemma? On one hand, we have the bright side- a great business model. On the other side, we have the dark side- crypto ban.

I was very confused: which side to take? So in this newsletter, I will show both sides of this dilemma to you. And you can decide which side you want to be on. Cool?

Let's go🚀🚀

🕹The Bright Side: Business model op💯

On CoinDCX, you can buy and sell cryptocurrency. In technical terms, this is called a cryptocurrency exchange. Just like you buy and sell stocks in a stock exchange, you buy and sell crypto on a crypto exchange.

Earlier, if you wanted bitcoin, there were only 2 ways available- you find someone who would sell it to you or do bitcoin mining. None of these options appealed to normal people. After all, normal people don't roam around asking for bitcoin. And normal people don't mine bitcoin in their pastime.

Enter crypto exchanges. They make the process of buying and selling crypto simple and safe. CoinDCX was among the first crypto exchanges in India, and look at them now: they have become a $1.1 billion crypto startup!!

A stock exchange is simple- you can exchange stocks for money. But a crypto exchange is a little more complicated. Here you can exchange crypto for money or other crypto. for example, in a crypto exchange, you can exchange bitcoin for eth, bitcoin for dogecoin, bitcoin for US dollars, bitcoin for Indian rupees, etc.

Now there are 2 types of crypto exchanges- centralized and decentralized.

Centralized crypto exchange means a central company controls the exchange. Examples are Coinbase and CoinDCX.

Decentralized crypto exchange means no central person or company or govt controls that exchange. Examples: UniSwap and BurgerSwap and SushiSwap and PancakeSwap(nice names😉).

Right now, centralized crypto exchanges are dominant- 99% of crypto trading happens there.

99%!!! Why this huge percentage in favor of centralized exchanges?

Because they are user-friendly. Just like Zerodha is a user-friendly way of investing in stocks, CoinDCX is a user-friendly way of investing in crypto. Plus, they are secure and reliable. Centralized exchanges offer an extra layer of security and reliability when it comes to transactions and trading.

User-friendly and reliable: these are 2 reasons for CoinDCX's success. But this is not the main reason for its bright future.

The main reason is: the powerful business model of crypto exchanges.

But they just help people buy and sell crypto. Where is the business model? How do they even make money through this?

Crypto exchanges make money in 4 ways-

Trading commission: Every time someone buys or sells crypto through the exchange, they have to pay some commission to the exchange. Usually, this commission is 0.1-0.5% per transaction. This seems like a small percentage, doesn’t it? But don't be fooled- when you multiply this small percentage by the millions of transactions taking place on the exchange, they earn a lot of money. Remember, this small trading commission is responsible for 96% of Coinbase's $1.8 billion revenue!
Listing fees: Just like companies do an IPO(Initial Public Offering) through a stock exchange, they can also do an ICO(Initial Coin Offering) through a crypto exchange. If you've seen the Silicon Valley TV series, you might remember that Pied Piper did an ICO instead of an IPO. When a company does ICO through a crypto exchange, they have to pay listing fees to the exchange.
Market Making: Another large revenue stream for cryptocurrency exchanges is the creation of a market or the creation of liquidity for a given financial instrument. Just like any market, a crypto exchange also needs a buyer and seller to agree upon a certain price. Now, it may happen that, based on demand and supply on different exchanges, prices may vary from exchange to exchange. For example, Bitcoin might be $41K on exchange A, and $42K on exchange B - now as a trader your obvious action would be, buy Bitcoin from exchange A and sell it to exchange B. it will straightaway earn you a profit of $1000! This is called arbitrage. Now, in the real world, this doesn't happen very frequently, as the 'Market Makers' keep buying and selling until the prices are almost the same on both the exchange. Similarly, exchanges like CoinDCX keep buying and selling cryptos in a completely automated manner, and in the process, it not only makes sure that prices are the same as the other exchanges but also earns them a good amount of profit.
Fund collection: Another method to increase revenue is to equip the platform with an IEO module, or the Initial Exchange Offer module where the crypto exchange facilitates crypto startups to raise funds from investors on the exchange and the exchange pockets a commission from the funds raised.

So trading commissions + listing fees + market-making + fund collection are 4 ways crypto exchanges make money.

And the result of these 4 revenue sources? A money-printing machine!

CoinDCX doesn't reveal its financial data😑 But we can guess their financials by looking at Coinbase(one of the first crypto exchanges in the world and now a $70 billion crypto giant). Coinbase reported their revenue for the first 3 months of 2021(~$1.8 billion), and it surpassed their total revenue of 2020 + 2019!!!!! It has grown 900% and its profit margins are an insane 60%!!!

Holy shit, right?

Coinbase proves that the crypto exchange business model is very lucrative. That's why CoinDCX has great potential.

🕹The Dark Side: Crypto Ban

Running a crypto exchange has several pitfalls as well- security, fraud, etc. But these problems look small compared to the bigger danger of crypto ban/crypto regulations. Take a look at these Indian crypto news from the last 3 years:

April 2018- The Reserve Bank of India (RBI) banned banks from supporting cryptocurrency transactions in April 2018, preventing crypto exchanges, including WazirX and CoinDCX, from accepting rupee deposits from users. This sounded like a death bell for these exchanges.

Mid 2019: A government committee had suggested banning all private cryptocurrencies, with a jail term of up to 10 years as well as heavy penalties for anyone dealing in digital currencies. The Government of India was showing that it was skeptical towards private cryptocurrencies.

2021: Latest reports say cryptocurrency may not face a complete ban in India. The Centre may soon set up a panel to regulate them. The decision was taken after several cryptocurrency exchanges urged the Centre to regulate virtual coins rather than banning them. So although the Government has softened its stance on cryptocurrencies, the risk of a ban still remains"

May 2021: Many private banks, including HDFC Bank, ICICI Bank, had allegedly directed payment gateways to stop processing deposits and withdrawals into/from these crypto exchanges. This caused serious problems not just to the crypto exchanges but to the customers who could not deposit/withdraw funds into their wallets on these apps.

July 2021: RBI, India's Central Bank has always been skeptical about private cryptocurrencies (bitcoin, eth, etc.). Apart from the 2018 order, RBI, in its recent white paper for Central Bank Digital Currencies (CBDC), has noted that one of the reasons why CBDCs are important is because Central banks seek to meet the public’s need for digital currencies, manifested in the increasing use of private virtual currencies, and thereby avoid the more damaging consequences of such private currencies.

After looking at all these news reports, I think a crypto ban or at least tough crypto regulations is a very real possibility.

What happens when a country turns against crypto? Just look at China.

They have been targeting bitcoin since 2013. But this year, they turned fully anti-crypto.

In May, China banned financial institutions and payment companies from providing crypto-related services. In June, there were mass arrests in China of people suspected of using cryptocurrencies in nefarious ways. That same month, regulators dialed up the pressure on banks and payment businesses to stop providing cryptocurrency services, and Weibo, the Twitter of China, suspended crypto-related accounts.

This is the dark side of CoinDCX: if the govt turns against crypto, CoinDCX will be severely affected.

🕹Conclusion:

Since the business model is so op, lots of startups have entered this space. WazirX, CoinSwitch Kuber, Zebpay, Unocoin- all these crypto exchange startups' growth has absolutely skyrocketed recently🚀🚀

Basically, this means tough competition for CoinDCX. So they are expanding beyond crypto exchange. They have launched new crypto products: CoinDCX Go, a crypto investment app, a professional trading platform called CoinDCX Pro, and DCX Learn(kinda like Zerodha Varsity, but for crypto). In the coming months, the company said it will launch the CoinDCX Prime product for HNI and enterprise customers, providing legally vetted and safe investments, as well as Cosmex, CoinDCX’s global trading product.

The good thing is that people are quickly becoming aware of crypto, so CoinDCX's new products have a fast-growing market in front of them. Plus, CoinDCX plans to use its new funding to spread more awareness about crypto in India so that even more people use its products.

So now we are at the ending of this article. I have told you everything about CoinDCX: its op business model, the danger from govt regulation, and its future plans.

So do you think CoinDCX will shrug off the competition and race ahead "to the moon"? Or do you think govt regulations will crash this rocketship?

Let me know by commenting or replying back to this mail.

This wraps up today’s article. I hope you found it informative!

Thanks to Adwait Pisharody and Yash Agarwal for their valuable contributions to today’s newsletter.

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