Why Tiger Global bet on crypto firm CoinSwitch

It is Tiger Global’s maiden investment in an Indian cryptocurrency startup. But before we begin with why Tiger chose CoinSwitch Kuber, let’s take a sneak peek into the crypto dossier.

That which can’t be deciphered, how can it be governed, and what can’t be governed, how can it be regulated? That’s the state of cryptocurrencies as governments and central banks worldwide, including in India, try to figure out the functionality and utility of the new game in town.

For instance, the U.S. Securities and Exchange Commission chief Gary Gensler mentions that he is intrigued by the technology but sees it more like the "Wild West '' that needs additional safeguards to protect investors. Seconding Gensler’s views is hedge fund rockstar, John Paulson, who made billions by going short in the subprime mortgage market. “Cryptocurrencies, regardless of where they’re trading today, will eventually prove to be worthless. Once the exuberance wears off, or liquidity dries up, they will go to zero. I wouldn’t recommend anyone invest in cryptocurrencies,” says Paulson in an episode of Bloomberg Wealth with David Rubenstein. Former Reserve Bank of India governor Raghuram Rajan, too, isn’t clear about what fundamentals are backing their [cryptocurrency] valuations “other than a heady environment with easy monetary policy fuelling all asset prices.”

The world is taking notice because the cryptocurrency market is currently estimated at $2 trillion with over 11,415 cryptocurrencies being traded. But more than 45% of the crypto market cap is cornered by the more popular Bitcoin, followed by Ethereum. That’s impressive considering that the fiat money market [the traditional forex market]—the bedrock of world trade and finance—is worth $7-trillion.

Now, the challenge for governments, barring Cuba, and central banks is that legitimising any cryptocurrency as a mode of payment will undermine the very role of fiat money. Currently, one bitcoin is worth $48,900 in dollars and 41,457 in euros! As per the Bank of International Settlements' triennial survey, the dollar was on one side of 88% of global trades, while euro was the second most traded currency appearing on one side of 32% of trades.

While central banks can always skew the math on conversion, the process itself will take the wind off the cryptocurrency market as its very genesis was that it was an answer to the flawed fiat currency system. But, for now, the easy solution for regulators would be to let cryptocurrencies exist as an asset class rather than a legit currency.

But what makes cryptocurrency a complex market to regulate is that unlike currencies and treasury bills, there is no government or central bank backing these cryptocurrencies. It’s like the dark web. For instance, Bitcoin is attributed to a motley bunch of unknowns who go by the pseudonyms of Satoshi Nakamoto and Hal Finney.

All cryptocurrencies are run by private computer networks referred to as a blockchain (or the database), which is a decentralized digital ledger of transactions distributed across a network of computer systems with no single system controlling the ledger. The two most popular transactions on major blockchains are Bitcoin and Ethereum. The value of a cryptocurrency tends to go up as the computational complexity to unlock an encrypted code increases, and that’s the reason why so many cryptocurrencies are thriving in the market.

In short, cryptos are more like a casino, and fuelling the rush are the over 1,000-plus crypto exchanges running all over the world and some of them operate in India as well. But none of the exchanges in India have managed to get a prominent PE to fund them except for CoinSwitch Kuber, which claims to have over nine million registered users.

But CoinSwitch Kuber is not an exchange but an aggregator of crypto exchanges. That’s where it's secret sauce lies, for now.

Started in 2017 by Ashish Singhal, Govind Soni, and Vimal Sagar, CoinSwitch started off its India operations from June 2020, following the reversal of RBI’s ban on cryptos. “We want to make investment in crypto simple and remove all the complexities in crypto trading, educate consumers and give them a simplified experience of one-click buy and sell,” says Singhal.

While investors from over 200 cities in India are investing in crypto through its platform, users from tier I cities account for 40%, but tier II (36%) and tier III (24%) make up for the majority of its clients. While the average ticket size is ₹9,000 per month per user on CoinSwitch, it varies across cities. In tier I, the average ticket size is ₹11,600, compared with ₹6,600 in tier II and ₹3,500 in tier III.

What’s surprising or worrying—depending on how one sees it—is that the average age of a crypto investor is 24 years on CoinSwitch and Singhal points out that crypto is the first investment in any asset class outside of savings bank account and fixed deposit for 65% of his customers!

But CoinSwitch has big names backing it—Sequoia Capital, Ribbit Capital, Paradigm, Kunal Shah, founder, Cred, besides Tiger Global Management’s $25 million investment in April this year. In doing so, BitCipher Labs, the parent of CoinSwitch, has emerged as the highest-funded cryptocurrency player in India with a valuation of $500 million. Tiger has also invested in Chinese crypto lender Babel Finance and the U.S.-based Coinbase.

Singhal points out that unlike other startups they did not knock on the fund’s doors. “We did not reach out to Tiger Global for funding. They contacted us and expressed their willingness to invest in our company. Tiger doesn’t invest less than $100 million but we said we just need $25 million,” says Singhal.

So why did Tiger bet on CoinSwitch? Scott Shleifer, Partner, Tiger Global had this to state: “Coinswitch is well positioned to capture the tremendous growing interest in crypto among retail investors as it build India’s leading cryptocurrency platform.”

The real story lies not in what Tiger is saying but what CoinSwitch is doing.

Singhal believes that Tiger sees the ability in CoinSwitch to replicate the success of Coinbase. It’s more about validation. “These are the same guys who backed Coinbase which was able to establish itself as the white knight of the industry, of who they are and how they are tackling the [crypto] issue and trying to communicate with the government. The idea is to send out the message that these big funds are backing us in India as well,” says Singhal.

CoinSwitch has reported about $8 million in profit in FY21 and hopes to breach $50 million in revenue in FY22. Without revealing the profit likely in FY22, Singhal says that since the startup is now investing a lot in creating content around cryptocurrencies to create the “big brand story” around CoinSwitch, he hints that profitability could be lower.

In the absence of any regulatory oversight and price discovery, a lot depends on the ability of crypto startups to create a business model around crypto trading.

Currently, the only overhead for CoinSwitch is its team cost. “We are not a capex intensive business, and don’t need too much money. Hence, our Ebitda margins are in the range of 60-65%,” reveals Singhal.

So how is CoinSwitch able to generate such bumper margins? It simply lies in the way it has smartly positioned itself as a retail brokerage platform of cryptocurrencies.

It follows a differential pricing mechanism. “A guy doing a million-dollar trade will get a different price for a guy investing ₹100. If a user goes to any of the exchanges he will get a varying rate but as a market maker we get a different rate since we aggregate prices from six to seven exchanges,” says Singhal. In short, CoinSwitch gives its users a fixed rate with no fluctuation and they have to “simply click buy” at the pegged rate. “Our algos, built since 2017, have perfected the price,” claims Singhal. But the guy investing a fractional amount will still end up buying at the highest end of the price band.

As on date, half a billion dollars is the next exposure of Indians to cryptocurrencies through CoinSwitch. “In the 14 months till date, Indians have clocked cumulative gains worth ₹500 crore in cryptocurrencies. The average position held by an investor is 40 days. We have seen that they exit with 10% gain and reinvest the money again,” reveals Singhal. The platform claims to be clocking an average 150% increase month-on-month in volumes. “Our average engagement time is 13.5 minutes, close to PUBG numbers before it got banned in India. There’s a growing appetite for cryptos,” feels Singhal.

For now the proponents of crypto are trying to convince the government and regulatory authorities on how the new asset class works. “We don’t know whether they are satisfied with the industry’s answers...it’s still at a Q&A stage,” says Sharan Nair, chief business officer at CoinSwitch.

Kuber claims to have an active monthly user base of about 1.5 million compared with 1.2 million for Zerodha. Going forward, the startup is looking to build a business beyond just crypto. “We want to go into traditional finance such as stocks, mutual funds, exchange-traded funds and bonds and give retail customers a comprehensive portfolio on our platform,” shares Singhal.

CoinSwitch is playing it smart with this move. As long as crypto thrives it will continue to milk a very young segment that hasn’t invested in any other class, but it wants them to stick around as crypto volatility can be gut wrenching. For instance in December 2020, Bitcoin was trading around $20,000 but soon went on to hit an all-time high of $65,000 in April but crashed in May to below $30,000 but is now back at $48,000 levels. “Most of our users are young and would take a high risk now, but over time their risk appetite would reduce and they would want to build a more comprehensive portfolio for the future. And that is where we see our direction,” sums up Singhal.

Looks like Tiger Global has made a well-timed bet.