> I don't see how the regulation level of Coinbase affects anything.

There's no point to a crypto-currency with insecure crypto. If you have insecure crypto, you need centralized regulation. If you have centralized regulation, you don't need crypto-currency.

> The point is that its that choice (for starters) which differentiates bitcoin from Paypal.

Paypal moves money in a lot of currencies, and there are lots of choices other than Paypal to move currency.

> Coinbase isn't going to take over bitcoin any more than MtGox did. I don't quite understand what you're worried about.

I think the analogy you're actually looking for is:

   "Coinbase isn't going to take over bitcoin any more than Google took over e-mail"

The decentralized nature of bitcoin is the entire point. If it's co-opted by cloud key escrow services, there's no point.

The decentralized nature of bitcoin is baked into the protocol, its a technical feature, not a social one. So it has less to do with market segmentation of the userbase, whether 80% of the people use bitcoin-qt, blockchain.info, or mtgox. My biggest fear was that we were going to see MtGox blow up in the early days, when it had 80% of the market. Luckily, it didn't happen until the later days (when it only had 30% of the market).

When the social/service distribution gets lopsided, it does present a huge risk. But its "only" the risk that service blows up, not a risk of the protocol getting co-opted. Even with 80% of users on MtGox, that never compromised the essential decentralized feature of bitcoin: having absolute control over your coins on the blockchain. The analogy to google mail is that Gmail users can still e-mail hotmail users (and send/receive e-mail from users on their own custom SMTP servers).

An example of a protocol getting co-opted might be Google Talk, which they announced last year was discontinuing support of XMPP. So now Gchat users can only message other Gchat users, not other XMPP users (though I'm not sure if Google has actually disabled it yet). This would be like if someday Coinbase announced that users couldn't send to any bitcoin addresses anymore, only other Coinbase usernames.

  I don't quite understand what you're
  worried about.

Keeping your bitcoin in Coinbase is a bad idea for the same reason keeping your bitcoin in MtGox is a bad idea.

It's the "largest and most established", until it isn't and your deposits have vanished like a fart in the wind.