Coinbase expands into derivatives market with FairX acquisition

When crypto goes up, Coinbase goes up. And when it goes down, Coinbase goes down. So goes the fate of the biggest crypto exchange — which is closely tied to Bitcoin. And where do they stand? Both are down nearly 30% since April.

Coinbase in the shadows of Binance

Coinbase may be the largest exchange in the US — but it’s nothing compared to Binance — the world’s largest.

• Even with a market cap of $50B, Coinbase is far behind Binance, with ~5x more daily trading volume.
• In 2019, WSJ reported insiders estimating Binance to be worth $300B — 6x that of Coinbase.

But there’s something Binance offers that Coinbase doesn’t — derivatives trading. Derivatives (i.e. options and futures) are a type of security used by advanced traders and professionals.

• Derivatives made up 55% of the total crypto market in December (per CryptoCompare).
• Binance’s derivative trading volume is 3x larger than its spot trading volume.

In the traditional financial market, the derivatives market is magnitudes larger than the stock market.

Pick the low hanging fruit

The crypto derivatives market is still young but it’ll likely continue taking up a bigger share of the total market. Offering derivatives trading is an obvious expansion — an area Coinbase has been working on for months.

Last week, Coinbase announced its purchase of FairX — a derivatives marketplace — to speed up the launch of its own derivatives trading product.

Competition among crypto exchanges is intense — and Coinbase is keeping up by:

• Entering NFT trading with its own marketplace — with 2.5M emails on its waitlist.
• Expanding internationally — it launched an exchange in Japan last year.
• Increasing the number of cryptocurrencies available on its platform.

Last year, Coinbase announced plans to list every crypto asset it’s legally allowed. Between 2020 and 2021, the number of tokens available to investors grew from 42 to 139. Compared to Binance, Coinbase’s number of listed tokens is still significantly lower.

Investor: Volatile and unpredictable

Coinbase’s sales — which are reliant on crypto trading volume — is highly volatile and unpredictable. So unpredictable that Coinbase doesn’t give sales forecasts — leaving investors in the dark until its next earnings report expected Feb 25.

Analyst targets: Early 2022, JPMorgan upgraded $COIN with a $345 target (55% upside) — seeing a path for it to diversify beyond crypto trading with its planned NFT marketplace and recently launched DeFi product.