Coinbase Tries to Catch Up to Foreign-Based Rivals With Move Into Derivatives

For Coinbase, the largest U.S. cryptocurrency exchange, offering derivatives trading for customers is a necessary step as it seeks to catch up to rival exchanges in a huge and lucrative market.

Coinbase announced the acquisition of FairX this week, a CFTC-regulated derivatives exchange, saying that “deep and liquid derivatives markets are essential to the functioning of traditional capital markets,” and noting how “these products are in high demand from investors who seek to effectively manage risk, execute complex trading strategies, and gain exposure to crypto outside of existing spot markets.”

Rivals such as FTX, Binance and OKEx have benefitted from their early starts in offering derivatives trading, which has been aided by the fact that they’re based outside the U.S. where regulations are often not as strict and tax burdens are lesser.

“Coinbase has kind of been left out, and a lot of that has to do with the fact that they’re U.S.-based,” Alex Tapscott, managing director of Ninepoint Partners’ digital assets group and one of Canada’s largest independent asset managers, told CoinDesk in an interview. “All of these other exchanges have reaped huge financial rewards” from derivative-related products, Tapscott said.

Non U.S.-based Binance had about $54 billion in derivatives trading volumes over the most recent 24-hour period, versus about $16.8 billion in spot trading, according to CoinMarketCap. Seychelles-based OKEx posted roughly $15.5 billion in derivatives trading volumes, and $5.5 billion in spot trading, and Bahamas-based FTX posted about $5.4 billion in derivatives trading and $2 billion in spot trading. Coinbase experienced about $3.3 billion in spot trading over the same period, CoinMarketCap’s data shows.

FTX.US finalized a deal in the fall to purchase regulated futures exchange LedgerX, which is now known as FTX US Derivatives, as it moves to offer derivatives trading to its American customers. Parent company FTX also recently became a member of the International Swaps and Derivatives Association (ISDA).

Derivatives marketplace CME Group could end up being a key competitor in the U.S. for Coinbase’s crypto derivatives business, according to Wall Street research analyst Owen Lau. CME told Oppenheimer on its earnings call that it has an edge in bitcoin derivatives given its offerings across many asset classes, risk management experience and its highly regulated platform standing. Still, Coinbase’s customer base can help the exchange “draw trading volume and create [a] deep liquidity pool,” noted Lau, who has an “outperform” rating on Coinbase’s stock.

Meanwhile, Cboe Global Markets could represent additional competition, having acquired crypto spot and derivatives marketplace ErisX in October. The deal gives Cboe a new set of crypto derivatives offerings through ErisX’s bitcoin and ether futures products, as well as spot crypto trading.

Coinbase can become the dominant U.S. player for retail derivatives trading, though its success hinges on favorable regulation being passed, Tapscott said. Still, as a public company, Tapscott said new growth areas are needed, and purchasing FairX is a “very good place to start.”

Leave a Comment