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Coinbase Acquires Futures Exchange FairX
Coinbase Acquires Futures Exchange FairX

On January 12th, 2022, Coinbase announced the acquisition of FairX, a
Commodities Futures Trading Commission (CFTC) registered Designated
Contract Market (DCM) offering futures. Architect Partners served as the
financial advisor for FairX.

FairX operates a regulated futures exchange for retail investors. The
company offers 1) straightforward and retail user-friendly products 2)
discounted fees compared to a traditional futures exchange, 3) retailfocused products requiring less capital, and 4) committed market makers
enabling strong liquidity. FairX launched in June 2021 and currently offers
futures on two index products in two sizes: the Bloomberg US Large Cap
Index Futures and SuperTech Index Futures, as well as Micro Crude Oil
Futures.
Since launch, FairX had an average daily volume across its products of about
9,000 contracts. Based in Chicago, FairX was founded in 2019 by Neal Brady,
CEO and co-founder of ErisX, acquired by CBOE (M&A Alert) last year,
Harsha Bhat, CTO and previous SVP/CTO of State Street’s GlobalLink trading
platforms, and Chairman Clifford Lewis. FairX raised over $27 million in three
funding rounds. Notable investors include Hyde Park Venture Partners, TD
Ameritrade, XTX Ventures, Battery Ventures, Limerick Hill, and Virtu
Financial.

We are seeing a trend of crypto-native firms acquiring regulated entities to
expand their offerings of sophisticated financial products. Both retail and
institutional clients demand regulatorily compliant solutions, but current
regulation is often disjointed as crypto can be an awkward fit for existing
regulatory structures. There has been much discussion regarding a
straightforward set of rules for crypto, most likely tweaks to existing
frameworks. Buying regulated entities therefore provides regulatory
“insurance” for crypto firms while future regulations are being
implemented. Coinbase has done this in the past, via purchases of three
SEC-licensed firms. FTX’s October 2021 acquisition of LedgerX is another
example, absorbing LedgerX’s 3 CFTC licenses of DCM, Swap Execution
Facility, and Derivatives Clearing Organization. We expect this approach to
accelerate in the next twelve months as crypto-native firms continue to
integrate with traditional financial services.

There are several drivers for this acquisition. First, FairX provides Coinbase
with a crypto derivatives regulatory framework for both retail and
institutional investors in the US. FairX is a CFTC registered DCM, and will be
Coinbase’s first entity fully regulated by CFTC (Coinbase applied for an
Futures Commission Merchant license in September of 2021, but has not yet
been approved). Second, it allows simplified access to futures to their
sizable retail client base. Lastly, it furthers Coinbase’s institutional product
line. Institutions need to hedge positions and hedging Bitcoin or Ethereum
is done under the commodity framework in the US.

Alerts

Coinbase Acquires One River Digital Asset Management

Ayush Mishra
March 3rd, 2023

Transaction Overview

On March 3rd, 2023 Coinbase announced the acquisition of the digital asset management firm, One River for an undisclosed amount. 

 

Target: One River Digital Asset Management

One River Digital Asset Management (ORDAM) is an SEC-registered, cryptocurrency investment management and advisory firm. The company offers institutional investors access to digital assets like Bitcoin, Ethereum, other cryptocurrencies, and blockchain-related companies. It’s based in Greenwich, Connecticut with additional offices in New York and Singapore. One River is split into two primary investment vehicles: the One River Digital Asset Fund and the One River Digital Bitcoin Fund. These offer institutional clients investment solutions, and advisory services, and implement their proprietary trading algorithms to create value for their clients.

 

One River’s closest competitors are other digital asset management firms such as Grayscale, WisdomTree, Bitwise Asset Management, Coinbase Asset Management, Fidelity Digital Assets, and ARK Invest.

 

The company was founded in 2019 by Eric Peters and Sebastian Bea. Both founders have extensive experience in the finance and technology fields. Peters and Bea lead the firm’s ~50 employees. One River has also ventured into the carbon-neutral Bitcoin space by launching a firm that focuses on mitigating the environmental impacts of Bitcoin mining. One River has raised $56M in capital over two rounds, with the latest round from September 2021 at a $186M post-money valuation. Former investors include Goldman Sachs (lead), Infinity Capital Partners, Liberty Mutual Insurance, and Coinbase Ventures. 

 

Buyer: Coinbase (NASDAQ: COIN)

Coinbase is one of the largest players in the cryptocurrency exchange and digital asset space. The company is well-known with 110 million users in over 100 countries. Coinbase also provides a variety of institutional-grade services for finance professionals in the digital asset industry including an institutional trading platform, custody solutions, and prime brokerage services. Coinbase is one of the first cryptocurrency exchanges to go public, and the company is listed on the NASDAQ, with a current equity value of $14.5B and an EV / LTM revenue multiple of 4.1x. 

 

Coinbase was founded in 2012 by Brian Armstrong and Fred Ehrsam. Armstrong is the current CEO, leading the firm’s ~3,000 employees. The company is headquartered in San Francisco, California, and has offices in New York, Chicago, Tokyo, and London. 

 

Coinbase has been a leading acquirer in the crypto space, previously acquiring FairX (2022), BtcTurk (2022), Unbound Security (2021), BRD (2021), Bison Trails (2021), and Tagomi (2020).

 

Transaction Parameters

ORDAM, a subsidiary of One River Asset Management, was acquired by Coinbase for an undisclosed amount. ORDAM will transition to become Coinbase Asset Management (CBAM).

 

Comparable digital asset management transactions include Huobi | About Capital Management, Blockchain.com | Altonomy ($250M), Gemini | Omniex, Deutsche Borse | Crypto Finance ($108M).

 

Strategic Rationale

Often, buyers and sellers have an existing relationship, which holds true in this case. Coinbase invested in One River’s Series A and had been a close partner for several years leading up to this acquisition, demonstrating the “Acquire your Acquirer” approach to driving premium value M&A. Coinbase followed this road and found a natural way to expand their product scope and firm strategy while still focused on the crypto industry.

 

Specifically, this transaction fulfills two strategic rationales:

  1. Continued investment in the institutional business line. Expanding their institutional offering through ODAM’s Separately Managed Account (SMA), Coinbase can continue to offer additional services to their growing segment. Coinbase has increasingly become institutionally focused, with 80% of trading volumes in 2022 being institutional and roughly 25% of the 100 largest hedge funds in the world by assets under management are Coinbase customers. 
  2. Recurring revenue. Pricing for SMAs is asset-based, so the revenue is a (relatively) consistent flow and can help diversify from the volatile trading revenue.  

 

Architect Partners’ Observations

Crypto-focused asset management is a very narrow tightrope to traverse.  With the SEC’s continued rejection of Bitcoin-based Exchange Traded Funds (ETFs) and recent messaging of the “qualified custody” requirement of crypto for wealth managers, regulatory uncertainty is a damper on the sector. Institutionally focused products, such as ORDAM’s, are an area that has more leeway.  While there are other firms with a similar focus, many have plateaued in growth.  While there are other asset manager players, will this prompt others to find a new home in a larger firm?

 

This transaction also signals a future vision of what exchanges may become – all-encompassing financial services firms (much like many, many other TradFi firms). Coinbase’s sole dedication to the crypto sector is becoming a differentiator in itself.

 

Sources 

PitchBook, Coinbase Website, One River Website, Press Release