Transaction Overview
On January 12th, 2022, Coinbase announced the acquisition of FairX, a Commodities Futures Trading Commission (CFTC) registered Designated Contract Market (DCM) offering futures and options. Architect Partners served as the financial advisor for FairX.
Target: FairX
FairX operates a regulated futures exchange for retail investors. The company offers 1) a straightforward and retail user-friendly platform 2) discounted fees compared to a traditional futures exchange, 3) retail-focused products requiring less capital, and 4) committed market makers enabling strong liquidity. FairX soft launched in July 2020 and currently offers futures on two indexes: the Bloomberg US Large Cap Index Futures and SuperTech Index Futures, and Micro Crude Oil Futures.
Since soft launch, FairX had an average daily volume across its four equity index futures products of about 9,000 trades and has grown to 3,000 retail accounts (as of 11/12/21). Based in Chicago, FairX was founded in 2019 by Neal Brady, CEO and co-founder of cryptocurrency exchange 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.
Buyer: Coinbase
Coinbase is a leading crypto-asset investment platform catering to both retail and institutional investors. Historically, Coinbase has built its reputation as an easy-to-use, trusted platform allowing individuals to invest in Bitcoin and Ethereum. Over the past several years, Coinbase has significantly broadened the number of crypto assets it supports and has been aggressively building a sophisticated, institutional-ready set of services such as Coinbase Pro, GDAX, and Coinbase Prime via both internal development and acquisitions. Coinbase can be considered a centralized brokerage firm where the assets of their users are largely held or custodied by Coinbase.
Headquartered in San Francisco, Coinbase was founded in June 2012 by Brian Armstrong and Fred Ehrsam. The company has thirty-five million users worldwide, trading a total of $320 billion in digital assets in Q3 2021. Coinbase has raised $547 million in capital from a wide variety of venture capital and growth capital investors, including Andreesen Horowitz (Marc Andreessen), Union Square Ventures (Fred Wilson), Ribbit Capital (Meyer Malka), DFJ Growth (Barry Schuler), IVP (Todd Chaffee) , and Tiger Global Management.
Coinbase had their direct listing IPO on April 14th, 2021, and closed their first day of trading at an $86 billion valuation. Coinbase has a current enterprise valuation of $49 billion and trailing twelve months revenues through September 30, 2021 of $5.4 billion giving them an EV/ TTM revenue multiple of 9.1x. Coinbase has acquired 27 companies since 2018 to expand their technology and market presence in the blockchain space. Key competitors include large exchanges such as Binance, Huobi, Bitfinex, Gemini, and Kraken among others.
Transaction Parameters
Coinbase is acquiring FairX for an undisclosed amount. The transaction is expected to close in Coinbase’s fiscal first quarter.
Comparable acquisitions of futures exchanges include ErisX | CBOE Global Markets (ND, M&A Alert), FTX | LedgerX (ND, M&A Alert), Crypto.com | Nadex & The Small Exchange ($216mm), and Deutsche Börse Group | Crypto Finance (~$100mm, M&A Alert).
Strategic Rationale
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 as a Futures Commission Merchant in November, 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. The DCM allows Coinbase to internalize the trading of futures/options for their Institutional clients.
Architect Partners’ Observations
We are seeing a trend of crypto-native firms acquiring regulated entities in order to expand their offering 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.
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