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
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

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.

Crypto Public Companies Snapshot

Crypto Public Companies Snapshot

Glenn Gottlieb
November 3, 2023

News on Macro Economic Data

The current economic environment continues to provide many mixed signals, and thus, we remain cautious.


Given the combination of global geopolitical instability, elevated interest rates, and the fact that the effects of most of the Fed rate hikes have yet to be felt, the Fed kept rates steady. Public markets are experiencing a bump due to the Fed pause.   “Looking under the hood” shows the macro environment may be eroding.      

Inflation has come down from its high but remains elevated.  September CPI was up 3.7% annualized in September, yet key staples – food and energy – were up 6.6%.   The economy continues to be driven by consumer spending, up 0.7% from August to September, but real incomes were up only 0.4% questioning the ability for the consumer to continue to drive economic growth, especially given record credit card balances, and the highest credit card and auto loan defaults in 10 years. 


With CBO estimates of GDP growth averaging 1.2% through 2025, there is fear that Treasury yields will necessarily have to go much higher as $1.6T (11% of GDP) will be coming to market over the next 6 months with a less-than-welcoming- market. 


Crypto Public Company Activity

Coinbase posted mixed third-quarter results beating revenue ($674M actual vs $651M estimate) and profitability estimates (-$0.01 EPS actual vs -$0.54 EPS estimate).  However, revenue was down 6% from Q2, and the company posted its seventh consecutive quarterly loss as trading volumes and number of people trading on the platform fell. 


Retail trading volume fell 21% QoQ and Institutional trading volume fell 17% QoQ leading to overall trading revenue falling 11.8% QoQ, and 21.1% YoY.   Coinbase made up much of their reduction in trading revenue with substantial increases in subscription and services revenues which rose 59% YoY.  


Guidance for Q4 expects subscription and services revenue to be flat, but looking for positive EBITDA. 


This week, Coinbase also announced that eligible customers in the US now can trade futures contracts tied to Bitcoin and Ethereum.


Coinbase stock is up close to 150% so far in 2023.