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
December 1, 2023


News on Macro Economic Data

There was some mixed news regarding the economy this past week:


On the positive side, the core personal consumption expenditures index (PCE), the Fed’s favored metric for inflation (excluding gas and food), rose 0.2% and 3.5% for the year, which was in line with expectations.  Consumer spending came in at a 0.2% increase in October.  Taking inflation into account, consumer spending was flat for the month.   Additionally, a couple of usually hawkish Fed governors seemed to soften their stance regarding additional rate hikes.


On the flip side, the manufacturing sector contracted for the 13th straight month, with a PMI of 46.7, and new orders remained in contraction, backorders are lower by 2.9%, and multiple analysts point to the coming slowdown in the economy.   While the slowdown would support the Fed’s objective, and assist with reducing inflation, it’s important to point out that M2 (money supply) has increased by 40% over the last two years, and to date, has only contracted 4%.   Excessive money supply and excessive government spending may contribute to continued higher-than-wanted inflation, thus supporting the Fed’s “higher for longer” mantra.


Crypto Public Company Activity

MicroStrategy is a business intelligence firm that also owns about 0.90% of the total circulating supply of Bitcoin.   Their current announced purchase of 16,130 BTC at $593M brings the company’s total holdings to 174,530 BTC at an average price of $30,252 per BTC, representing an unrealized gain of about $1.35B.  


MicroStrategy began accumulating BTC in August 2020 as a hedge against inflation and to protect its cash reserves.   MicroStrategy also took the path of not only converting cash to BTC, but also raising debt to fund additional BTC purchases.   While the strategy was questioned at the time, there is no doubt that it has proven very profitable. 


Far more interesting is an analysis of the performance of MicroStrategy in relation to the performance of its stock price.  MicroStrategy stock has been a top performer over the last three years, and has grown to an $8B market cap.   Yet the financial performance of MicroStrategy’s core business has struggled with profitability over the last few years, and has fluctuated between marginal revenue growth and negative revenue growth.   Since initiating BTC purchases,  enterprise value to revenue has grown from 1.4x in August 2020 to 19.1x today.   In comparison, the software industry average EV / Rev is roughly 2.6x, and the hottest public tech company in the universe, Nvidia, has an EV/Rev of 25x.   


With $6.55B in BTC holdings, and an $8B market cap, it is reasonable to assume that the underlying MicroStrategy business, while funding BTC purchases, is almost irrelevant to the share price, and that BTC holdings are driving enterprise value.  Given the announcement of the most recent purchase has driven MSTR up over 4% today, is it too much to think that with MSTR holding nearly 1% of outstanding BTC, they represent the first BTC ETF?