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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.

Crypto Public Companies Snapshot

Crypto Public Companies Snapshot

Glenn Gottlieb
January 5, 2023
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News on Macro Economic Data

 

2024 is looking to be a very interesting year.   The predicted recession of 2023 never materialized, and most economists are optimistic for a soft landing in 2024.  With that in mind, the Fed suggested 3 interest rate cuts during the year.    The market is predicting 6-7 cuts during 2024.  A requirement for 6-7 cuts this year doesn’t seem like a vote of confidence regarding economic health in 2024.  A recession has always followed a tightening of the money supply, and leading indicators have been declining for 18 months.   Thus, it will be interesting to follow, as it’s also an election year.   Two key topics for today:  

 

The Fed’s balance sheet doubled to $8T since 2020 which may become a real issue in 2024.   The Treasury Department has put out their schedule showing a reduction in bond auctions.   The most recent auctions have not gone very well.   The Fed, China, and Japan are not buying bonds so yields most likely will have to increase to attract investors driving up long-term interest rates.   The Treasury Dept seems instead to be focused on T- bills bringing up issues that may hinder the economy.  

 

The December jobs report came in much stronger than expected at 216K jobs.  However, of those jobs 52K were government, 74K were private education and Health Services, and 57K were leisure, hospitality, and retail.   The labor force participation rate declined by 683K workers, and multiple job holders continues to rise.   Additionally, The Wall Street Journal’s analysis showed that recent job growth trend has been government, health care and social services which means job creation has mostly supported government spending on social services and not jobs that boost the economy.  

 

Crypto Public Company Activity

 

One of the most watched, and arguably the most exciting milestone for Bitcoin in early 2024 is the possible approval of one or more Bitcoin spot ETFs.   It represents true institutional acceptance.   Aside from the hype, many analysts believe the price of Bitcoin will go higher due to the increased demand generated by ETFs.

 

This past Wednesday the price of Bitcoin fell more than 10% when Matrixport posted a seemingly very definitive report that Bitcoin spot ETFs, with a reported regulatory approval date of January 10, were ultimately not going to receive approval by the SEC. 

 

The overall reaction to the report, including the 10% drop in the price of Bitcoin, prompted Jhan Wu, Chairman of Bitmain and Matrixport, to defend the analyst and the freedom of Matrixport’s analysts to state their opinions as they see the market.   He also denied their report was responsible for the drop in Bitcoin pricing.

 

Independent of the Matrixport analyst’s view, Grayscale, ARK, and VanEck have received approval for their spot Bitcoin ETFs to trade on their exchange of choice along with approved ticker symbols.  These moves do not mean SEC approval of the spot ETFs, but are a key step towards trading once they are approved.  

 

The ETF watch goes on.