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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 19, 2023
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News on Macro Economic Data

 

There wasn’t much economic news this past week.   The economic picture shows signs of improvement, but also persistent headwinds.   Recession fears are receding, as a survey of economists believe the likelihood of a recession in 2024 is only 42%, but only project a 1.6% growth rate. 

 

Jamie Dimon, CEO of JP Morgan, made news by suggesting he is “…a little skeptical of this kind of Goldilocks scenario.  I still think the chances of it not being a soft landing are higher than other people”.    The Conference Board also believes it is more probable that the US will slip into a short and shallow recession than not in 2024.

 

San Francisco Fed President and voting member today said that inflation is not down to 2%, there is a lot of work left to do, and suggested it’s too early to suggest rate changes are around the corner.  

 

Crypto Public Company Activity

 

Stock in the top 12 Bitcoin miners fell sharply this week and are down about $6B in market capitalization since January 1 according to TheMinerMag.   This drop is certainly the result of a confluence of factors rather than a singular event.  A few possible catalysts include:

 

  1. Miner revenue does fluctuate, but the trend line has been declining in recent weeks.  Total fees have fallen over the past 30 days from ~$60M per day to ~$40M per day according to YCharts

 

  1. The Expected April Bitcoin halving will reduce mining rewards in half which investors could believe will adversely affect profitability and negatively impact stock prices

 

  1. Bitcoin ETFs enable a direct, efficient, and liquid investment in Bitcoin that may be reallocating funds away from mining stocks.   It would be a justifiable rotation to reallocate profits from the Q4 2023 runup in mining stocks to the current increasing value of Bitcoin

 

  1. Negative news within a sector generally has a corresponding negative effect on an entire sector.  Hut8 fell 20% on Thursday alone, as unverified reports emerged of financial misbehavior regarding its recent $742M merger with US Bitcoin Corp.  The allegation came from J Capital Research – a short seller of Hut8 stock

 

The world of crypto mining is complex, and this short-term move is worth keeping an eye on.  Like any risk asset, there are always both positive and negative movements.   And, in the volatile world of crypto, all investments carry above-average risk and deserve deep diligence.