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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
February 9, 2024
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News on Macro Economic Data

Unlike almost any other time, Fed watching is driving market activity.  To that end, Fed Chair Powell said that any rate cuts will come later this year, and are “not likely” to occur in March as the market expected.   Richmond Fed President Thomas Barkin, a voting member, said the Fed has time to be patient regarding rate cuts.  The market was expecting six cuts this year, but with these comments, the prospects of that are fading rapidly. The Fed signaled three rate cuts this year.  However, any occurring late this year could be seen as political in this election year. 

 

Despite some concerns about the economy, there is still a lot of liquidity, mostly due to government spending.  Some economists feel this spending is buoying the economy and markets right now, but also can help maintain stubborn inflation.    

 

Next week the CPI and PPI numbers come out, which will provide greater insight into trends. 

 

Crypto Public Company Activity

Snapshots from this past week:

 

Blackrock or MicroStrategy?:  MicroStrategy acquired another 850 BTC for $37.2M in January, raising its holdings to 190,000 BTC.  Michael Saylor believes BTC is the safest long-term investment and inflation hedge.   MicroStrategy has an astounding 312 PE Ratio, with the 190,000 BTC representing about 80% of MicroStrategy’s market cap.   BlackRock iShares Bitcoin Trust is now a top 5 ETF based on 2024 inflows of $3.2B.

 

NBA Voyager Lawsuit:   Voyager investors filed a lawsuit against the NBA alleging it acted in a “grossly negligent” fashion by approving a marketing deal between Voyager and Mark Cuban, owner of the Dallas Mavericks.   The lawsuit alleges the NBA promoted Voyager’s “unregistered securities”, as well as promoting multiple crypto companies through sponsorships and naming rights despite the risks associated with crypto.

 

Baakt:  On February 7, Bakkt filed an amendment to its Q3 2023 10Q that raised questions about Bakkt being a going concern.   In a press release on Feb 8, Bakkt wrote, “In response to questions, management remains confident about our business and will continue to focus on delivering for our clients, making progress on our primary business objectives, and working efficiently to scale our business and move toward profitability. We plan to share more during our earnings announcement later this quarter”.