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.

Public Companies

Crypto Public Companies Snapshot

Eric F. Risley
May 19, 2023

It’s time to change.  Bitcoin Miners should be referred to as Bitcoin Network Operators.


Today the Bitcoin network is comprised of 16,866 reachable nodes, has been in existence for fourteen years, has validated and stored over 839 billion transactions, and has achieved an overall uptime of 99.9882659% since inception and a perfect 100% since 2013.  Impressive indeed.  


The issuance of Bitcoin, built into the protocol code as an economic reward, has created the necessary economic incentive for node operators to build today’s network.  Architect Partners estimates that roughly $31 billion has been invested just in the necessary data centers and specialized computers.  Additionally, the electricity expenditure today totals roughly $6 billion per year.  


This is an extraordinary phenomenon where an incentive, created by an idea, and a collective buy-in to that idea, has translated into a physical manifestation costing $10s of billions.  However, this Bitcoin incentive (commonly analogized as a mining reward) is declining and will eventually stop.


Transaction fees are also explicitly featured in the Bitcoin Whitepaper. “Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and (Bitcoin can) be completely inflation free”.


Historically, transaction fees have been a very small proportion of the total compensation received by operators of nodes.  This has begun to change, particularly during periods of high demand for transaction validation. In fact, last week, transaction fees represented 36% of total rewards (in Q1 2023, the average was 7.9%) to node operators.


Our thesis is that transaction fees will become the dominant component of node operator compensation as the Bitcoin network matures. Why continue to call those that run this network “miners” when mining rewards are gradually declining and will eventually be eliminated?