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 12th, 2023

Perhaps the winter metaphor is being overplayed?

Crypto is out of favor, or is it?


Valuation is a complicated topic, particularly for early-stage businesses focused on emerging markets like crypto or, the more in vogue term today, digital assets. Liquid public equity markets, like those that exist for the group of public crypto companies on the left, provide a real-time consensus of “fair” valuation from a large number of both institutional and retail investors. So what does the market say about our currently “out of favor” sector? Actually very positive things, perhaps surprisingly.


Most would consider Block (formerly Square) to be an attractive, financially successful and well-run business, we certainly do. In fact, they have a $33 billion enterprise value which is far above all of the other companies we track. However, what really matters is placing the enterprise value in the context of the economic engine that the business represents. This is often done by considering the company’s value compared to revenue, earnings before depreciation, interest and tax (EBITDA), earnings before interest and tax (EBIT), or net income. To keep things simple, Block trades at 1.6x estimated 2023 revenue. While Block has a good crypto asset-centered business, it’s relatively small.


Now let’s consider Coinbase, a pure-play crypto business that has been facing the strong crypto winter and regulatory headwinds. Coinbase’s enterprise value ($11.5 billion) is ⅓ the size of Block’s but the public equity market ascribes a far superior valuation of 4.1x estimated 2023 revenue.


Perhaps the winter metaphor is being overplayed?