Coinbase Tries to Catch Up to Foreign-Based Rivals With Move Into Derivatives

With its acquisition of derivatives exchange FairX this week, Coinbase is seeking to gain traction in a market that’s dominated by its foreign-based competitors.

AccessTimeIconJan 13, 2022 at 9:24 p.m. UTC
Updated May 11, 2023 at 7:14 p.m. UTC

For Coinbase, the largest U.S. cryptocurrency exchange by trading volume, offering derivatives trading for customers is a necessary step as it seeks to catch up to rival exchanges in the huge and lucrative market.

On Wednesday, Coinbase announced the acquisition of FairX, a derivatives exchange that's regulated by the Commodity Futures Trading Commission. Coinbase said that “deep and liquid derivatives markets are essential to the functioning of traditional capital markets” and noted how “these products are in high demand from investors who seek to effectively manage risk, execute complex trading strategies and gain exposure to crypto outside of existing spot markets.”

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  • Coinbase rivals such as Binance, FTX and OKEx have benefitted from their early starts in offering derivatives trading and from the fact that they are based outside the U.S., because regulations are often less stringent and taxes lower outside the country.

    “Coinbase has kind of been left out, and a lot of that has to do with the fact that they’re U.S.-based,” Alex Tapscott, managing director of the digital assets group at Canada's Ninepoint Partners, told CoinDesk in an interview. “All of these other exchanges have reaped huge financial rewards” from derivative-related products, he said.

    Binance, which isn't based in the U.S., had about $54 billion in derivatives trading volume over the most recent 24-hour period, versus about $16.8 billion in spot trading, according to CoinMarketCap. Seychelles-based OKEx posted roughly $15.5 billion in derivatives trading volume and $5.5 billion in spot trading, and Bahamas-based FTX posted about $5.4 billion in derivatives trading and $2 billion in spot trading. Coinbase had about $3.3 billion in spot trading over the same period, CoinMarketCap’s data shows.

    In October, FTX.US bought regulated futures exchange LedgerX, which is now known as FTX US Derivatives, as it moves to offer derivatives trading to its American customers. Last month, parent company FTX became a member of the International Swaps and Derivatives Association (ISDA).

    Derivatives marketplace CME Group could end up being a competitor in the U.S. for Coinbase’s crypto derivatives business, according to Owen Lau, a research analyst at Oppenheimer. CME told Oppenheimer on an earnings call that it has an edge in bitcoin derivatives given its offerings across many asset classes, its risk management experience and its highly regulated platform. Still, Coinbase’s customer base can help the exchange “draw trading volume and create [a] deep liquidity pool,” noted Lau, who has an outperform rating on Coinbase’s stock.

    Meanwhile, Cboe Global Markets could also represent competition: It acquired crypto spot and derivatives marketplace ErisX in October. That deal gave Cboe a new set of crypto derivatives offerings through ErisX’s bitcoin and ether futures products, in addition to spot crypto trading.

    Coinbase can become the dominant U.S. player for retail derivatives trading, though its success hinges on favorable regulation being passed, Tapscott said. Still, as a public company, Coinbase needs new growth areas and purchasing FairX is a “very good place to start," he said.

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    Michael Bellusci is CoinDesk's crypto reporter focused on public companies and digital asset firms.