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Coinbase is offering a “Nano” Bitcoin futures contract with a price sized at 1/100th of a Bitcoin, the equivalent of about $210 on Friday morning.
Dreamstime
Coinbase
Global says it will launch a Bitcoin derivative on Monday. Investors in the stock shouldn’t expect a windfall, even though such products account for the vast majority of crypto trading.
It’s true that offering cryptocurrency derivatives, in general, has long been a goal of U.S.-based exchanges. Some Americans trade on foreign platforms—often even though they aren’t supposed to—because it allows them to buy products that let them supercharge their bets with high leverage. The hope is that as companies introduce regulated products available to Americans, a lot of that money will come back to U.S. platforms.
Overall crypto trading volume has also long been well above that in the spot markets where exchanges like Coinbase typically do business. In the 24 hours through early Friday afternoon, for example, the crypto trading platform Binance saw $52.5 billion in crypto derivatives volume, compared to $12.7 billion in spot trading. Coinbase had about $1.7 billion in spot volume.
That Coinbase is now able to dip its toe in the waters is no doubt a positive for the stock. But investors shouldn’t get carried away. It will take a while for derivatives to generate much revenue for the company.
For one, it’s important to look at what, exactly, Coinbase has announced. Starting June 27, the company’s derivatives exchange, which it acquired and renamed earlier this year, will offer a “Nano” Bitcoin futures contract with a price sized at 1/100th of a Bitcoin, the equivalent of about $210 on Friday morning.
That might make the product more appealing to retail investors, since it requires less capital, but the contract won’t be the kind of high-leverage offering that has helped drive volume on foreign exchanges. In fact, the new Coinbase product isn’t all that different than the futures already offered on regulated commodity exchanges for years.
CME Group
already has “micro” Bitcoin and Ether futures, sized at 1/10th of a coin. In March, it launched micro Bitcoin and Ether options, so Coinbase’s product will be competing with offerings on other, well-established markets.
Two, Coinbase can’t yet offer the product directly to clients. The company says that for now, the derivatives will trade on third-party platforms while Coinbase seeks a necessary license.
Finally, the announcement doesn’t obviate the big problem facing the company, which is that as crypto-trading competition increases, its margins might erode, says Mizuho analyst Dan Dolev, who has a Neutral rating on the stock.
Coinbase’s announcement isn’t “anything to write home about,” Dolev says. “It doesn’t solve the main issue, which is free trading is coming, and free trading means that their moat or revenue is going to be under pressure.”
A Coinbase spokesperson declined to comment.
Binance.US, Binance’s American affiliate, this week eliminated commissions for trading Bitcoin against the dollar and some dollar-backed tokens and said it would expand its fee-free tier to other digital assets in the future.
The story is similar to what played out among stockbrokers over the past couple of decades. Competition lowered commissions and then largely stamped them out. It was a great deal for investors in general, but not for those holding brokers’ stocks.
—Daren Fonda contributed to this article.
Write to Joe Light at joe.light@barrons.com