01.13.2022

Coinbase Buy Increases Competition in Crypto Derivatives

01.13.2022
Shanny Basar
Coinbase Buy Increases Competition in Crypto Derivatives

Coinbase, the listed US cryptocurrency exchange, is acquiring regulated derivatives platform FairX following acquisitions last year by other venues in order to launch crypto derivatives.

FairX is regulated by the Commodity Futures Trading Commission as a designated contract market.

Coinbase said in a blog that the exchange plans to use FairX’s infrastructure to offer crypto derivatives to all customers in the US over time.

Consultancy Coalition Greenwich had predicted in a report, Top Market Structure Trends for 2022, that unconventional mergers and acquisitions in financial services are likely this year.

David Easthope, senior analyst who heads fintech research in the market structure and technology team at Coalition Greenwich, said in a webinar: “I think 2022 is going to force us to stop thinking only about which big exchange or broker will buy Coinbase. We should think about what Coinbase or FTX will continue to buy and which traditional firms might they look at as we move forward.”

In October 2021 FTX, a US-regulated crypto exchange completed its purchase of LedgerX, which has been rebranded FTX US Derivatives. Through the deal FTX US gained a CFTC-regulated designated contract market, swap execution facility and derivatives clearing organization.

In the same month Cboe Global Markets announced an acquisition of Eris Digital Holdings. ErisX operates a U.S. based digital asset spot market, a regulated futures exchange and a regulated clearing house. Cboe said ownership presents a unique opportunity for the exchange group to enter the digital asset spot and derivatives marketplaces.

CME Group has already launched bitcoin and ethereum derivatives and reported record average daily volume in bitcoin contracts in 2021.

Easthope expects M&A deals to move beyond acquiring licences to more strategic partnerships and unconventional pairings.

Maven 11 had predicted in its 2022 outlook that Coinbase would roll out derivatives on its platform.

The Dutch blockchain and crypto asset investment firm said in its outlook that derivatives in decentralized finance (DeFi) had been rather a niche product in 2021.

“2022 will make the competition even more difficult as we expect Coinbase to roll out their derivatives offering which will likely start with perpetual swaps in Europe with options following later on,” added Maven 11.

The firm expects that the perpetual swaps market will continuously stay dominated by centralized exchanges, but some DeFi options protocols will start to emerge and grow market share.

Maven 11 said: “We believe that the options market in DeFi will explode in 2022 and yield strategies will become a new normal for the protocols as a part of their treasury diversification strategies.”

The winner is expected to revolutionize the crypto options pricing model that still relies on the Black and Scholes pricing model which Maven 11 explained is problematic to use as the existence of fat tails (extreme returns) in crypto leads to underpricing of the options itself.

“In essence, the protocol that will develop a superior model for the option pricing than Black and Scholes  will be the winner in the DeFi options space,” said the outlook.

Hirander Misra, chairman & chief executive of GMEX Group, the software provider for market infrastructure and digital platform, predicted that in 2022 digital market infrastructure interoperability solutions will gain increased traction.

Misra wrote: “We will increasingly see the evolution of solutions and services that bridge the gap between traditional and digital capital markets, whilst effectively mapping to evolving regulatory frameworks to enable mass adoption by institutional players. Institutional players largely want exposure to digital assets in the same way as they do other asset classes.”

As a result financial players need to optimize digital asset infrastructure through cloud-enabled microservices and a distributed hub model that integrates private ledgers and public blockchains into traditional market infrastructure, to expand and prosper.

“Traditional exchanges and post trade operators will harness such solutions to digitally transform themselves, as they seek both technology and knowledge enhancing partnerships,” Misra added. “They will no longer be able to ignore the keen interest in digital asset trading from both retail and institutional investors or the need to service the market with trusted digital asset infrastructure.”

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