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Coinbase Sets Sights on Crypto Derivatives Throne Left Vacant by FTX – Opportunity Abounds

Published September 29, 2023 11:29 AM
Teuta Franjkovic
Published September 29, 2023 11:29 AM

Key Takeaways

  • Coinbase has received approval from Bermudan authorities to list perpetual futures contracts for non-US customers.
  • Unlike traditional futures contracts that expire monthly or quarterly, perpetual swaps have no set expiration date.
  • Traders pay a funding rate based on the difference between the mark and index price of the underlying asset.
  • Binance currently dominates the futures market in terms of trading volume, but Coinbase aims to capture a share as well.

The cryptocurrency exchange Coinbase announced  that it has been given the go-ahead by Bermudan authorities to list perpetual futures for consumers outside of the United States.

The decision is not shocking; in April, Coinbase obtained a licence in Bermuda  to run a spot exchange in response to a gung-ho approach from American regulators with the eventual goal of launching a perpetual futures platform.

Cash-Settled Derivatives Explained

A cash-settled derivatives contract known as a perpetual futures allows traders to use leverage to “long” or “short” an underlying asset. Perpetual swap traders pay a funding rate that equals the difference between the mark and index price of the underlying asset instead of the contract expiring every month or quarter, maintaining pricing efficiency.

The total liquidity and trading volume in the cryptocurrency market fell after FTX, the biggest crypto futures platform at the time, went under last year. The market is still suffering from the fall almost a year later, with little liquidity remaining mostly concentrated across a small number of exchanges.

The crypto market is presently dominated by Binance in terms of trading volume . For derivatives, however, Binance earned over $30 billion in trading volume over the 24 hours, translating to about $9.6 million in daily revenue from trading fees. Its spot market has seen activity of $6.2 billion, compared to Coinbase ‘s $1.2 billion. Coinbase has the ability to keep exceeding revenue projections if it can win some of this market share.

Coinbase did not immediately respond to a request for comment.

Competitive Long-Term Advantage

Perpetual futures could provide a long-term competitive advantage. Since Coinbase’s rivals currently dominate the international spot market and decentralised exchanges already provide service to it, Coinbase would be vying for a lesser share of the industry.

When it submitted a petition in July requesting that the SEC establish guidelines for cryptocurrencies and explain when a digital asset qualifies as a security, Coinbase launched an offence against the agency. Coinbase also filed a petition with a federal court in Texas to get the government to reply to its initial request after the SEC failed to do so.

The exchange also made public its response  to an SEC notice from March that claimed the company had broken a number of rules intended to safeguard investors with regard to assets listed on its crypto exchange, its wallet, and staking services.

“We didn’t list securities then, and we still don’t. We’d like to in the future, but the SEC has still not complied with the law by providing companies like Coinbase with a way to register to be able to do that,” the company stated .

On Friday, the price of Coinbase’s COIN  increased by 4.69%, indicating that investors are once again upbeat as the Nasdaq-listed exchange adds a new source of income to its repertoire.

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