Coinbase Listing and Development of Digital Currency Exchanges

2021-05-08, 03:48

On April 14, in 2021, Coinbase listed directly on the NASDAQ, marking the world’s first digital currency exchange entering traditional finance. The listing proves that digital currency exchanges may become more accepted by mainstream financial markets. In this case, it will significantly influence the future development of digital currency in terms of transactions and various options offered to investors as investors. This article will discuss the advantages and disadvantages of the listing, and analyze the impact on the development of exchanges and investors.

The listing enabled Coinbase to obtain a high volume of network traffic in a short period of time and a lot of third party publicity from mainstream news outlets. This attracted a lot of attention for the entire digital currency industry. It created synergy between ordinary investors and the digital currency market, while also helping Coinbase executives obtain huge benefits by cashing out.

The Worldwide Publicity

The impact of Coinbase's listing is reflected by the immediate publicity that was received. According to Google Trends data, on April 14th (listing day), Coinbase's global search index increased by 203.03% from the previous day, and domestic search index in the United States increased by 222.58% from the previous day, far exceeding that of other digital currency exchanges.

The day before listing, the Coinbase search index, for the first time, surpassed Binance. Under regulatory pressure from the US Commodity Futures Commission, Binance has suspended services to new users in North America. Coinbase is currently the most prominent digital currency exchange in the United States with geographical advantages and without any serious competitors. Coinbase's search data has always been better in the US than Binance and other exchanges.

Global search trends of digital currency exchanges
Data source: Google Trends

Search Trends of Digital Currency Exchanges in the U.S.
Data source: Google Trends

Public Attention for Digital Currency

The listing of Coinbase has brought positive effects to the digital currency market as a whole. On the day of listing, BTC and ETH prices and trading volumes performed well overall, in the digital currency market.

Bitcoin transaction volume on Coinbase was US$1.4179 billion, and the Ethereum transaction volume was US$809.1 million, an increase of 26.389% and 40.611%, respectively, from the transaction volume of the previous day. While the listing attracted network traffic, it also affected investor choices, allowing more funds to flow into the digital currency market. Although the prices of Bitcoin and Ethereum fluctuated significantly in the last ten days of April, the industry speculated that these fluctuations were due to the closure of a Turkish digital currency exchange and Biden's preparation to impose a tax on the wealthy.

Information Barriers Weakened

The listing of Coinbase means that all compliance measures need to be strictly adhered to.e in accordance with SEC and NASDAQ requirements. This is also the first time a digital currency exchange has publicly disclosed operational information under regulatory requirements.The SEC requires Coinbase to disclose its business information to the public. This information includes revealing and evaluating potential operating risks, making all management, compensation packages, and shareholdings public information.

Major shareholders, their transactions, and their funds will also be made available to the public. Coinbase will also need to provide financial information and audit reports on a regular basis. Through Coinbase's prospectus and regular disclosure reports, the public has complete transparency when it comes to the business model and operating status of the cryptocurrency exchange. This will help eliminate the lack of information shared between the digital currency industry and the public.

Two parts of Coinbase’s disclosures are particularly noteworthy. First, it is the rapid growth of Coinbase. As digital currencies usher in a bull market, Coinbase, as an exchange, has seen fantastic growth in terms of scale, revenue and profits.

Data source: Coinbase prospectus and Coinbase first quarter 2021 earnings report

The second is risks identified at an exchange level in the digital currency market. Coinbase pointed out in its potential risk analysis that the operating status of digital currency exchanges is heavily dependent on transaction price and volume. If digital currency prices (especially the prices of Bitcoin and Ethereum) drop heavily, the operation of exchanges will be greatly affected.

Furthermore, the digital currency market’s future development has high risks and huge uncertainties which exchanges cannot hedge or predict. Exchanges can only passively accept the market conditions of the digital currency market. Third, acts such as cyber-attacks cause severe blows to the reputation of exchanges. Digital currencies are extremely susceptible to changes in regulatory policy. If the exchange fails to pass the compliance review, the business model will be difficult to maintain.

The above risks are not exclusive to Coinbase and are shared by all exchanges. . Coinbase's prospectus and disclosure report revealed many problems faced by large digital currency exchanges. However, Coinbase disclosing their business information to the public through audited financial statements and prospectuses, will increase investor’s knowledge, and increase trust in Coinbase.

High Handling Fees

Coinbase's long-standing compliance and prudence have brought Coinbase users more security and relatively less investment risk than some of their competitors. Coinbase compensates for losses caused by compliance operations by increasing the handling fee.

High cash income

According to experimental market data and shareholding information disclosed by Coinbase, after i listing, CEO Brian Armstrong made a profit of 292 million yuan from the capital market by selling his stock, and Chief Financial Officer (CFO) Alesia Haas cashed out 99.32 million US dollars. Frederick Wilson, the director of Coinbase, sold 4.7 million Coinbase stocks and obtained $1.82 billion in proceeds. High cash proceeds may become a driving force for exchange managers and owners to move towards listing in the future.

The listing of Coinbase has brought a new development direction to digital currency exchanges. It is no longer a fantasy for digital currency exchanges to pass compliance reviews and issue shares in the traditional financial market. However, Coinbase has made significant compromises in its business model and service scope to meet the compliance review. In a digital currency market that advocates freedom and confidentiality, these compromising measures may harm the competitiveness of Coinbase.

Single business model

Compared with other exchanges, Coinbase is conservative with the types of trading currencies and the variety of trading products it offers. Currently, Coinbase provides spot trading services and does not provide any derivatives or OTC product trading services. As a "good boy" in the eyes of regulators, Coinbase has always prioritized prudence in the selection and use of currencies, currency trading services, and currency products. Coinbase did not provide trading services for Dogecoin, which has recently become very popular in the market. It can be seen that operators have high standards for digital currency selection. Coinbase canceled leverage for primary users and Pro users for compliance reasons. Most other centralized exchanges provide customers with leverage services, and some exchanges such as Gate.io, will provide customers with multiple ways to initiate leverage.

According to CoinGeko's statistics based on the digital currency industry, the unity of Coinbase's business model has begun to hurt its competitiveness and market share.

Market share of the top ten centralized digital currency exchanges in the first quarter of 2021
Image source: CoinGecko Digital Currency Industry Report (Q1 2021)

Among the top ten digital currency exchanges, Coinbase has not increased its market share while the listing date approaches. Instead, it has continued to decline in the first quarter of 2021. This is undoubtedly due to the popularity of perpetual contracts for digital currency derivatives this year. According to TokenInsight's research data report, in the first quarter of 2021, perpetual contract trading volume has reached 14.32 trillion U.S. dollars, which not only surpassed the total amount of derivative tradings last year but even exceeded the spot trading volume for this quarter. Currently, there are more than 50 exchanges that provide perpetual contract trading services. Coinbase cannot engage in derivatives transactions subject to compliance requirements, which may be the main reason for its decline in market share.

Perpetual contract trading volume of the top ten centralized digital currency exchanges in the first quarter of 2021
Image source: CoinGecko Digital Currency Industry Report (Q1 2021)

Area of Limited Service

As a model of compliance for digital currency exchanges, Coinbase is very cooperative with the requirements of local regulatory agencies. However, due to different regulations in other regions, Coinbase cannot meet the regulatory standards of each regional agency. Therefore, it has considerable difficulties with cross-regional development. Faced with this dilemma, Coinbase chose to adhere to the local regulations of the United States and abandon some of the overseas markets. This plan allows Coinbase to have strong domestic competitiveness in the United States, but it also means that it will have to sacrifice some market share outside of the United States.

The Coinbase listing certainly provides a new direction for the development of digital currency exchanges. It has become a practical way for digital currency exchanges to move closer to traditional finance, embrace compliance, and obtain benefits by raising fees and financing listings. Adhering to the "original doctrine" of digital currency and continuing to carry out free trading services are also attractive to exchanges. For trading volume, centralized exchanges are currently the absolute hub for digital currency trading. The decisions made by centralized exchanges in the face of these developments will undoubtedly have a fundamental impact on the progress of the entire digital currency industry.

The transaction volume of centralized exchanges and decentralized exchanges in the first quarter of 2021
Image source: CoinGecko Digital Currency Industry Report (Q1 2021)

For now, investors do not have to face the changes in the digital currency industry brought about by the transformation of exchanges. The Coinbase listing is more to allow investors to see matching attributes with /traditional trading platforms and their features. Coinbase is among the top ten digital currency exchanges, risk-averse investors from the traditional financial market are likely to use Coinbase for trading. However, investors who are more risk tolerant and want to pursue flexible trading methods will most likely choose other platforms for trading.

Author: Gate.io Researcher: Charles F.
*This article expresses the views and opinions of the author. Under no circumstances does the content constitute investment advice
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.

แชร์