Coinbase will list a derivatives product called the nano futures contract on Monday.
This will be the first product listed on the Coinbase Derivatives Exchange, offering investors the opportunity to buy a contract linked to the price of one-hundredth of a bitcoin. Customers can purchase the Nano futures contract through third-party brokerages. Customers will not be able to buy the nano futures contract from Coinbase directly until the exchange receives a license to operate as a futures commission merchant. The exchange first applied for the license on Sept. 16, 2021.
U.S. customers have a healthy appetite for crypto derivatives
Coinbase floated the idea of bringing derivatives to its U.S. customer base after purchasing derivatives exchange FairX in January this year.
Americans have long been trading derivative products on foreign exchanges, sinking their teeth into high-leverage products that U.S. exchanges have lacked, indicted by the volume of crypto derivative trades in December 2021 surpassing that of spot trading. Binance alone recorded $52.5 billion in derivative trade volume during the 24 hours ending Friday afternoon, compared to $12.7 billion in spot products. Coinbase enjoyed $1.7 million in spot trading during the same period.
It’s worth bearing in mind that the new nano futures contract will not offer leverage-type bets that drive volume on exchanges like Binance.
Challenges Coinbase faces
A report by Barron’s suggests that it would take a long time for derivatives products to generate significant income for the company.
The new Coinbase product will enter a market of established crypto derivative products, while the company battles cash flow problems.
In March, the CME Group announced micro futures contracts linked to one-tenth of the price of bitcoin and Ethereum.
To add pressure, Moody’s Investors Services recently reduced Coinbase’s guaranteed senior unsecured notes from Ba2 to Ba1, relegating its corporate debt to “junk” status, with the potential for future downgrades. Ba ratings are assigned by Moody’s to credit obligations containing speculative components, considered to be a serious credit risk. Moody’s cited Coinbase’s reduced revenue and cash flow due to the current crypto market downturn as reasons for the downgrade. Coinbase’s recent employee layoff did not count in its favor, with the rating agency still seeing threats to the company’s profitability.
Dan Dolev, a senior analyst at Mizuho, believes that the new product does not address the central issue of competitors offering zero trading fees, which would severely affect revenue if Coinbase were to compete.
Coinbase’s shares fell precipitously on May 3, 2022, from $130.15 to $62.71 at market close on Friday.