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~85% of Coinbase's revenue comes from its core crypto transaction business - taking a % of each trade executed on its exchange. Coinbase entices institutional volume with discounted fees to trade against its retail clients who pay full price - a classic dynamic among exchanges.pic.twitter.com/nPNOJTqrEk
As of February 2021, Coinbase dominates crypto trading in the US. This wasn't always the case however - market share has slowly increased since late 2017 with gains coming from rival exchange Bittrex:pic.twitter.com/MDVy4WNxYT
Coinbase's market share inflection point came at the same time that CME launched Bitcoin futures, which is not a coincidence. As CME's futures business has grown, Coinbase's share has grown in direct proportion:pic.twitter.com/IyxwXqYOQr
CME's Bitcoin market is almost solely institutional. One contract equals 5 Bitcoin (~$250K notional), and traders have to post high amounts of margin given BTC's volatility. The contract is also cash-settled, meaning institutions don't have to touch physical BTC to trade it.
A paper published in late 2020 argues CME's futures market leads Bitcoin price discovery. This isn't surprising - institutions are generally more informed, so their positions should impact the market more. HFT firms then arbitrage CME's futures market into the spot market.pic.twitter.com/lvaxjjBDGi
Where does HFT arb CME's futures market? They'll go to the most liquid, established exchange with a clean record when it comes to hacks & manipulation. Coinbase far and away leads the pack. HFT offloads their trades to the retail crypto masses, paying discounted fees to do so.
Without CME's futures market, institutions wouldn't be able to trade Bitcoin as freely or in the same kind of size, and HFT wouldn't have a clean way to arbitrage high-information trades. Volumes & market share on Coinbase would be nowhere near what they are today.
I'll be doing a full write-up on Coinbase in this week's newsletter - sign up below so you won't miss it:https://frontmonth.substack.com/
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