The past week has not been kind to cryptoasset markets. The much-vaunted Bitcoin Cash hard fork has descended into farce, creating uncertainty that brought the prior week’s rally to a screeching halt. More seriously, it has likely given pause to new market entrants who are rightly concerned about the petty partisan bickering on display that leads to such forks –and, frankly, the general lack of maturity on display by the more vocal personalities within the broader ecosystem.
Yet this recent setback is merely another bump on the precipitous decline that cryptoassets have faced since December 2017. At times like this, when long-only #HODLers are forming ad-hoc crisis support groups to swap intellectually hollow bromides on Crypto Twitter, professional investors and even your marginally sophisticated crypto day-traders prefer to generate alpha via the unique opportunities that this market offers. Examples include cross-exchange arbitrage of a magnitude that no longer exists in other markets, bouts of extreme price volatility, and — one of our favorites — new exchange listings.
For obvious reasons, investors need to be judicious when selecting the exchanges and counterparties with whom they trade. Anyone who has ever dealt with (what allegedly passes for) customer support at Binance, or applied even the most mildly skeptical eye to the trading volumes claimed by most non-US crypto exchanges, is likely nodding their head in agreement.
This focus on higher-quality trading venues also means that we, along with many others, pay close attention to any announcements regarding new token listings. Here in the US, the market’s focus is directed in particular to Coinbase where the hype around their listings has reached a fever pitch not seen since Amazon released its HQ2 short list. A July 2018 post to the exchange’s Twitter account stated, without the slightest whiff of irony, that it was “announcing that [they were] exploring the addition of” a short list of cryptoassets.
As pompous as such utterances might seem, crypto investors took it seriously and bid the prices of those assets higher — first at the time of the announcement, and again upon their listing. This phenomenon has given rise to the notion of a “Coinbase Premium”, whereby assets listed on that platform are elevated in the court of public opinion because of the stamp of approval that a Coinbase listing implies as well as the additional liquidity the new trading venue offers.
But does such a premium actually exist?
Breaking Down The Numbers
Coinbase listed ZRX on 12 October and BAT on 2 November. Let’s review asset price performance and volumes since their listing.
Given the external dislocations presented by the Bitcoin Cash fork, and the broader price collapse that is now under way throughout the asset class, we will choose to ignore the previous week and stop the clock for our analysis at UTC close on 12 November:
We acknowledge the limitations of the BAT dataset, given that only ten trading days were measured after its listing. However, a couple of points do stand out:
- A Coinbase listing provides an immediate spike in trading volume. No surprise.
- A Coinbase listing results in rapid price appreciation both in USD and BTC terms. No surprise.
- Asset price (out)performance from the listing does not appear sustainable in USD or BTC terms. This is not what we would have expected.
Taking a step back further, let’s see how these assets performed surrounding and since that July announcement mentioned earlier:
Note how the immediate impact of a Coinbase announcement was a significant (short-term) improvement price on much higher volume. This in itself is really not surprising given the general lack of liquidity that existed with both assets prior to the spotlight that Coinbase shone upon them.
However, if we consider the pre-July 13 announcement price and volume to be the “unaffected” numbers, it appears that inclusion within the Coinbase ecosystem has resulted in neither absolute nor relative (at least, when compared to BTC) price outperformance for either ZRX or BAT on a sustainable basis.
Moreover, while BAT’s listing is recent enough so as to still have an impact on trailing volume numbers, ZRX’s average volumes over the seven days up to and including 12 November were actually lower than they were in the month prior to the July announcement.
Note: Let me pre-emptively point out (to relieve readers of the need to comment) that our decision to stop the analysis on 12 November actually provides far more favorable results for these assets than if we had included all market data through 19 November (this article’s publishing date). We chose to exclude the most recent market data due to the systemic downturn that the broader market has taken since that time, since BTC had traded in a relatively narrow range up until that point and improved our ability to isolate and analyze the so-called “Coinbase Effect.”
So what are the implications for cryptoasset investors?
- New Coinbase listings appear to have no medium-term impact on asset value or liquidity.
- However, a listing has created fantastic short-term opportunities, especially for investors trading on Coinbase’s institutional or “professional” platforms, who have earlier access to the newly listed assets and can flip them quickly.
- This gives rise to the argument that, far from creating a level playing field, the cryptoasset markets are trodding a well-worn path of favoring institutional traders over individual ‘Main Street’ investors, who are now in a disadvantageous position.
- In short, it seems that a “Coinbase Premium” does indeed exist. Unfortunately, the moniker is quite appropriate since it is only available to the exchange’s “premium” clients — and only for a very short time.
Thanks to everyone who read my most recent article “As Bitcoin Reaches a Major Milestone, What Happens Now?”. That article was one of the five most-read articles on Medium.com for a couple of days. I am working on a follow-up post where we will take a step back and look at whether cryptoassets can find a place amongst other, more established asset classes in a professionally managed investment portfolio. Stay tuned…
DISCLAIMER: Nothing in this column is intended as investment advice and you definitely should not interpret it as such. Don’t rely on my advice, or for that matter anyone else’s advice, when making investment decisions. Doing your own research is the key to success in any market.