What is the Coinbase Effect and is it Worth Relying On by@tonyfirsov

What is the Coinbase Effect and is it Worth Relying On

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Tony Firsov

Financial and crypto journalist.

Coinbase is the largest cryptocurrency exchange in the USA. It’s called the industry’s unicorn and a leader in mergers and acquisitions with the biggest influence across the USA market. The platform is second only to Binance in terms of trading volume while adhering to the rather old-fashioned policy in the listing procedure, which is why Coinbase supports fewer assets than Binance.

Over the years, there has been a trend noticed around Coinbase - when a coin is listed on the exchange and announced on media, this sharply moves its rate upward. But, does it always work so with Coinbase, or is this only a short-term trend? Let’s try to figure it out today.

Incredible Growth But Only Temporary

Let’s consider the example of OmiseGO (OMG) that was listed on Coinbase. We can see, OMG rate multiplied on the first day of listing on Coinbase, followed by a sharp drop right after it soared. The number of OmiseGO addresses increased by 99,6% a day before the listing, compared with the number of addresses fixed the day before. The total number of active addresses was the biggest since November 2018. On May 21, the number of on-chain transactions increased by 83,9% compared with the previous day, reaching the highest level ever.

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The same thing about Chainlink - the rate grew from $2,60 to $5,10 before the listing and dropped to $3,80 afterward. Similarly, with OmiseGO, the number of active addresses registered and transactions in Chainlink reached its maximum level on a listing day. 

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Another example is MKR listing (the token of the DeFi project MakerDAO), we can see its rate skyrocketed 40% right after its listing was announced on Coinbase. It was followed by short correction of the price. The token’s rate went up just before the listing, reaching its all-time high of $730. However, the MKR price showed a downward trend right after the start of the trades. 

This phenomenon can be explained by too many rumors and hype around the coin before its listing, for all the cases we consider in this article are followed by sharp price growth right before the trades start, and the closer to listing - the bigger the price growth rate we observe. And in the end, harsh correction in all the cases. This phenomenon got the name “the Coinbase effect,” and it was noticed that it takes place simultaneously with increasing on-chain activity. 

Probably the loudest skyrocketing rate was noticed when Bitcoin Cash (BCH) was listed on Coinbase. It was in late 2017 - that was the peak of the crypto market when Bitcoin was about to reach $20 000 with a market cap of $800 billion. Once Coinbase announced support for the main Bitcoin fork, its rate soared to almost $4000, but the trades were ceased in a couple of minutes, for volatility was too high, and the growth was recognized as suspicious. Similar to the cases we mentioned before, the sharp upward rate movement followed after the Coinbase announcement.

As a matter of fact, the BCH rate skyrocketed even higher up to $9500 from about $2400-2500 level on the former GDAX  exchange (now Coinbase Pro). The same drop followed once the trades ceased. A similar situation happened with XRP, Dash, Zcash listing, as well as many others, following with sharp price soaring and the same sharp drop afterward.

Looking at such sharp volatility fluctuations on the listing eve and right after the trades are opened, the company’s CEO supposed insider trading might occur and promised to figure it out. The company even received a class action blaming Coinbase for insider trading during the BCH listing. No proof was found, though.

One of the latest situations of unnaturally sharp volatility was fixed with the DeFi token Compound listing when the COMP rate fell right after the trades were opened. The asset trades opened at $400 and dropped twice. The reason may be that some early investors wanted to make money on the hype around COMP, for its rate was moving steadily up before the listing on Coinbase. When the trades were opened, there were 25 transactions fixed each for 2000 COMP to the exchange wallets.

Listing on Binance

This is the largest exchange in terms of trading volume, with strict conditions for listing which are not clearly defined in any source. The head of the trading platform says that they reject 97-98% of applications.

Requirements for applications:

-fill out the form on binance.com, providing the information about your project;

-send the application and wait for the answer. The stage of the application consideration can be known on binance.com only, so it does not make sense to write to tech support or reach Binance management on their social networks.

Criteria when considering an application:

-applicants trying to put pressure on the Binance managers are dropped out;

-promises to pay million dollars for listing will not work either - the company values reputation first and foremost;

-the exchange is favorably disposed to projects and companies that used to help promote BNB - the native token of Binance.

-when evaluating a project, the Binance team carefully analyzes its usefulness, applicability for solving actual problems, the audience interested in it, listing on other exchanges, and trading volume;

-it does not matter how much you are willing to pay for the listing - it will not work. The developers of “shit coins'  would pay any amount of money for listing on such a large player as Binance, but they are out, so money - in any amount - is not a ticket to Binance listing.

The exchange definitely charges some fee for listing, but there is no certain information about it, nor does the Binance head comment on this issue.

GMT Token’s case

GMT Token company is working to make it to Binance - the largest crypto platform that affects assets' rates equally or even more than Coinbase.

According to our sources, in 2022, GMT will start to implement the next stage of its strategy. Besides using their mining capacities, the team will attract other participants in the mining market to place their equipment in the project’s ecosystem. New miners will be offered to place their equipment in GMT data centers. In return, miners will receive GMT tokens in an amount proportional to the power security. Part of the tokens will be burned, and the released power will be distributed among all tokens in circulation.

If this strategy is implemented successfully, the token power security will sharply increase, and its value may reach $1.5 in the next 12 months.

It is clear from the foregoing why the company did not rush to receive a listing on Binance and preferred local exchanges instead. Now listing on Binance looks quite logical in 2022.

Other Factors

However, the Coinbase effect seems to be overestimated, for, as a matter of fact, the announcements of new tokens to be listed on the exchange usually cause their price fluctuations within -1% - +14% related to USD, BTC, ETH. Experts estimated that the exchange announcements have no significant influence on general market trends of the assets announced. They studied 16 assets added to the exchange, and 6 of them showed a downward trend within 10 days after the listing, while only 3 raised less than 5%. So on average, the fluctuation was estimated at +4%.

As for Coinbase announcements and their effect on the asset rates, here experts see the bigger reason is a general market trend happening along with short-term effects from the exchange announcements. For example, in 2018, most of the assets went down during the bearish market trend. In 2019 the rates moved up and down. So it appears that the dynamic largely depends on the market trend at the time when the asset was listed, while Coinbase news mostly bears a short-term effect on the assets rates. 

Most crypto assets did not maintain high prices and dropped in a few days after listing, which refers to the assets with low liquidity (LOOM, CVC). Some kept their prices at the same high level (GNT), while others skyrocketed (OMG, XTZ).

The Block research shows the following dynamics on the day when Coinbase announced listing:

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The assets grew by 9% towards USD and 8%  to BTC on average. 14 out of 16 assets showed a positive trend.

Then the rates dropped during 24 hours from the trades opening, 1%  towards USD per day on average. 5 out of 19 assets showed a positive trend. Within a week after listing, most of the assets kept on downward movement -3% towards USD and -1% to BTC on average. 2 out of 19 assets showed a positive trend during the week, especially Chainlink we have mentioned before. 

In a month after the listing, the drop was estimated at -6% on average:

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5 out of 19 assets grew towards USD and BTC, especially Zilliqa, which did not show an upward trend the first day after the listing.

Wrapping Up

We can’t put it all on the Coinbase effect and blame it for those impulse assets fluctuations after the listing, for there may be several reasons, and the biggest might be a general market trend. The upward trend of new-added coins on the exchange is usually of short-tern nature, and it does not last long if the market is bearish. Besides, we should also keep in mind the level of assets’ liquidity, which also plays an essential role in future rate changes.

Trying to grab coins and wait for the rate boost, trying to make a big deal of fortune, we should bear in mind that such trading activities are pretty risky, and we should be especially careful and remember that there are plenty of factors influencing the prices and behavior of the asset. So, to some extent, those huge rate fluctuations might be caused by the Coinbase effect, but it would be naive to think it's all about the exchange announcements. It is recommended to make a big deal of research across the cryptocurrency and the factors that might be crucial in its rate changes before investing in this or that digital asset.

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