CEO DailyCFO DailyBroadsheetData SheetTerm Sheet

Excitement over the ‘Coinbase effect’ is spilling over ahead of its stock market debut

April 7, 2021, 8:13 PM UTC

This is the web version of The Ledger, Fortune’s weekly newsletter covering financial technology and cryptocurrency. Sign up here to get it free in your inbox.

There’s an enduring concept in the world of cryptocurrency investing called “the Coinbase effect.” The idea is that the price of cryptocurrencies that are going to be listed for sale on dominant crypto exchange Coinbase start rising in the days after the news becomes public.

The phenomenon is no surprise. Coinbase is the U.S.’s biggest cryptocurrency exchange. Speculators can reasonably expect that enthusiasm for an up-and-coming digital coin will mount in the lead-up to a listing, when a widened audience of potential buyers and sellers will gain access to it.

The effect is real. In a recent article analyzing the price performance of tokens—digital assets tied to blockchains, the distributed ledger technology that underpins cryptocurrencies—Roberto Talamas, an analyst at crypto research firm Messari, found that “the Coinbase listing has the highest impact on price among exchange listings with an average five-day return of 29%.” In other words, five days after Coinbase announces a new token listing, the price of that token appreciates significantly.

(It’s worth noting that Talamas’s analysis excluded some outlier tokens, ones that experienced anomalously high price surges, such as District0x and Civic. Including these outliers pushes the Coinbase bump even higher to 91%.)

Rival exchanges don’t enjoy the same Midas touch. Average returns dipped ever so slightly negative five days after listing announcements at Binance and Gemini, Talamas found. Other exchanges, such as Kraken, OKEx, and FTX, showed positive price jumps five days after new token listing announcements. But these price bumps clocked in at sub-20% on average, and none touched Coinbase’s lead.

Talamas attributes Coinbase’s gold-fingered powers to its popularity among retail investors. The company counts 56 million verified users, including 6.1 million monthly transacting users, or people who actually buy and sell cryptocurrency, per the company’s first quarter financial statement, released this week. All that activity made for envious earnings: During the most recent three months ended March 31, Coinbase estimates that it scored between $730 million and $800 million in profit on revenues of $1.8 billion.

As Coinbase gears up for its own hotly anticipated direct stock market listing next Wednesday, a broader version of the Coinbase effect seems to have infiltrated the market. Investors are pouring outrageous sums of money into non-fungible tokens, or NFTs, blockchain-linked digital collectibles. In Korea, optimistic investors are sending stocks with cryptocurrency exposure skyward. And the total market value of all cryptocurrencies reached an all-time high of $2 trillion this week.

While it’s impossible to point directly to the impact of Coinbase’s upcoming listing on the markets—especially given overarching macroeconomic trends that are fueling a broader tech rally and Bitcoin bull run—there’s no doubt that Coinbase, the industry’s big kahuna, is having some effect. And there’s no shortage of people basking in its aura.

Robert Leshner, the founder of Compound, a “decentralized finance” project that automates cryptocurrency lending and borrowing, recently called out the industry’s froth. “There are dozens of week-old projects with billion dollar valuations,” Leshner observed on Twitter. “Let that sink in.”

With Coinbase’s debut slated for Wednesday, the animal spirits are too busy sinking in their teeth to care.

Robert Hackett

@rhhackett

robert.hackett@fortune.com

DECENTRALIZED NEWS

Credits 🚀

Plaid raises a stupid-in-a-good-way $425 million in funding after Visa deal crash ... Signal pilots embedded cryptocurrency payments ... Snap acquires shopping app to push ecommerce play ... Ripple wins significant motion in SEC case ... Sweden's Riksbank releases huge CBDC study ... Mike Novogratz moves into Facebook ahead of its crypto launch ... Microsoft adopts crypto miners' cooling hack for its cloud servers ... Fidelity, Square, and Coinbase launch crypto trade group ...

Debits 🐻

Archegos' stupid-in-a-bad-way meltdown cost Credit Suisse $4.7B ... Inside the trouble at Goldman Sachs' Marcus effort ... China's Bitcoin miners could derail national climate goals ... New crypto 'trading' game Crash makes the gambling part explicit ... Former BitMEX CEO Arthur Hayes surrenders to U.S. law enforcement ... How NFTs went from artist's tool to cash grab ... Is passive investing hurting the market? ... McDonald's teases stupid-in-a-stupid way Big Mac NFT.

FOMO NO MO

When bitcoin launched in 2009, most nations’ policy makers largely played down its significance. China paid attention.

From a new deep dive into China's digital yuan project from the Wall Street Journal. China is “positioning the digital yuan for international use and designing it to be untethered to the global financial system,” which matters in part because it would allow circumvention of U.S. economic sanctions, and more broadly because it could make the yuan more convenient than the dollar for users in the developing world. That’s a defiant page right out of the Bitcoin playbook, whose partisans have also taken square aim at unseating the dollar and undermining U.S. financial hegemony. But the digital yuan is aimed at strengthening a state instead of, as Bitcoin is framed, creating a monetary system free from state interference—a classic illustration of similar technology turned to very different ends.

The digital yuan’s status as a geopolitical tool creates some tension with its utility as a financial technology. For users, of course, there’s no real expectation of privacy in a system run through the central bank of a shamelessly oppressive regime. And the digital yuan is also still a digital yuan: it will not trade independently of lower-tech versions of Chinese currency. It’s unclear whether a simply technological advantage will serve to make that currency as appealing as the dollar worldwide, particularly in the wake of a series of corporate accounting and governance scandals that have badly damaged faith in the robustness of China’s economy.

BUBBLE-O-METER

$2 trillion

The total market capitalization of all cryptocurrencies as of Tuesday, April 7—a new record. Much as with stocks, though, remember that "market cap" is a tricky number, since it includes the notional value of cryptocurrencies that may never have actually been on the market, such as founder's rewards and treasuries.

THE LEDGER'S LATEST

Janet Yellen says this weeks' World Bank and IMF meetings will be a 'Bretton Woods' moment - Nicole Goodkind

Funko shares pop 27% on NFT market entry - Phil Wahba

Gamestop is finally cashing in on the Reddit frenzy - Chris Morris

Interest in a wealth tax is rising - Geoff Colvin

Cryptocurrency makes up the bulk of thefts by hacking - Shawn Tully

This NFT comes with a house - Chris Morris

Crypto scams spiral higher in the U.K.  - Sophie Mellor

(Some of these stories require a subscription to access. Thank you for supporting our journalism.)

 

MEMES AND MUMBLES

Image

Why yes, clever reader, that IS (an actress playing) Starling Bank CEO Ann Boden, in just one of many gleefully insane moments from this truly entertaining Fintech Rap Battle featuring (actor portrayals of) the CEOs and founders of a dozen-odd mostly European fintechs. Boden, Monzo's Tom Blomfield, Revolut's Nikolay Storonsky, Ricky Knox of Tandem, etc. deliver absurd disses about user numbers amidst awkward dance moves and, for some reason, llamas.

These meme rap battles are getting pretty played out, but this one is extremely-stupid-in-a-superb-way.

This edition of The Ledger was curated by David Z. Morris. We are currently accepting pitches for guest columns. Contact david.morris@fortune.com.

Our mission to make business better is fueled by readers like you. To enjoy unlimited access to our journalism, subscribe today.