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Coinbase launches perpetual futures exchange, 5 years late to the game

The US largest crypto exchange has launched Coinbase International Exchange for non-US professional investors to trade derivatives, starting with Bitcoin and Ethereum perpetual futures.

In its press release, Coinbase identifies the importance of perpetual futures markets by stating that it “accounted for nearly 75% of global crypto trading volume in 2022, creating highly-liquid markets and offering traders additional versatility in their trading strategies.”.

Perpetual futures were popularized by BitMex and invented by its founder Arthur Hayes. It’s a hilarious story of how BitMex found its product-market fit and grew to become the biggest derivatives exchange.

BitMex started as a crypto exchange offering expiring futures and low leverage. Traders would have to roll over from the “front” futures contract, a currently expiring contract, to the “back” futures contract, a contract with an expiry relatively far in the future.

Since most of the traders on BitMex early on were retail, they would not know how to roll-over the futures contracts 🤣. They would be stuck with the “front” contract until it expires, effectively liquidating & closing their position.

Arthur solved this problem by creating perpetual futures, which never expire and retail traders would not need to roll-over. My readers from Europe & Asia will recognize perpetual futures are quite similar to Contracts-For-Difference (CFDs), common in retail FX trading.

The second magical ingredient for the growth and success of BitMex, is massive leverage! When BitMex started early on, it offered very modest leverage and couldn’t achieve a liquidity loop, where volume & trading attracts more volume & trading. Arthur recognized that the missing piece for BitMex to achieve escape velocity is leverage, with which traders have massive firepower to trade high volumes.

Last but not least, BitMex bootstrapped initial liquidity on the exchange by running an internal market-making & proprietary trading desk. Bitmex itself was the market maker for the perpetual contracts to ensure liquidity, hence trading against its clients. The rest is history - BitMex grew rapidly, becoming in 2018 the biggest crypto exchange by volume.

Today perpetual futures exchanges offer leverage up to 100x. Traders can with $1, trade an amount of $100 because the exchange lends out to the remaining $99. Trading with high leverage like 100x might seem like an awesome idea since you can achieve 100x profits, but it also means that a price move of 1% against you can wipe out your whole capital, liquidating your position.

Coinbase offers up to 5x leverage to traders, un-competitive in the global crypto derivatives markets, and claims to have external market makers providing liquidity. Finally, Coinbase boasts liquidation that meets rigorous compliance standards.

Coinbase is pretty much 5 years late to the game. The end.

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