Cryptonomics: What is the Coinbase Effect?

Listing on Coinbase has become an industry phenomena known to help propel a token, but for how long - and why does it happen?

By
Kyle Heise
on
September 28, 2021
Category:
Cryptonomics

Predictable or Unpredictable Cryptos

The volatilities of cryptocurrencies are well known. The near-consensus opinion outside of the cryptocurrency industry bubble is that tokens and coins are impossible to predict. 

There are few, if any, controls over cryptocurrencies. The decentralized nature of cryptos gives the sense of uncontrollable and unpredictable price outcomes. It is hard not to agree with the consensus opinion. Prices are wont to rise and fall massive percentages in a single hour. 

Since cryptocurrencies are also not formally recognized assets, listing on different exchanges–– centralized or decentralized––can help set a project up for success or failure. 

Coinbase, the first publicly traded U.S. digital asset exchange, defies the unpredictable nature of digital assets. Coinbase plays a big role in how cryptos achieve acceptance and hinder those it denies. This recognition step has been called the ‘Coinbase Effect’ for the subsequent price rise that occurs when listing on the exchange. 

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The right timing to list on an exchange can lead to a significant windfall for token or coin holders. In essence, Coinbase acts as a gateway to recognition in the space. The exchange’s effect allows for an almost predictable response in an unpredictable space.


A Crypto Phenomena

This “Coinbase Effect” has turned into a phenomenon around the industry whereby a listing will positively affect a token or coin. The theory around the ‘Coinbase Effect’ is simple: get listed on Coinbase, and your price will skyrocket. 

Many coins and tokens have seen enormous success following their listings on Coinbase. A report by Messari from March 2021 entitled “Analyzing the Crypto Exchange Pump Phenomenon,” dove deep into the effects of a Coinbase listing.  Messari analyzed 28 token performances over the first five days of listing on Coinbase. 

​​Prices see an average rise of 91% within the first five days of listing. The mainstream recognition of Coinbase is enough to boost a token and its trading volume massively.

“Coinbase listings have the highest average return standing at 91%, but also have the widest distribution of ranging from -32% to 645%,” writes Roberto Talamas, an analyst at Messari and author of the report. 
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The Messari report identified that not all listings are equal. Even after filtering the data to mitigate the effects of outliers, Coinbase still had the highest post-listing price response compared to exchanges like Binance, FTX, OKEx, Kraken, or Gemini. The report by Messari gives credence to the ‘Coinbase Effect.’ 

“After controlling for outliers, it remains evident that the Coinbase listing has the highest impact on price among exchange listings with an average five-day return of 29%,” says Talamas. The report continues:” Our analysis has shown that when it comes to exchange listings, the Coinbase listing has, on average, the highest positive impact on asset returns soon after the announcement is made,” detailed the report.

The ‘Coinbase Effect’ was also on full display in early September following the listing of memetoken Shiba Inu, a copycat token out to splurge on the success of Dogecoin. The memetoken saw an over 1000% price increase from its listing on Coinbase. However, the token has flattened nearly back to original prices almost two weeks later. 

For more information about the Messari study, read it in full here.

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Short-Lived Effects

Some do not see the ‘Coinbase Effect’ with the same immaculate piety. Not all coins indeed remain at the all-time highs that they reach following the ‘Coinbase Effect.’ In fact, the ‘Coinbase Effect has minimal effect on the long-term health of a coin. The aftereffects are usually very short-lived.

Research by CoinMetrics from 2020 sought to debunk the ‘Coinbase Effect’ theory by taking a more holistic view of the listings. Their report does not try to paint a picture to users that a listing on Coinbase is negative. What it does call into question is the overall effect on the coin or token.

“The short-term, 10 day, price changes tend to be temporarily skewed toward the broader market trend at the time of the event. Over time these distributions flatten out, with the 100-day price changes becoming more normally distributed over a broad range,” reads the conclusion of the report. 

The effects of the Coinbase listing are indeed short-lived, however predictable. It’s almost impossible to sustain the enormous growth seen from initial listings, but the initial growth is certainly one crypto investors should take note of - that exposure could mean enough adoption to sustain a future pattern of growth. 

The power and sway of a major exchange like Coinbase prove the role of institutional backing in crypto. Investors and crypto diehards will be anathema to the idea that centralized entities have such a huge impact, but it is an undeniable feature of listing on Coinbase.

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Kyle Heise

Born and raised in the East Bay of California. He has studied and worked on three continents and lived in eight countries. Kyle resides in San Francisco. He holds bags mostly in Ethererum, Cake, and BSC GameFi projects.

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