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The Coinbase Pump

Exclusive Research

  • Coinbase listings tend to have a positive impact on the listed assets’ prices immediately following the announcement.
  • Price movements on surprise listings are even more pronounced.
  • Despite not being the largest exchange, Coinbase has the highest post-listing price response compared to other exchanges.
  • The shorter-term impacts of listing announcements are however subject to the broader trend of the asset class.

Background

Cryptocurrency listings on exchanges, particularly on large platforms like Coinbase and Binance, tend to see massive price action. For the crypto community, a listing on a centralised exchange is perceived as validation. But the phenomena, in many regards, should be obvious, as when an asset gets listed on a popular exchange it immediately gains exposure to a new set of market participants.

The ‘Coinbase Effect’

Coinbase is the most prominent cryptocurrency exchange platform in the US and many other regions worldwide. The crypto market is now accustomed to a new terminology referred to as the “Coinbase effect” or “Coinbase pump”, which defines what occurs to any crypto asset listed on the exchange. The “Coinbase Pump” has affected the price of many cryptocurrencies, some as recently as last month. However, it stands out for its relatively limited asset offerings, which adds credibility to new listings. Think of it as affirmative action, which brings out the hype.

Coinbase was founded in 2012 and it is the largest cryptocurrency exchange in the US. The San Francisco based exchange, arguably provides the best interface and an easy way to enter the crypto ecosystem from fiat. The centralised digital asset exchange has certainly made crypto investment easy and straightforward. Coinbase has 300+ spot markets as of today and the exchange plays a big role in making cryptocurrency investments accessible to millions of investors. New cryptocurrency listings on their platform, therefore, are still a big deal. The market is accustomed to the ‘Coinbase Effect’, which refers to the events after any crypto asset is listed on Coinbase. The ‘Coinbase Effect’ has affected the price movements of many cryptocurrencies in the past and given very favourable returns.

The listings on Coinbase in 2020 give an insight into the impact of the exchange on cryptocurrencies. Therefore, it is essential to look at some of the assets listed in 2020, 30 days before and on the actual trading day. The chart below shows the performance of some of the digital assets listed on Coinbase platforms last year.

The term ‘Coinbase Effect’ came into discussion in 2017, although the exchange was established five years prior. The prices of bitcoin cash and litecoin doubled after their Coinbase listings. Coinbase announced the listing of litecoin on 3 May 2017 and bitcoin cash on 19 December 2017. The seven-day excess return post-announcement was 45.74% for bitcoin cash and 100.05% for litecoin. Excess return is calculated as the return of an asset over a basket of 50% bitcoin & 50% ether to nullify the effect of broad market movement.

The Coinbase effect has been thoroughly researched by analysts. Cryptocurrency analysis firm, Messari, published a report in Q1 of this year that studied similar listings on other major exchanges and found the ‘Coinbase Effect’ real. The quick price appreciation after Coinbase listing is extraordinary in comparison with other digital market venues including Binance, Gemini, Kraken, Okex and FTX, despite the fact that it is not the largest exchange in the world.

The early days

In the early days, cryptocurrency traders tracked CoinMarketCap listings using APIs to get listing notifications before the exchanges tweeted about listings. Another popular method was to scan the exchange APIs to find out whether new assets were likely to get listed or not. Using these methods, it was possible to track exchange listings before the official announcements. Nowadays, such strategies don’t really work, as the exchanges do not add assets to their APIs before announcements. A big exchange listing is an important event for any altcoin, as it gets wider reach. Event-driven trading is a tried and tested trading strategy that takes advantage of pricing inefficiency. Similar trading strategies are visible in the traditional stock markets and can occur after events such as a board meeting, merger, acquisition etc. For example , company A decides to do the acquisition of company B. The stock price of company B typically rises when the announcement is made. If the acquisition finally does not materialise, the price of stock B suffers.

The temporary discontinuation of the pump

2018 was a dull year for the cryptocurrency market. The exchange listings on the retail investor-friendly exchange did not get the desired results. Basic Attention Token (BAT) was added to Coinbase on 8 November 2018 and its price dropped by 20%. Zcash’s price also fell by 17% after its Coinbase listing on 29 November 2018. The crypto market was going through a downward spiral at the time and investors were probably not interested enough to put their hard-earned money into volatile assets.

Coinbase announced the listing of XRP on 25 February 2019 and finally added it on 28 February. Again, there was not any positive price movement after listing, as, overall, the market sentiment was very bearish. The one-day excess return of XRP against a basket of 50% bitcoin and 50% ether was 6.79% and the seven-day excess return was nil from the announcement date. XRP was already an established digital asset at that time, but there was a lot of negative press against it. It is important to note that the price of XRP surged almost 3000% in 2017.

At the beginning of 2019, bitcoin was trading below $4000. The crypto market almost collapsed, but showed signals of improvement from the middle of the year. The ‘Coinbase Effect’ became the talk of the market again, as the bulls came back. Coinbase listed chainlink (LINK) on 26 June 2019. It was a low-cap cryptocurrency and after the listing, its price surged from $2.26 to $4.15. That was a whopping 83% gain. Chainlink was a relatively new decentralised blockchain oracle that was a green concept. It surprised the analysts who called the ‘Coinbase Effect’ dead. The overall market sentiment was already improving at that time and people were putting money into bitcoin. When the ‘numero uno’ cryptocurrency moves well, the investors rush to take bets on more volatile altcoins. The investment decision is often driven by FOMO (fear of missing out) in this market and the traders play risky shots.

Recent Pumps

On 16 September 2021, Coinbase announced that it was listing privacy token horizen (ZEN) on the same day. The event prompted a 22% rise in ZEN price. In the same month, memecoin shiba inu’s (SHIB) price also soared after its Coinbase listing and the community cheered the move. The effect of Coinbase listing is found to be exciting and relevant for a certain investor class even today.

And...The Dump

Many investors get wrecked as they buy the newly listed assets at an abnormal peak. On 21 May 2020, Coinbase made an announcement to list omiseGo (OMG) on its platform. “OmiseGO (OMG) is launching at http://Coinbase.com and in the iOS and Android apps within the next 15 minutes”, the official tweet said. The news brought high-level social media activity and the investors rushed to buy OMG. OMG was trading at approximately $1 on 20 May. On 21 May, OMG’s trade volume increased drastically. On Coinbase, the price reached $3.90 while the price on Binance reached $2.14 (82.34% Coinbase premium). The altcoin crashed after the listing and the market analysts raised eyebrows regarding insider trading. The price of many cryptocurrencies starts to rise a few days before the Coinbase listing announcement and the exchange does not take any accountability regarding this.

Coinbase listing may happen with or without a pre-listing announcement. Assets like UNI, CVC, DNT and CELO were listed in 2020 without pre-listing announcements and saw a sharp increase in price. DNT was listed on 5 November 2020 with a 173% surge in price on the listing date. UNI was listed on 17 September 2020 with a 99% price surge. Both dropped on the next day of listing. Cardano (ADA)’s Coinbase listing announcement came on 16 March 2021 and the altcoin pumped 36% in the next two days. Finally, when trading started on Coinbase, it lost some of its gains.

Conclusion
The “Coinbase Pump” is a well-known phenomenon propelling asset prices higher when new listings are announced. Coinbase listings have the highest average return standing at 91%, but also have the widest distribution ranging from -32% to 645%,” (Per Messari). Coinbase still had the highest post-listing price response compared with other big exchanges. Before buying based on the Coinbase listing news, the recent past price movement of the token and ATH should be checked, as an exchange listing announcement does not change the fundamentals of a cryptocurrency.

Nothing in this article constitutes professional and/or financial advice. The content is provided exclusively for informational and/or educational purposes. Nothing is to be construed as an offer or a recommendation to buy or sell any type of asset. Seek independent professional advice in regards to financial, tax, legal and other matters.

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