Crypto Exchanges Plus Hedge Funds? Interesting.


Actually, VERY interesting.

Coinbase Global just announced that it is buying One River Asset Management’s crypto investments business. The actual acquisition is for One River Digital Asset Management (ORDAM)–a subsidiary of One River Asset Management — and will be rechristened Coinbase Asset Management (CAM). So Coinbase will diversify away from being strictly dependent upon the retail investor/trader and, hopefully, gains a huge institutional investor base.

Clever? Hmmmm!

Lets take a look “under the hood” of this brilliant cool Ferrari business structure. Now technically Coinbase is NOT buying a hedge fund but rather an asset management firm that offers institutions investment management and advice. In this case, the new Coinbase Asset Management (CAM) will offer institutions digital asset (crypto) investment strategies based upon One River Asset Management’s strategies which, in turn, are based upon One River’s hedge fund strategies. Follow that? Well not to worry since One River’s CEO and Chief Investment Officer, Eric Peters, will be running BOTH entities. Oh, and of course, it would be expected that any and all investment transactions would be executed on the Coinbase platform. Really, it’s brilliant.

I certainly applaud the creativity and the objective of diversifying Coinbase into a more institutional digital execution platform, but a couple of words come quickly to mind – CONFLICT OF INTEREST. Oh, another word just popped into my head. MANIPULATION. To be sure, those two possibilities are extremely likely to “bother” regulators as well as those same institutions that Coinbase seeks.

Think about it. A new CAM institutional client (say a sovereign wealth fund) employs a strategy designed by One River Asset Management (ORAM) and positions are established. Knowing the exact makeup of the CAM portfolio, would ORAM be in a position to “front run” any portfolio adjustments? Certainly a possible conflict of interest exists. Would “outside” clients/traders using the Coinbase platform have trades executed that may benefit the CAM portfolios thus enhancing performance? Again, the potential of price manipulation could exist.

Obviously there are more possible conflicts to consider, and discover, over time.

Certainly there are reasons the CME, NYSE, CBOE and other exchanges have not established an asset management subsidiary (regulation being one). It would be expected that Coinbase will, at some point, be required to be a regulated exchange as well. Would regulators require a breakup of this new structure? Will the same questions inhibit Coinbase’s ability to attract institutional clients? Clever, brilliant or ?????

As always, the biggest winners in whatever the ultimate outcome of this acquisition? The attorneys. They get paid to put it together and will get paid to defend it and will get paid to take it apart (if need be).

Now THAT’S both clever and brilliant.