Does the Coinbase Effect Still Exist? ChainLink’s 83.6% Gain Says Maybe

• Final Thoughts - The Edge

Back in my day, I remember when you could only buy three things on Coinbase. 

Those early to the cryptocurrency investment game will remember that the world’s most basic user-friendly exchange, Coinbase, only had a handful of digital assets including Bitcoin, Ethereum (added July 2016), and Litecoin (added May 2017). 

It was at this time that even the faintest rumor of a new coin getting added would skyrocket that coin’s price by double digits. When a digital asset did get added to Coinbase, however, the effect tended to be rather uneventful. 

Ripple, for example, was added in February 2019 and its price stayed stable at around $0.30 per XRP. 

XLM had a similar fate: 

$XLM added to Coinbase Pro but the pump started a week ago ???? pic.twitter.com/tmOFb3KEpk

— Rob “Crypto Bobby” Paone (@crypto_bobby) March 13, 2019

This is why many analysts and investors pointed towards the slumping of the “Coinbase Effect.” A coin getting added to Coinbase resulted in lackluster price gains, and it showed that people very much tend to buy the rumor and sell the news, or at least the former part of the expression. 

In June 2019, the Coinbase Effect argument was given new life. A relatively obscure project called ChainLink was added to Coinbase and its price skyrocketed from $2.26 to $4.15 per LINK over the next day – a whopping gain of 83.6%.  

To the many analysts prematurely hammering the nails in the Coinbase Effect’s coffin, this new piece of information changed everything. Here’s what we make of it.

What is ChainLink?

Chainlink basically takes information that is external to blockchain applications and puts it on-chain.  With ChainLink, smart contract users can use the network’s oracles to retrieve data from off-chain application program interfaces (APIs), data pools, and other resources and integrate them into the blockchain. Basically, ChainLink.

The Coinbase Effect was overshadowed by the cryptocurrency winter. It doesn’t matter how powerful of an effect Coinbase can have on the market if the market is overall extremely bearish. People weren’t willing to put money into BTC, one of the more stable digital assets, and they sure weren’t wanting to bet big on the more obscure altcoins.   

Basic trader psychology dictates that investors sometimes tend to operate on emotional, rather than logical responses. This is why many decisions are made based on FOMO (fear of missing out) or attempts to recover large losses with increasingly riskier plays. 

The psychology of cheap coins is another notable way to frame the Coinbase Effect. The value of a company or project has little to do with the price of its token/coin, but people (especially beginners) tend to react to it like it does. What sounds better – 0.8% of a Bitcoin or 1,000 Stellar Lumens (XLM)? Both lots are worth about $100 USD, and most beginners would rather go for the higher volume in hopes of exponential price gains. Again, that big What IF this altcoin becomes BIGGER than Bitcoin? element of trader psychology will urge people to purchase more of the smaller coin. 

The Law of diminishing returns will weigh on the Effect: There are currently 15 digital assets, one of them being a stablecoin, on Coinbase. 

The tangible value of being on an exchange is volume and liquidity: The big question here for savvy traders is quantifying how valuable it is to get listed on a Coinbase or Binance absent of any market speculation. 

We’re in a highly speculative, although decreasingly so, industry: There are few if any asset classes as homogenously over-speculated as that of cryptocurrency. The cryptocurrency market has yet to mature to the point of deciphering a company’s value on P&L statements and quarterly reports. Folks, this is the same industry where some founders regularly announce that they will announce an announcement in the future – and the price of their token goes up. That being said, I believe the market has no choice but to mature in the long-term, and this future is going to look very different than what we’ve been used to in the last cryptocurrency boom (mid-2017 to early-2018). 

Final Thoughts – The Edge

The Coinbase Effect was prematurely presumed dead. As evidenced by ChainLink becoming the best performing digital asset of the year* based on just one announcement (getting added to Coinbase), the Coinbase Effect still has some gas in the tank. 

We urge our readers to explore the lower price digital assets, not for the sake of investing in them or make any speculative reaches, but to understand how markets will react to the next coin/token being added to Coinbase.