Coinbase in S&P 500: More crypto firms to come?

This past week, Coinbase joined the SP 500, one of the worlds most elite stock indexes a triumph for the crypto firm, which spent much of the 2020s battling US government agencies like the SEC and Commodity Futures Trading Commission for its survival.But this attainment is not about one company alone.This is more than an achievement for Coinbase; its a landmark for the broader crypto and blockchain industry, said Meryem Habibi, chief revenue officer of Bitpace. Coinbase joining the SP 500 doesnt just boost the owner of the largest US cryptocurrency exchange. It cements the legitimacy of an entire asset class, she told Cointelegraph.Jason Kennard, head of business development at ARK Invest Europe, told Cointelegraph that for the first time, a crypto-native firm had met the stringent profitability, liquidity and market cap requirements of the most iconic benchmark index in global markets, adding:It sends a strong signal to institutional investors: Crypto infrastructure has matured into a credible, systemic part of the financial ecosystem.It is a milestone event, Steve Sosnick, chief strategist at Interactive Brokers, told Cointelegraph, because whether they want it or not, or know it or not, equity investors who buy SP 500 index funds will now have crypto exposure via COIN. Indeed, Coinbase could now get billions of dollars in passive investor flows just from becoming part of the SP 500.Whats remarkable about this is that just a few months ago, the company was engaged in an intense legal battle with the SEC, which was charging that its platform was illegal because it was trafficking in unregistered securities, Benchmark analyst Mark Palmer told CNBC.This normalizes crypto exposure in conservative portfolios that might otherwise avoid digital assets and brings with it indirect adoption by institutional investors, retirement plans and sovereign funds that has broader industry significance, added Habibi.Still, it was only a matter of time before some crypto firm would be brought into the SP 500 fold, Russell Rhoads, clinical associate professor of financial management at Indiana Universitys Kelley School of Business Indianapolis, told Cointelegraph. It does make sense for COIN or some other crypto-related firm to be in the index, as the industry is becoming more important to the global economy and you want the SP 500 constituents to be representative of the economy.Separately, Coinbase also reported a data breach last week, a compromise of passwords or private keys that could eventually cost the crypto exchange $180 million to $400 million.The hack has exposed the personal information of tens of thousands of users and has left them vulnerable to robberies and kidnappings, as seen in the wake of the 2021 Ledger breach.Related: Violent crypto robberies on the rise: Six attacks that targeted investorsMeanwhile, inclusion in the SP 500 means that index funds, including those managed by BlackRock, Vanguard and State Street, must now allocate capital to Coinbase, Habibi told Cointelegraph. This means billions of dollars in passive investment will flow into a crypto-native business.$10 billion in new capital inflows?How much money could flow Coinbases way? Passive investing (e.g., investing in an ETF that mirrors the SP 500) has proliferated in recent years. SP DJII estimated in 2024 that roughly $10 trillion is now passively tracking the SP 500.If Coinbase gets only a 0.1% weighting a share that Habibi thinks reasonable it could reap $10 billion in potential capital flows without a single investor actively choosing crypto exposure.SP Dow Jones Indices Annual Survey of Assets. Source: SP GlobalInstitutional acceptance is arguably the bigger story here, Habibi continued. Coinbases inclusion in the index signals that public markets now reward not just growth, but regulatory compliance, operational maturity and long-term vision in the crypto space. She added:The move paves the way for other crypto firms e.g., Circle, Chainalysis, Fireblocks to aim for public listings and eventual index inclusion, potentially triggering a new wave of institutional-grade crypto finance companies.It may be premature to speak yet about a convergence of the crypto and TradFi economic sectors, however, as some are doing. Crypto, overall, is still a very small fraction of the overall economy, Seoyoung Kim, associate professor of finance at Santa Clara University, told Cointelegraph. I think the greater convergence coming ahead will be increasing institutional adoption of blockchain-based protocols and tokenization.A convergence of economies?Others disagree. We have been talking about TradFi-crypto convergence for quite some time, Owen Lau, executive director at Oppenheimer Co, told Cointelegraph. It is happening and will continue to happen. Robinhood/Bitstamp, Kraken/Ninja Trader and Ripple/Hidden Road are good examples.Were not quite at full convergence, but were definitely past the separation phase, opined Kennard. He, too, referenced crypto ETFs but also pointed to recent events, like Galaxy Digitals listing on the Nasdaq exchange this month and Coinbases role as custodian for multiple ETFs, demonstrating that TradFi firms are now looking to crypto-native firms for some infrastructure needs. Regulatory clarity is still emerging, but institutional rails are being laid fast, said Kennard.More equity listings mean that crypto companies can tap markets as a source of liquidity, but that doesnt necessarily involve a convergence of financial channels, stated Interactive Brokers Sosnick. Convergence will occur when a traditional finance company truly adopts crypto as a means of payment.Related: Senate stablecoin vote splits Democrats amid concerns over corruptionStill, Habibi pointed to convergence in infrastructure solutions, like JPMorgans Onyx platform that is being used to settle billions in intraday repo transactions using blockchain technology, Nasdaqs digital asset custody infrastructure launch and PayPals launch of its PayPal USD (PYUSD) stablecoin, which integrates crypto rails and consumer fintech.These examples underscore a shift in which crypto and TradFi are no longer competing but co-evolving. Crypto-native firms are beginning to resemble traditional financial institutions in structure, while banks are adopting decentralized technologies to improve efficiency, reduce settlement friction, and expand asset reach, Habibi explained.Who is next?Now that Coinbase has broken ground, should one expect other crypto firms to gain SP 500 inclusion soon? Maybe not.A large market capitalization is needed to join the SP 500, but that alone is not sufficient. There are other criteria. A candidate must have been profitable in the most recent year and quarter to qualify, for instance. Galaxy Digital is newly listed [on Nasdaq], but [it still] needs consistent profitability, said Kennard. Marathon Digital, Riot Platforms and Strategy are often cited but may be a little early in their journey.Lau didnt expect any crypto-native companies to join the SP 500 anytime soon, though it could happen in the next two to three years, he said. Rhoads ventured, I would not go as far as stating this is the beginning of multiple crypto-related firms joining the SP 500, as the new members often replace a firm in same industry in this case, COIN replaced Discover Financial.Strategy (MSTR) is a possible candidate. It easily has the necessary market capitalization, but its struggling to meet the indexs earnings requirements. I dont see MSTR making the cut, said Kim.Im not sure who would be next even Gemini (still private) seems far off based on valuations from their last funding rounds, Kim continued. Its really tough to make it into the SP 500, and so well likely see existing SP 500 firms increasingly adopt blockchain/crypto services before we see a true-blue crypto firm i.e., one that started as a crypto firm enter the index.Time will tell, but for now, Im not aware of any crypto-linked companies with sufficient market cap and consistent earnings that meet SPX criteria, concluded Sosnick.Magazine: TradFi is building Ethereum L2s to tokenize trillions in RWAs: Inside story