Coinbase COIN joins S&P 500 Index, depositing decentralized finance into more investment portfolios

Coinbase's shares have underperformed the S&P 500 since IPO. The Trump administration rolled back tougher enforcement policies under former U.S. Securities and Exchange Commission Chair Gary Gensler. Instead of being kept on the market fringes, cryptocurrencies are being ushered into the financial firmament.

Cryptocurrency exchange operator Coinbase will be joining the S&P 500 Index on May 19, replacing Discover Financial Services, S&P Global Indices said on Friday.

The move comes as the Trump administration has rolled back tougher enforcement policies that could have kept crypto on the market fringes and ushered it into the financial firmament.

It also follows regulatory approval of crypto-linked exchange-traded funds from BlackRock and other asset managers, which helped to inflate the market. The total value of digital currencies now stands at some $3.4 trillion, triple the sum three years ago, according to CoinMarketCap.

By that standard, it makes sense for Coinbase to enter the benchmark stock index, which is designed to reflect the broader economy.

The $60 billion company generated $2.6 billion of profit last year and eschews many of the industry's riskier practices. It's also a stark contrast to another crypto firm, DeFi Technologies, which started trading on Nasdaq on Friday.

DeFi's main business is creating ETF-like securities for lesser-known currencies such as Hedera and Dogecoin. Its net loss doubled last year and it owes nearly $900 million to holders of its products compared to about $700 million of assets DeFi indicates can be liquidated in a year or less, a difference that can be a potential indicator of liquidity stress. The company also says it has other assets, some of which are held off the balance sheet, that provide a backstop.

Other concerns exist elsewhere. The spread between the highest price buyers are willing to pay for the biggest crypto assets and the lowest sellers will accept has narrowed, but it remains broader than for many easily tradable stocks, according to S&P's research arm. This gap leaves plenty of room for sophisticated traders to siphon returns from less savvy investors.

A meme coin associated with the president himself is a case in point. About 764,000 crypto wallets have lost money on $TRUMP, according to blockchain research firm Chainalysis, while 58 have made more than $1 million apiece.

The S&P 500 may showcase the shinier side of crypto, but be sure to consider the other side of the coin.