The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Stephen Gandel

NEW YORK, May 13 (Reuters Breakingviews) - Crypto is gaining currency. Coinbase COIN.O, which operates an exchange for buying and selling bitcoin and other digital money, will be joining the S&P 500 Index .SPX, depositing decentralized finance into more investment portfolios. It’s a fresh step to mainstreaming an industry whose glossy veneer masks a murkier underbelly.

Legitimacy has come quickly, less than three years after a scandal toppled Sam Bankman-Fried's exchange operator, FTX. 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.

Regulatory approval of crypto-linked exchange-traded funds from BlackRock and other asset managers helped inflate the market. The total value of digital currencies 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, as acquired credit card issuer Discover Financial Services exits. The $60 billion company generated $2.6 billion of profit last year and eschews many of the industry’s riskier practices.

It's an exception to the rule. On the same day, S&P Global Indices welcomed Coinbase, another crypto firm DeFi Technologies DEFI.NLB started trading on Nasdaq. Its 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 wider 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 outfit Chainalysis, while 58 have made more than $10 million apiece. The S&P 500 may showcase the shinier side of crypto, but be sure to consider the other side of the coin.

Follow @stephengandel on X

CONTEXT NEWS

S&P Global Indices said on May 12 that shares of cryptocurrency exchange operator Coinbase would be added to the S&P 500 Index, replacing credit card provider Discover Financial Services, which is being acquired by Capital One Financial.

Coinbase shares jumped more than 15%, to $238.80, at 1015 EDT on May 13.

(Editing by Jeffrey Goldfarb and Maya Nandhini)

((For previous columns by the author, Reuters customers can click on GANDEL/ stephen.gandel@thomsonreuters.com))