Brian Armstrong, chief executive officer of Coinbase Global Inc., speaks in the course of the Messari Mainnet summit in Latest York, on Thursday, Sept. 21, 2023.
Michael Nagle | Bloomberg | Getty Images
Now that the SEC has approved the creation of bitcoin exchange-traded funds, Coinbase’s position within the crypto market is poised to take a dramatic turn.
Within the weeks ahead, Coinbase will help shepherd among the biggest names in asset management, including BlackRock, Franklin Templeton, and WisdomTree, into the digital asset ecosystem as their custodial partner of selection. Meaning Coinbase can be central to the storage and safekeeping of the assets for those firms.
While custody revenue presents an enormous growth opportunity for Coinbase within the near term, some industry analysts are concerned that the corporate’s core transaction business is in danger on account of the myriad ways investors will give you the option to access bitcoin. As a substitute of getting to go to an asset exchange resembling Kraken, Binance, or Coinbase, they’ll give you the option to take a position within the digital currency through the identical mechanism they already use to purchase stock and bond ETFs.
In a report Dec. 4, analysts at Bernstein predicted that in lower than five years, 10% of the worldwide supply of the world’s largest cryptocurrency, or roughly $300 billion, can be managed by ETFs. The firm called it the “largest pipe ever built between traditional financial markets and crypto financial markets.”
In 2023, Coinbase’s stock was one in every of the highest performers within the tech industry, soaring almost 400%. Much of that rally was tied to bitcoin, which increased 150%. But a part of the outperformance relative to bitcoin was on account of the joy that latest ETFs would drive more interest in crypto and be a boon for Coinbase.
“ETFs should expand the pie and convey latest people and institutions into the cryptoeconomy,” Coinbase Chief Operating Officer Emilie Choi said on the corporate’s most up-to-date earnings call in November. “They need to add credibility to the market, and we must always see increased liquidity and market stability as we have seen with other asset classes resembling gold.”
From June 15, the day that BlackRock — with its $9 trillion in assets under management — filed for a so-called spot bitcoin ETF and named Coinbase its crypto custodian, shares within the exchange rose from around $54 to over $170 by the tip of the 12 months.
JPMorgan analysts wrote in a November report that Coinbase can be a key beneficiary of the approaching ETF boom, given the immediate upside of custody fees from asset managers.
“We estimate Bitcoin custody and surveillance revenue will greater than offset decline in Bitcoin trading volume as assets migrate to ETFs,” the analysts said.
A number of the momentum on Wall Street has faded to start out 2024, with the stock down 14% for the reason that calendar turned. In response to Mizuho analysts, there may very well be more pain to come back.
“With the hype around Bitcoin ETFs prone to reach a climax in the approaching weeks, COIN bulls could experience a rough awakening once they realize how minimal the revenue impact is,” Mizuho wrote in a note Thursday.
Mizuho’s analysts have the equivalent of a sell rating on the stock and were bearish throughout last 12 months’s rally, ending 2023 with a $54 price goal, by far the bottom amongst analysts tracked by FactSet.
The battle for market share
Almost half of Coinbase’s revenue comes from the fees it charges on transactions, meaning the corporate needs people to maintain using the exchange to purchase and trade bitcoin and other digital currencies.
Within the third quarter in 2023, total transaction revenue accounted for 46% of net revenue. Nevertheless, Coinbase has been diversifying into latest businesses. In 2022, transactions made up closer to 75% of revenue.
A couple of-quarter of Coinbase’s revenue within the third quarter got here from interest income on the exchange’s stablecoin reserves, including Circle’s U.S. dollar-pegged USDC coin. Stablecoin revenue greater than doubled from a 12 months earlier primarily on account of rising rates of interest.
“A couple of years ago, our business at Coinbase was 95% trading fees, and we made an enormous effort across the time it went public to start out diversifying our revenue,” CEO Brian Armstrong told CNBC in a recent interview. “What’s great is that now we’ve got multiple sources of revenue — a few of them in a high rate of interest environment go up, a few of them in a low rate of interest environment go up.”
Still, transaction fees remain a key income driver for the exchange. And in contrast to trading platform Robinhood, which enables investments in a wide selection of asset types, Coinbase doesn’t allow for trading of ETFs.
“Spot bitcoin ETFs appear poised to take volume away from crypto exchanges,” said Bryan Armour, director of passive strategies research for North America at Morningstar.
JPMorgan anticipates that latest account growth will slow as “novice crypto investors get their initial exposure and possibly final exposure through ETFs somewhat than Coinbase,” adding that lots of these neophyte traders won’t ever transcend bitcoin, “thus never needing the services of a Coinbase.”
Mizuho sees the income from custody fees as fairly modest given how far investors have pushed up the stock. The firm predicts ETF approval may add just $25 million to $30 million in annual custody fees, with one other $200 million to $210 million of recent revenue “if incremental Bitcoin inflows generate additional spot trading opportunities.”
With a collective gain of as much as $240 million in additional annual revenue, “this represents just mid-to-high single-digit percentage upside vs. current 2024 consensus,” the Mizuho analysts wrote. They said they “don’t imagine the nearly 400% increase within the stock in anticipation of ETF approval justifies our reasonable estimate for the ETFs’ actual contribution to revenue.”
A Coinbase spokesperson told CNBC in an emailed statement that, along with custody fees, the corporate will generate profits by providing services resembling agency trading, matching and settlement, and financing to ETF issuers.
“The platform believes that spot ETFs can be a positive catalyst for all the crypto space, adding credibility, increasing liquidity, and bringing latest participants and institutions into the cryptoeconomy,” the spokesperson said, reiterating prior comments from Coinbase executives.
Competition could also create pricing pressure.
ARK, Invesco, Fidelity, WisdomTree, and Valkyrie are all offering deals that involve fee-free trading for a certain time frame. Others are choosing discounted fees.
Coinbase’s transaction fee varies, with a max of 0.6% on transactions as much as $10,000 in value. In the corporate’s most up-to-date quarterly earnings call, Choi said that Coinbase doesn’t plan to cut back transaction fees to make them more competitive with other platforms where ETFs are being traded at significantly lower prices.
The transaction charges on Coinbase also vary between its Pro platform and the retail app, where fees are higher. For retail transactions as much as $1,000, the fee ranges from 1.5% to three%.
Nevertheless, JPMorgan analysts said greater efficiency and transparency in equity markets, paired with lower costs to execute, could drive more cryptocurrency trading to ETFs over time, which could ultimately “pressure Coinbase to lower commissions and to narrow trading spreads, reversing the multi-quarter increase we have witnessed in Coinbase’s retail revenue capture.”
Still, Coinbase has its believers amongst crypto enthusiasts, resembling Nic Carter, a partner at Castle Island Ventures.
“They’re essential infrastructure by way of custody, trading, and surveillance for nearly all of the ETF proposals,” Carter said. “Regardless that it would affect their fees on the margin I feel they’re still winners here.”
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