Investors seeking to take advantage of last year's bull market in Bitcoin (BTC +2.83%) and other cryptocurrencies flocked to cryptocurrency exchange pioneer Coinbase Global (COIN +2.67%) following its April 2021 IPO. As Bitcoin prices have fallen sharply in 2022, however, Coinbase's share price has followed suit.
The bull case for Coinbase has centered on its role in helping millions of customers get exposure to digital assets. Due in part to its strong reputation, investors using Coinbase have been willing to pay relatively high fees for trading. However, one threat to Coinbase has always been the possibility that a rival exchange would offer the same trading services with more attractive commissions. Now, just as the stock brokerage industry saw in its own race to zero fees, Coinbase faces a new challenge from a company that's known around the world and carries a lot of weight in the crypto community.
Enter Binance.us
Binance has a strong reputation in the digital assets industry. its platform leads the way in terms of global trading volume. The company has a separate affiliate for U.S. crypto clients, Binance.us, and it announced that Binance.us would eliminate trading fees for some of its trades.
Specifically, customers will pay no fees when they use U.S. dollars to buy Bitcoin. In addition, those using several types of stablecoins, including Tether (USDT +0.03%), USD Coin (USDC +0.02%), or the company's own Binance USD (BUSD 0.11%) to buy Bitcoin will do so commission-free.
To be fair, Binance.us was already charging much lower fees than Coinbase for most customers. The Binance.us fee schedule for traders starts at 0.1%, with still lower commissions for those who meet certain monthly trading volume thresholds. Moreover, Binance.us offers a 25% discount for those who use its exchange token, BNB (BNB +0.74%), to pay commissions.
By contrast, the Coinbase Pro trading platform, which corresponds most closely to the Binance.us trading platform, has pricing tiers that start at 0.4% to 0.6%. Coinbase offers similar discounts for those with higher trading volumes, but it takes anywhere from $100,000 to $100 million in monthly activity to get down to the 0.1% level.
Coinbase falls further
The Binance.us news is understandably troubling to Coinbase investors, and the stock was down almost 7% on Wednesday afternoon in response. However, it's important to note that Bitcoin prices fell by more than 5% over the past 24 hours, potentially nipping what many had hoped was the beginning of a rebound in the bud. With that as the backdrop, it's hard to attribute all (or even most) of Coinbase's stock price drop to the Binance.us announcement.
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Yet even though the lower fees that Binance.us already offered didn't seem to have a major impact on its business, the fact that crypto trading fees are making news could trigger a snowball effect that will have other companies in the cryptocurrency realm looking to distinguish themselves from their competitors based on price. Stock investors saw the same thing happen in the stock brokerage industry, where niche players were the first to eliminate fees, forcing bigger companies to follow suit.
In the crypto realm, it's important to keep in mind other ways that exchanges can make money. Robinhood Markets (HOOD +2.42%), for instance, has never charged an explicit crypto trading fee. However, an investor who buys Bitcoin through its platform can expect to pay a higher price than another investor who sells Bitcoin at exactly the same moment receives, because Robinhood incorporates spreads into its price quotes. Coinbase's retail Bitcoin purchasing product has similar provisions, but the spreads for Coinbase Pro and Binance.us are based on market conditions, and investors have the option of placing limit orders that execute only when their desired prices are met.
Look forward to a fee-free crypto future
One goal of the crypto universe was to reduce the fee-based friction found in the traditional financial industry. This move by Binance.us aligns well with that goal, but it could leave Coinbase struggling to keep up. Moreover, if Coinbase does cut its own fees, the expected impact on its revenues and potential profits could just send its stock price down even further.
