If Ethereum (ETH 6.16%) actually pulls off the Merge on Sept. 15, it has the potential to boost overall positive sentiment around crypto and entice more retail investors to enter the market. That would be good news for embattled cryptocurrency exchange Coinbase Global (COIN 16.84%), which has been struggling to boost its monthly user numbers and generate more trading revenue on its platform.
But that's just the first half of the story. Since Ethereum will be transitioning to a proof-of-stake blockchain as a result of the Merge, it will generate more interest in staking, which is the process by which investors earn interest on crypto by loaning it out to others. Coinbase has stated that it would like to become the No. 1 staking provider in the world and has already taken steps to make it easier for both retail and institutional investors to stake their Ethereum. As a result, Coinbase could have two ways to win from the Merge.
A new way to attract investors
Staking could be a fantastic way to attract new retail crypto investors who may not be familiar with the concept. With crypto staking, customers agree to "lock up" their crypto for a specific time frame in return for earning rewards. Right now, for example, Coinbase is offering 3.28% staking rewards for Ethereum. You can literally make an extra 3.28% each year in passive income simply by staking Ethereum on Coinbase. So, as long as Coinbase is able to offer competitive market rates, it will attract new retail investors.
And, given what we've heard from Coinbase over the past 30 days, this seems very likely. In a recent shareholder letter, for example, Coinbase specifically pointed out that it views staking as an important new business. In addition to making more coins available for staking recently, Coinbase officially launched Ethereum staking to U.S. domestic institutional clients on Aug. 1. The influx of institutional money into staking could dwarf anything that Coinbase sees on the retail side, especially given the context of the recent BlackRock (BLK -0.93%) deal.
As Coinbase sees it, staking is also a fantastic way to keep users on the platform. It makes Coinbase "stickier." Long story short, if you have money locked up on Coinbase, you're not going to be leaving. Even if you're not trading crypto, you might be tempted to explore other products on Coinbase, such as its new NFT marketplace. So, not only is Coinbase attracting new retail investors, but it is also ensuring that they remain long-term customers.
A new source of revenue
OK, here comes the good part. Staking could also be a fantastic way to generate incremental revenue for Coinbase. JPMorgan recently did some back-of-the-envelope calculations and suggested that Coinbase could generate incremental annual staking revenue of $650 million. That's based on the assumption that Coinbase has a 15% share of all Ethereum assets worldwide. That percentage might seem high (and even JPMorgan acknowledges that it was shocked by the figure), but it's based on the fact that Coinbase now has access to huge volumes of institutional money via the BlackRock deal. BlackRock manages $10 trillion in assets, and if even a tiny portion of that asset base converts to crypto, that would be huge for Coinbase. As a result, JPMorgan now says that Coinbase will be a "meaningful" beneficiary of the Merge.
The Ethereum multiplier effect
In short, Coinbase could see a potential multiplier effect from the Merge. Every new customer represents a source of new crypto trading revenue. If these customers are buying and staking Ethereum, that represents another source of revenue. And, if they stay on the Coinbase platform, they might be persuaded to trade other digital assets (such as NFTs), which would be another revenue source.
Of course, Coinbase has a long way to go to get back into the good graces of Wall Street investors. And Coinbase could face regulatory issues related to its new Ethereum staking services. That being said, the Merge could be a wonderful catalyst not only for Ethereum but also for Coinbase. If people are buying Ethereum and then staking it, Coinbase could end up having opportunities to attract, retain, and monetize new customers after a very challenging past six months.