Before Jan. 10, the only means of gaining true Bitcoin (BTC +0.65%) exposure was by directly purchasing the cryptocurrency off of an exchange, such as Coinbase Global (COIN 0.88%). But now investors can buy shares of one of 11 newly approved spot Bitcoin exchange-traded funds (ETFs) through conventional brokerages.
This has created some concern that the ETFs could jeopardize one of Coinbase's main uses and source of income. However, this assumption fails to paint the full picture. Here's why the ETFs will likely be a net gain for Coinbase over the long term.
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The new ETF landscape
With a crowded field of choices, investors have several options for picking which new Bitcoin ETF they want to buy. Recognizing this, providers are in the midst of a fee war in an attempt to remain competitive and attract buyers.
The majority of the ETFs have an expense ratio of 0% and offer fees lower than 0.4%, and some are waiving fees for a period of time. Compared to Coinbase, which charges anywhere from 1.5% to nearly 4% depending on the method of payment, cost-oriented investors would clearly opt for Bitcoin exposure via an ETF.
Here lies the potential problem concerned investors are pointing out. Based on the most recent earnings statement, Bitcoin transaction fees made up around 17% of Coinbase's total revenue. Historically, this number has tended to hover around 18% to 20%.
While Coinbase offers investors the ability to store purchased Bitcoins on a digital wallet, rather than merely owning shares of an ETF, this isn't a priority for everybody. For many investors, simply having exposure to the cryptocurrency in the form of an ETF is enough and the low fees make them an even better option. As these new ETFs become more popular among institutional and retail investors, Coinbase faces the likely reality that revenue from Bitcoin transactions will decline. But not all hope should be lost.
How Coinbase benefits from the ETFs
One of the more overlooked aspects of the recent approval of spot Bitcoin ETFs is the role that Coinbase plays. While media attention focused on the big names sponsoring the new funds -- like BlackRock, Fidelity, and Invesco -- a detail was glossed over.
Out of the 11 Bitcoin ETFs now trading on the stock market, Coinbase serves as the custodian for eight of them. This means that Coinbase will benefit from two fees it charges. As the ETF providers buy and sell Bitcoins, Coinbase will receive a 0.2% fee. In addition, it also charges a fee to store those Bitcoins, with a varying cost structure depending on the total value in custody, ranging from 0.1% 0.2 %.
These might sound like minuscule numbers, but when considering just how much interest these ETFs have garnered in a short amount of time, those small percentages could begin to add up. Admittedly, we are still in the early days of Bitcoin's arrival on Wall Street, but it remains hard to dismiss just how much activity they are generating. Over the first three days of trading, the ETFs registered over $10 billion in volume. Furthermore, two of them -- BlackRock's and Fidelity's -- at the time of this writing ranked in the top five of total inflow among all ETFs during the past week.
Popularity of the ETFs trickled to Coinbase's platform as well. On the day the ETFs were approved, it registered more than $7.5 billion in Bitcoin transactions as investor interest skyrocketed. It was the second-largest single day of trading in the company's history.
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Key Data Points
Quantifying the impact
It's difficult to get hard numbers given the newness of the ETFs, but extrapolation of known fees and projected activity can shed some light on just how much money Coinbase could generate from its integral role.
One analyst firm estimates up to $30 million in custody fees annually for Coinbase. That isn't very much, considering that during the first three quarters of 2023 it generated over $2 billion in revenue. Yet this assessment overlooks one crucial aspect.
Coinbase charges custodial fees based on the total dollar value held in each account. Not the total number of Bitcoins. This holds significant implications over the long term. Should Bitcoin continue its journey of price appreciation -- a reasonable assumption due to its scarcity and current trajectory -- the underlying value of the funds held in custody will appreciate. Should Bitcoin double in price, Coinbase will see those fees double as well. If there is anything Bitcoin's short 15-year history has proved, it's that increases of this size can be a piece of cake.
The other aspect that remains even more difficult to quantify, but holds greater implications, is the ripple effect that will occur in the wake of the approval of these ETFs. There is truly no way to estimate how significant of an impact they will have, but one fact remains certain: The approval stands as a momentous accomplishment in Bitcoin's evolution and holds the potential to accelerate market adoption among institutions and eventually trickle down to retail investors. As we saw with the trading surge on its platform in the days after the ETFs got the green light, the legitimization of Bitcoin and crypto in general will inevitably attract more activity and cushion Coinbase's bottom line.
Considering the long term
While the threat of ETFs stealing Bitcoin transaction revenue warrants concern, the reality is that Coinbase's role as a custodian and position as an industry leader should prove capable of offsetting any declines. But of most importance is the landmark that the ETF approval is.
Now the world's most valuable cryptocurrency has a home on Wall Street, and some of the biggest names in the financial industry want a piece of it. As interest in other cryptocurrencies grows and development of new use cases progresses, Coinbase remains one of the key beneficiaries of crypto's evolution.
