It has been quite the year for Coinbase Global (COIN 2.77%). Crypto is back in a bull market, the Securities and Exchange Commission (SEC) approved spot Bitcoin (BTC 1.74%) exchange-traded funds (ETFs), and Coinbase posted its first profitable quarter in more than two years. As a result, its stock has risen more than 275% in the last year.
And as is common in bull markets, the good news keeps on coming. Rumors are swirling that the SEC will green-light a spot Ethereum (ETH 0.86%) ETF soon. Not only is Coinbase going to be the custodian for some of these ETFs, but a pending approval will also create a domino effect of benefits for the company as interest in Ethereum grows.
Here are three little-known facts about why the Ethereum ETF approval will give the company a major boost.
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1. It will increase volume on the platform
When the spot Bitcoin ETFs were approved in January, many believed they would deal a blow to Coinbase. Since investors could now gain exposure to the cryptocurrency through an ETF trading on the stock market, why would they use Coinbase?
While the concerns were valid at the time, we can now see that the approval of the ETFs generated massive trading volumes on Coinbase. The exchange saw volume on its platform increase by 300%.
You can probably see where this is going. Ethereum is the second-most-traded cryptocurrency on Coinbase. And since the exchange generates revenue from trading fees, if a similar outcome arises after the approval of an Ethereum ETF, then Coinbase will be raking in some serious profits. The more trading that happens, the more money it will make.
2. Staking should get a boost
One of Coinbase's most popular products is its staking service. When buying Ethereum on its platform, the company allows users to easily stake it and earn passive income with just a few button clicks. For providing this service, it takes a 25% cut of the staking rewards it pays to users.
Should Ethereum's price follow a similar trajectory to that of Bitcoin after it got its spot ETF approval, then that 25% cut will grow significantly. Imagine the difference this will have when considering that Coinbase manages billions of dollars of staked Ethereum.
We can see the impact that rising Ethereum prices could have on Coinbase's bottom line just by looking at last quarter's earnings report. From the fourth quarter of 2023 to the first quarter of 2024, Coinbase saw a 59% increase in its Blockchain Rewards (staking) revenue as Ethereum's price jumped 60%.
While this is only one quarter, the increase in staking revenue corresponds nearly directly to the increase in Ethereum's value. If the crypto's value jumps 50% as Bitcoin's did in the three months after it received spot ETF approval, Coinbase's Blockchain Reward segment should see a similar increase or a jump of roughly $75 million.
3. The first company built on Ethereum
The last benefit that an approval of spot Ethereum ETFs will have for Coinbase is slightly abstract, but it might be the most lucrative. The company has two main products that are uniquely Ethereum-based: Base and USDC (USDC 0.00%).
Launched In August 2023, Base is Coinbase's very own blockchain. The technical matters of this are a conversation for another day, but what is important is that Base is compatible with Ethereum, and for every transaction that occurs on Base, the company gets a cut.
Since the beginning of March, Base produced nearly $35 million in profits as users flocked to the blockchain in the wake of Ethereum's Dencun upgrade, which lowered fees on Layer 2 blockchains like Base.
If activity stays on its current trajectory, Base could produce somewhere around $200 million on an annual basis. That's not bad when considering that Coinbase posted net income of $95 million in all 2023.
Then there is USDC. Coinbase leverages this stablecoin in several ways to generate revenue, including interest income from reserves; transaction and conversion fees; custody services; and through its partnership with Circle, the creator of the stablecoin. In the first quarter of 2024, Coinbase raked in roughly $197 million in revenue from USDC.
Since USDC and Base are both based on Ethereum, an ETF approval could produce serious benefits. There is no easy way to quantify it, but if the Bitcoin ETF approval sparked increased activity on Bitcoin, then it is plausible to assume an ETF approval for Ethereum will lead to a surge of interest and activity for that crypto, inevitably trickling over into Coinbase's Ethereum-based services.
The bottom line
The most obvious benefit for Coinbase and the approval of spot Ethereum ETFs is that it will be the custodian for five of the eight ETF applicants. This will produce additional revenue, but a deeper understanding of Coinbase's Ethereum-centric business model shows that just being a custodian for the ETFs will pale in comparison to the ripple effect across its revenue streams.
To put it simply, what is good for Ethereum is good for Coinbase. Best of all, we are only in the beginning stages of greater acceptance and interest in Ethereum and its unique role in the digital economy.
How much of a catalyst this will be for Coinbase's stock remains unknown, but rest assured, it will make the company much more valuable than it is today.
