Shares of Coinbase experienced a rollercoaster ride on Thursday, initially surging by 6.5% before ultimately dropping by more than 6%. The fluctuation came in response to the Securities and Exchange Commission’s (SEC) late-Wednesday decision permitting the trading of the first ETFs backed by Bitcoin tokens themselves.
Coinbase, a major player in the crypto industry, has seen remarkable growth over the past year, with its stock soaring by 225% during that time. Recent months have seen even greater upward momentum, fueled by optimism surrounding the regulatory approval of spot Bitcoin ETFs.
Analyst Moshe Katri from Wedbush expressed confidence in Coinbase’s future prospects, attributing the SEC’s Bitcoin ETF approvals as a catalyst for the company’s success. Wedbush raised its price target on Coinbase’s Outperform-rated stock from $120 to $180, highlighting Coinbase’s role as a custodian for the majority of approved funds. This positioning allows Coinbase to generate revenue through custody fees, asset management, and potentially selling valuable market data to fund issuers.
While the SEC has emphasized that it does not endorse cryptocurrencies, its implicit regulatory acceptance of Bitcoin is expected to ignite a fresh wave of investor interest in digital tokens. This renewed enthusiasm could attract more retail investors to platforms like Coinbase. Nevertheless, the real prize lies in capturing institutional investors who have remained hesitant due to the lack of regulatory clarity around crypto assets.
Katri believes that the SEC’s ETF approvals present an opportunity for Coinbase to expand its retail and institutional accounts since less than 10% of hedge funds currently invest in crypto assets. However, there is also a bear case for Coinbase stock. The company has been targeted by short sellers, with concerns raised about legal, regulatory, and competitive challenges. Additionally, the approval of spot Bitcoin ETFs may not deliver the level of benefits expected by bullish investors and could potentially introduce new difficulties.
It remains to be seen how Coinbase will navigate the evolving landscape, but its position within the industry and exposure to ETFs present both opportunities and risks for the company’s future performance.
Introduction
The recent approval wave by the SEC to convert the $28 billion Bitcoin Grayscale Trust into an ETF has sparked concerns about the potential impact on leading cryptocurrency exchange Coinbase. The race to the bottom in ETF fees, led by financial stalwarts like BlackRock, Fidelity, Invesco, and ARK, has raised questions about Coinbase’s fee-based brokerage business and dominance in Bitcoin trading.
A Muted Upside and Potential Cannibalization
Analyst Dan Dolev from Mizuho Securities believes that Coinbase may not benefit significantly from the introduction of Bitcoin ETFs. According to his analysis, the revenue increase for Coinbase would only be around 1%-2% from custody fees alone, with a maximum total benefit of 5%-10% if the ETFs drive additional spot Bitcoin trading. Dolev also warns that the deeper cannibalization of high-margin spot Bitcoin trading and potential loss of market share to brokers offering ETFs could offset any future benefits for Coinbase.
The Overlapping Battle for Investors
Spot Bitcoin ETFs offer both retail and institutional investors a regulated and straightforward avenue to buy, sell, or hold Bitcoin. This directly overlaps with Coinbase’s core business, where Bitcoin trading remains dominant. As larger players in the financial industry, such as BlackRock and Fidelity, compete on ETF fees and even waive them for the first six months, Coinbase’s fee-based brokerage business faces mounting pressure. Analyst Patrick O’Shaughnessy from Raymond James estimates that Coinbase’s average retail take rate has recently reached 2.5%, a rate that Robinhood Markets, a prominent retail-focused broker with a significant crypto business, likely also grapples with.
Grayscale’s Role and the Movement of Crypto Capital
Grayscale, the company behind the $28 billion Bitcoin Grayscale Trust and now the converted ETF, has lowered its management fee from 2% to 1.5%, placing it somewhere between Coinbase and BlackRock in terms of fees. This shift further intensifies the competition among industry leaders. The ongoing jockeying over fees highlights the likelihood of significant movement of crypto capital in the aftermath of this regulatory milestone, particularly as investors show increased interest in both ETFs and tokens.
Conclusion
The approval of Bitcoin ETFs and the subsequent race to the bottom in fees pose potential challenges for Coinbase, a leading cryptocurrency exchange heavily focused on Bitcoin trading. The limited revenue upside from custody fees and the risk of cannibalization and market share loss to ETF-offering brokers could negatively impact Coinbase’s fee-based brokerage business. However, with the dynamic nature of the crypto market, only time will reveal the true implications of this regulatory decision.