Before January 10th, it was the only way to achieve the truth Bitcoin (BTC -0.02%) The exposure was by purchasing cryptocurrency directly from an exchange, e.g Coinbase International (currency 0.33%). But now investors can buy shares of one of 11 newly approved bitcoin spot trading funds (ETFs) through traditional brokerages.
This has raised some concern that ETFs may jeopardize one of Coinbase’s main uses and source of income. However, this assumption does not paint the full picture. That’s why ETFs are likely to be a net gain for Coinbase in the long term.
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The new landscape for ETFs
With a crowded field of choices, investors have many options for choosing which new Bitcoin ETF they want to purchase. Realizing this, providers are in the midst of a fee war trying to stay competitive and attract buyers.
The majority of ETFs have 0% expense ratios and offer fees less than 0.4%, and some waive fees for a period of time. Compared to Coinbase, which charges fees ranging from 1.5% to nearly 4% depending on the payment method, it is clear that cost-oriented investors will choose exposure to Bitcoin via ETFs.
Therein lies the potential problem that concerned investors point out. Based on a recent earnings release, Bitcoin transaction fees accounted for about 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 in a digital wallet, rather than just owning shares in an ETF, this is not a priority for everyone. For many investors, simply getting exposure to cryptocurrency in the form of an exchange-traded fund (ETF) is enough, and the low fees make them a better option. As these new ETFs become more popular among institutional and retail investors, Coinbase faces the potential reality of declining revenues from Bitcoin transactions. But we should not lose all hope.
How Coinbase Benefits from ETFs
One of the most overlooked aspects of the recent approval of Bitcoin ETFs is the role Coinbase plays. While media attention has focused on the big names sponsoring the new funds – e.g Black stonesincerity, and Invesco -Details have been polished.
Of the 11 Bitcoin ETFs now trading on the stock market, Coinbase serves as custodian for eight of them. This means that Coinbase will benefit from the fees it charges. Since the ETF providers buy and sell bitcoins, Coinbase will charge a 0.2% fee. In addition, it also charges fees for storing these bitcoins, with a varying cost structure depending on the total value of the save, ranging from 0.1% to 0.2%.
These may seem like small numbers, but when you consider how much interest these ETFs have earned in a short period of time, these small percentages can start to add up. Granted, we’re still in the early days of Bitcoin hitting Wall Street, but it’s still hard to ignore the amount of activity it’s generating. During the first three days of trading, the ETFs recorded volume of more than $10 billion. Moreover, two of them – BlackRock and Fidelity – at the time of writing were in the top five for total B2B inflows. everyone ETFs over the past week.
The popularity of ETFs has carried over to Coinbase as well. On the day the ETFs were approved, more than $7.5 billion in Bitcoin transactions were recorded as investor interest soared. This was the second-largest trading day in the company’s history.
Measure impact
It’s difficult to get hard numbers given the newness of ETFs, but extrapolating known fees and expected activity can shed some light on how much money Coinbase could make from its integrated role.
One analyst firm estimates up to $30 million in custody fees per year for Coinbase. That’s not a lot, considering that through the first three quarters of 2023, it generated more than $2 billion in revenue. However, this assessment ignores one very important aspect.
Coinbase charges custody fees based on the total dollar value held in each account. Not the total number of bitcoins. This has significant long-term implications. If Bitcoin continues its journey toward higher prices — a reasonable assumption given its scarcity and current trajectory — the underlying value of the funds held will rise. If the price of Bitcoin doubles, Coinbase will see these fees double as well. If there’s anything that Bitcoin’s short 15-year history has proven, it’s that increases of this size can be very easy.
Another aspect that is still difficult to measure, but has larger implications, is the ripple effect that will occur following the approval of these ETFs. There’s really no way to estimate just how significant the impact it will have, but one fact remains certain: approval represents a momentous milestone in Bitcoin’s evolution and has the potential to accelerate market adoption among institutions and eventually trickle down to retail investors. As we saw with trading on its platform surging in the days after the ETFs got the green light, the legalization of Bitcoin and cryptocurrencies in general will inevitably attract more activity and dampen Coinbase’s profits.
Taking into account the long term
While the threat of ETFs stealing Bitcoin transaction revenue is concerning, the reality is that Coinbase’s role as custodian and its position as an industry leader should prove capable of offsetting any declines. But more importantly, it has been approved by the European Training Foundation.
Now the world’s most valuable cryptocurrency has a place 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 new use cases develop, Coinbase remains a major beneficiary of the evolution of cryptocurrencies.