Coinbase Faces Competition as Bitcoin ETFs Threaten Trading Volume and Margins

The brokerage firm has cautioned that if spot bitcoin ETFs gain traction, it could redirect potential Coinbase customers towards equity brokers.

Coinbase Global (COIN.O), the world’s largest publicly traded cryptocurrency exchange, may face challenges in trading volume and margin due to the increasing interest in bitcoin through low-cost exchange-traded funds (ETFs) tracking its spot price.

Analysts suggest that this trend could also impact Coinbase’s trading commissions and spreads, as highlighted by J.P. Morgan analyst Kenneth Worthington.

The brokerage firm has cautioned that if spot bitcoin ETFs gain traction, it could redirect potential Coinbase customers towards equity brokers.

The allure of lower fees offered by ETF issuers and the simplicity of gaining exposure to digital assets through regulated stock exchanges could lure new investors into this space.

Since the recent introduction of this financial instrument in U.S. stock markets, Coinbase’s shares have experienced a nearly 13% decline, compared to a 7.5% drop in bitcoin’s value.

Nonetheless, bitcoin has still risen by approximately 60% since September, largely in anticipation of ETFs.

CFRA Research has downgraded Coinbase from a “hold” to a “sell” rating, citing the potential need for the exchange to reduce trading fees to stay competitive with low-cost ETFs.

The accessibility of spot bitcoin ETFs through platforms like Robinhood, which charge minimal commissions, is also expected to exert pressure on Coinbase’s profit margins.

Mizuho analyst Dan Dolev suggests that this development is likely to set a lower benchmark for pure-play crypto exchanges like Coinbase that have been enjoying high earnings.

Despite these challenges, a Coinbase spokesperson has indicated that the company currently has no plans to lower its transaction fees and expects to benefit from the broader adoption of bitcoin.

Furthermore, some investors view bitcoin as a currency and prefer to own the digital asset directly through Coinbase, providing a silver lining for the exchange.

It is anticipated that a significant portion of investors interested in other crypto assets beyond bitcoin will continue to use Coinbase as their preferred platform, according to Oppenheimer analyst Owen Lau.

Coinbase anticipates generating revenue from custody fees charged for holding the underlying bitcoin acquired from crypto exchanges.

The company has been named as a custodian for eight of the 11 ETF listings, although specific details about its custody fees have not been disclosed. J.P. Morgan estimates that these fees could amount to 10 to 15 basis points.

However, CFRA Research analyst Michael Elliott suggests that the boost from custody fees may not be sufficient to counterbalance the potential loss of investors to ETFs, given the highly competitive nature of the broader custody business and its typically low fee structure.