Bitcoin ETF threatens Coinbase after stock price rises nearly 400% in 2023

While custody revenue represents a significant near-term growth opportunity for Coinbase, some industry analysts believe the myriad ways investors can access Bitcoin could put the company’s core transaction business at risk. I am concerned that I may have been exposed to Instead of going to asset exchanges like Kraken, Binance, or Coinbase, you’ll be able to invest in digital currencies through the same mechanism you already use to buy stocks and bond ETFs.

Bernstein analysts predicted in a Dec. 4 report that within five years, 10% of the global supply of the world’s largest cryptocurrency, or about $300 billion, will be managed in ETFs. did. The company called it “the largest conduit ever built between traditional and crypto financial markets.”

In 2023, Coinbase stock became one of the top performers in the technology industry, rising nearly 400%. Much of that rise was tied to Bitcoin, which rose 150%. However, part of the performance compared to Bitcoin was due to excitement about the new ETF increasing interest in cryptocurrencies, which is a boon for Coinbase.

“ETFs should expand the pie and bring new talent and institutions into the crypto economy,” Emily Choi, Coinbase’s chief operating officer, said during the company’s latest earnings call in November. “They should increase market confidence and should increase liquidity and market stability, as we have seen with other asset classes such as gold.”

Since June 15, the day BlackRock, which manages $9 trillion in assets, filed for a so-called Spot Bitcoin ETF and appointed Coinbase as its crypto custodian, the exchange’s stock price has ranged from around $54. By the end of the year, it had risen to more than $170. Year.

JPMorgan analysts wrote in a November report that Coinbase will be a major beneficiary of the coming ETF boom, given the immediate rise in custody fees from asset managers.

“We estimate that Bitcoin custodial and monitoring revenues from assets moving into ETFs will more than offset the decline in Bitcoin trading volume,” the analysts said.

Some of Wall Street’s momentum faded into 2024, with stocks down 14% since the calendar turned. More pain could be on the way, Mizuho analysts said.

“The hype surrounding Bitcoin ETFs is likely to reach a crescendo in the coming weeks, and COIN bulls could experience a hard awakening when they realize how minimal the impact on their returns will be.” “There is,” Mizuho wrote in a memo Thursday.

Mizuho analysts have the same rating as “sell” on the stock, were generally bearish during last year’s stock price rise, and ended with a 2023 price target of $54, but this is That’s by far the lowest of any analyst tracked by FactSet.

Almost half of Coinbase’s revenue comes from the fees it charges on transactions, meaning the company must continue to use exchanges to buy and trade Bitcoin and other digital currencies.

In the third quarter of 2023, gross trading revenue accounted for 46% of net revenue. However, Coinbase is diversifying into new businesses. In 2022, transactions accounted for nearly 75% of revenue.

More than a quarter of Coinbase’s revenue in the third quarter came from interest income from the exchange’s stablecoin reserves, including Circle’s USD-pegged USDC coin. Stablecoin revenue more than doubled year over year, primarily due to higher interest rates.

“A few years ago, our business at Coinbase was 95% transaction fees, but when we went public, we made a huge effort to start diversifying our revenue,” said CEO Brian Armstrong. Ta. he told CNBC in a recent interview.. “The great thing is, you now have multiple streams of income. In a high interest rate environment, some of it goes up, and in a low interest rate environment, some of it goes up.”

Still, trading fees remain an important source of revenue for exchanges. Also, unlike Robinhood, a trading platform that allows you to invest in a wide range of asset types, Coinbase does not allow trading in ETFs.

“Spot Bitcoin ETFs appear poised to take volume from crypto exchanges,” said Brian Armor, director of North American passive strategies research at Morningstar.

JPMorgan expects new account growth to slow as “novice crypto investors gain their initial and perhaps final exposure through ETFs rather than Coinbase,” and expects new account growth to slow as these novice traders Many will never outgrow Bitcoin and “therefore will not need Coinbase’s services,” he added. ”

Mizuho views its revenue from custody fees as fairly modest given that investors have historically driven up the stock price. The company said the ETF approval would add just $25 million to $30 million in annual custody fees, and an additional $200 million to $210 million “if Bitcoin inflows increase and further spot trading opportunities emerge.” The company expects to generate $1 million in new revenue.

Combined, it could generate up to $240 million in additional annual revenue, “which represents only a mid-to-high single-digit percentage upside compared to the current consensus for 2024,” Mizuho analysts said. is writing. They said, “We do not believe that the nearly 400% increase in stock price in anticipation of the ETF’s approval justifies our reasonable estimate of the ETF’s actual earnings contribution.”

A Coinbase spokesperson told CNBC in an email that in addition to storage fees, the company makes money by providing services such as proxy trading, matching and settlement, and lending to ETF issuers.

“The platform believes that spot ETFs will be a positive catalyst for the entire crypto space, increasing confidence, increasing liquidity, and bringing new participants and institutions to the crypto economy,” the spokesperson said. , reiterated earlier comments from Coinbase executives.

Competition may also create pricing pressures.

ARK, Invesco, Fidelity, WisdomTree, and Valkyrie all offer trading with commission-free trading for a period of time. Some companies are opting for discounted rates.

Coinbase’s transaction fees vary and can go up to 0.6% for transactions up to $10,000 in amount. In the company’s latest quarterly earnings call, Choi said Coinbase has no plans to lower trading fees to be more competitive with other platforms where ETFs trade at significantly lower prices.

Coinbase’s transaction fees also vary between the pro platform and retail app, with higher fees. For retail transactions up to $1,000, fees range from 1.5% to 3%.

However, JPMorgan analysts believe that increasing efficiency and transparency in stock markets and lower execution costs could lead to an increase in crypto trading into ETFs over time, ultimately leading to “This could put pressure on Coinbase to lower fees and narrow trading spreads, potentially reversing multiple quarters of profits.” This is the increase we have witnessed in Coinbase’s retail revenue acquisition. ”

Still, Coinbase has its admirers among crypto enthusiasts, including Nic Carter, a partner at Castle Island Ventures.

“For the majority of ETF proposals, they are essential infrastructure in terms of storage, trading and monitoring,” Carter said. “I think they’re still a winner here, even though it may impact fees on the margin.”

clock: Former SEC Chairman Jay Clayton talks about changes in Bitcoin trading