Coinbase earns a significant amount of revenue from transaction fees, which means you’d expect bullish markets to be highly beneficial for the company. Because transaction fees are percentage-based, it should collect more dollars per transaction, while more investors rushing to capitalize on a bull run should translate to a higher number of transactions.
Over the first three quarters of 2023, however, the trends generated have been decidedly mixed, according to Coinbase’s public financials. The company has seen a 16% decline in monthly transacting users (MTUs) — defined as consumers who actively or passively transacts in one or more products on the platform at least once during the rolling 28-day period ending on the date of measurement — and a 54% decline in trading volume. Consumer trading volume is down 69% while institutional volume is down 50%. Total transaction revenue in the YTD was 51% lower than in the same period last year, while 48.7% of all crypto assets held by customers and 37% of transaction revenue is related to Bitcoin (BTC).
The company registered a loss in trading volume in virtually every crypto asset except for Bitcoin, wherein the share of trading volume registered a 28% increase.
The launch of numerous Bitcoin ETFs in January was a massive game changer for the consideration of crypto assets as an investment by the public. With the exception of Feb. 1, every single day from the date of the ETF launches on Jan. 11 to Feb. 5 saw daily volumes within the ETFs surpass $1 billion. This intensely competitive new asset class has witnessed fees being slashed to historic lows of around 0.2-1.5%, with some firms even offering to waive fees for a specific period or for a minimum dollar volume.
Meanwhile, Coinbase charges between 1.5% and 4% in crypto-related fees. Given that spot ETFs have very strong correlations with their underlying assets, switching to the ETF over the underlying asset is an innately rational choice made possible via discount brokerages such as Robinhood. This is a problem for Coinbase: around 17% of its revenue comes from Bitcoin transaction fees.
Where Coinbase does benefit from these ETFs is that it is a custodian for eight of the 11 new bitcoin ETFs. Given that the ETF issuers are required to physically hold the underlying asset, the company should make around 0.1-0.15% in custodian fees — a significantly smaller amount than what it collects from transactions of the underlying asset.
The only silver lining is that “crypto-native” proponents who consider crypto as a “parallel” alternative to the world of fiat currencies will likely continue to own their cryptocurrencies directly through the exchange. However, given the number of investors who hold Bitcoin as an investment asset translatable to fiats as and when needed will likely be small and continue to shrink, the likely dominant paradigm being set in place is that the “crypto native” is poised to continue to diminish in their dominance of the crypto marketplace.
Coinbase Chief Operating Officer Emilie Choi stated during the company’s third-quarter earnings call that Coinbase doesn’t plan to reduce transaction fees — and it seems like they weren’t anticipating that many ETFs would be cleared for trading or that they would be so popular.
If more issuers are approved, we can expect a two-fold impact: (1) reducing volumes of the underlying assets being traded in favor of the ETFs, and (2) increasing competition from other exchanges now that crypto ETF approval has a strong precedent established.
Investors interested in the future of Coinbase should keep their eyes peeled on the company’s Q4 earnings on Feb. 15 to gauge if some form of amelioration is laid out for fees charged for itcoin transactions, which will likely be a bitter pill to swallow, and incentives being offered for crypto ETF issuers.
The challenge lies in addressing the relative ease of gaining exposure to crypto-based assets via discount brokerages who also enable the investors to effectively manage their other assets such as equities and derivatives alongside crypto-based assets. A significant portion of the transactions in the underlying as registered by Coinbase in the course of Q4 will likely be the result of a number of savvy investors “buying the rumor” of upcoming spot ETF approvals. Any uptick in transactions in this period must, thus, be considered to have some elements of a “false positive” being imputed.
In the immediate term, Coinbase will likely continue being hurt by reduced transaction fee volumes which will not be substantially supplanted by the custodian fees it collects. In the long run, the company will have to put in a lot of effort to position itself as a niche for crypto ETF issuers if it wants to remain the dominant venue for all things crypto.
Sandeep Rao is a senior quantitative researcher at Leverage Shares. He previously worked as a senior research associate for Nasdaq’s Index R&D Team. He holds an M.S. in finance and an MBA from the Illinois Institute of Technology.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.