Is Coinbase in the crosshairs? The multi-million dollar dilemma facing Bitcoin ETFs as they surge in popularity.

The only way to get the truth before January 10th Bitcoin (BTC -2.22%) Exposure was achieved by purchasing cryptocurrencies directly from exchanges. Coinbase Global (coin 0.33%). However, investors can now purchase shares of one of 11 newly approved spot Bitcoin exchange-traded funds (ETFs) through existing brokerages.

This has raised concerns that the ETF could jeopardize one of Coinbase’s primary uses and sources of income. However, this assumption fails to paint the full picture. Here’s why the ETF is likely to be a net positive for Coinbase over the long term.

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New ETF environment

With so many choices, investors have several options to choose which new Bitcoin ETF they want to buy. Recognizing this, suppliers are waging a fee war to stay competitive and attract buyers.

Most ETFs have an expense ratio of 0% and offering fees of 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 payment method, cost-oriented investors will definitely opt for Bitcoin exposure through ETFs.

Here is a potential problem that investors are pointing out. Bitcoin trading fees accounted for about 17% of Coinbase’s total revenue, according to its most recent revenue statement. Historically, this number has tended to hover around 18% to 20%.

Coinbase offers investors the ability to store their purchased Bitcoin in a digital wallet rather than simply owning ETF shares, but this isn’t a priority for everyone. For many investors, simply getting exposure to cryptocurrencies in the form of an ETF is sufficient, and the low fees make this a much better option. As these new ETFs grow in popularity among institutional and retail investors, Coinbase is faced with the reality of potentially diminishing returns from Bitcoin trading. But all hope should not be lost.

How Coinbase Profits from ETFs

One of the most overlooked aspects of the recent spot Bitcoin ETF approval is the role played by Coinbase. Media attention focused on high-profile companies backing the new fund. black stonefidelity and Invesco –Details are polished.

Of the 11 Bitcoin ETFs currently traded on the stock market, Coinbase acts as custodian for eight of them. This means you benefit from both fees charged by Coinbase. When the ETF provider buys or sells Bitcoin, Coinbase takes a 0.2% fee. Additionally, they charge a fee for storing Bitcoin with a fee structure that varies from 0.1% to 0.2% depending on the total value stored.

It may sound like a very small number, but when you consider how much attention this ETF has gained in a short period of time, those small percentages can start to add up. Of course, we’re still in the early stages of Bitcoin’s arrival on Wall Street, but it’s still hard to ignore how much activity it’s generating. In the first three days of trading, ETF volume exceeded $10 billion. Moreover, as of this writing, two of them, BlackRock and Fidelity, are in the top five for overall inflows. every ETF last week.

The popularity of ETFs has also trickled down to the Coinbase platform. The day the ETF was approved, investor interest surged, with Bitcoin trading hitting more than $7.5 billion. It was the second-biggest trading day in the company’s history.

Quantify impact

Because the ETF is new, hard numbers are hard to come by, but extrapolating known fees and expected activity can give us an idea of ​​how much money Coinbase could make through its essential role.

One analytics firm estimates Coinbase’s storage fees at up to $30 million per year. That’s not much, considering it generated more than $2 billion in revenue during the first three quarters of 2023. However, this assessment overlooks one important aspect.

Coinbase charges a management fee based on the total dollar value held in each account. It is not the total number of Bitcoins. This has important long-term implications. If Bitcoin continues its upward price journey (a reasonable assumption due to its scarcity and current trajectory), the underlying value of the funds held will rise. If the price of Bitcoin doubles, Coinbase will see its fees double as well. If Bitcoin’s short 15-year history has proven anything, it is that an increase of this magnitude is a piece of cake.

Another aspect that is much more difficult to quantify but has greater implications is the ripple effect that will result from the approval of these ETFs. There is no way to predict how big an impact it will have, but one thing is certain. Approval is a significant achievement in Bitcoin’s evolution and has the potential to accelerate market adoption among institutions and eventually spill over to individual investors. The legalization of Bitcoin and cryptocurrencies will inevitably drive more activity and ease Coinbase’s earnings, as we saw in the surge in trading on the platform in the days following the ETF’s approval.

If you think long term

The threat of ETFs stealing Bitcoin trading profits raises concerns, but the reality is that Coinbase’s role as custodian and position as an industry leader should prove capable of offsetting any downside. But the most important one is the landmark of ETF approval.

Now the world’s most valuable cryptocurrency has a home on Wall Street, and some big names in finance want a piece of it. As interest in other cryptocurrencies grows and new use cases develop, Coinbase remains one of the major beneficiaries of cryptocurrency developments.