Bitcoin ETFs Pose Risk for Coinbase Stock, Leverage Shares Says

• Coinbase’s revenue from bitcoin transactions may decline because ETF fees are lower than the exchange’s, the analysts said.

• Still, the company will benefit from fee revenue derived from acting on behalf of the ETFs.

Coinbase (COIN) shares could benefit from growing adoption of bitcoin exchange-traded funds (ETFs), but the crypto exchange needs to put in “a lot of effort” to maintain its financial growth, analysts at exchange-traded product provider Leverage Shares said in a note.

COIN was one of 2023’s best-performing stocks, appreciating more than 390% over the year, with the business recording strong financial results as crypto assets rallied. This year, however, the shares have fallen 32%. Bitcoin, meantime, is up 2.65%, data from MarketWatch show.

The advent of ETFs and their attraction for professional investors endangers some of the sources of Coinbase’s revenue, the analysts led by Sandeep Rao said. Previously the investors could gain exposure to bitcoin only through regulated exchanges; now they can do so through the ETFs at lower cost.

“Most of the spot bitcoin ETFs offer fees lower than 0.4%, while Coinbase charges between 1.5% to 4%,” Rao said in an interview. “Therefore, investors may prefer to gain exposure to bitcoin via an ETF, which could cause Coinbase’s revenue from bitcoin transactions to decline. Bitcoin transaction fees are around 17% of Coinbase’s total revenue.”

But a long-term driver for Coinbase revenues could be the fees it generates by custody of bitcoin for ETF providers. The company is a custodian for eight of the 11 funds and will receive a 0.2% fee and charge additional fees for storing the bitcoin, Rao said.

“While it is difficult to quantify the impact of the spot bitcoin ETFs on Coinbase’s revenue in the early days of their listing, over the long-term, the company is likely to be a beneficiary. As Coinbase charges custodial fees based on the total value of each account, not the number of bitcoin, the price of bitcoin is one of the determinants of the value of the funds held in custody,” Rao said.

A general rise in crypto markets is also likely to attract more customers, generating higher revenue on trading fees and related services, the analysts concluded.

• Short-term: Several funds offering fee waivers for the next few months will seemingly reduce Coinbase’s fees, but reduced trading volume since approval is likely to sting more over the next few quarters.

• Medium-term: Once the initial hype has settled, Coinbase will likely need to revisit its cost structure. However, as recently as the third-quarter earnings call, executives had no immediate plans to reduce transaction fees.

• Long-term: If more issuers are approved (regardless of whether Coinbase is named custodian), trading volume will continue to slide in favor of the ETPs and Coinbase’s competition for market share will ramp up.