Bitcoin ETFs threaten Coinbase after stock rose almost 400% in 2023
Brian Armstrong, chief executive officer of Coinbase Global Inc., speaks during the Messari Mainnet summit in New York, on Thursday, Sept. 21, 2023.
Michael Nagle | Bloomberg | Getty Images
While custody revenue presents a big growth opportunity for Coinbase in the near term, some industry analysts are concerned that the company’s core transaction business is at risk due to the myriad ways investors will be able to access bitcoin. Instead of having to go to an asset exchange such as Kraken, Binance, or Coinbase, they’ll be able to invest in the digital currency through the same mechanism they already use to buy stock and bond ETFs.
In a report Dec. 4, analysts at Bernstein predicted that in less than five years, 10% of the global supply of the world’s largest cryptocurrency, or roughly $300 billion, will be managed by ETFs. The firm called it the “largest pipe ever built between traditional financial markets and crypto financial markets.”
In 2023, Coinbase’s stock was one of the top performers in the tech industry, soaring almost 400%. Much of that rally was tied to bitcoin, which increased 150%. But part of the outperformance relative to bitcoin was due to the excitement that new ETFs would drive more interest in crypto and be a boon for Coinbase.
“ETFs should expand the pie and bring new people and institutions into the cryptoeconomy,” Coinbase Chief Operating Officer Emilie Choi said on the company’s most recent earnings call in November. “They should add credibility to the market, and we should see increased liquidity and market stability as we’ve seen with other asset classes such as gold.”
From June 15, the day that BlackRock — with its $9 trillion in assets under management — filed for a so-called spot bitcoin ETF and named Coinbase its crypto custodian, shares in the exchange rose from around $54 to over $170 by the end of the year.
JPMorgan analysts wrote in a November report that Coinbase would be a key beneficiary of the coming ETF boom, given the immediate upside of custody fees from asset managers.
“We estimate Bitcoin custody and surveillance revenue will more than offset decline in Bitcoin trading volume as assets migrate to ETFs,” the analysts said.
Some of the momentum on Wall Street has faded to start 2024, with the stock down 14% since the calendar turned. According to Mizuho analysts, there could be more pain to come.
“With the hype around Bitcoin ETFs likely to reach a climax in the coming weeks, COIN bulls could experience a rough awakening when they realize how minimal the revenue impact is,” Mizuho wrote in a note Thursday.
Mizuho’s analysts have the equivalent of a sell rating on the stock and were bearish throughout last year’s rally, finishing 2023 with a $54 price target, by far the lowest among analysts tracked by FactSet.
Almost half of Coinbase’s revenue comes from the fees it charges on transactions, meaning the company needs people to keep using the exchange to buy and trade bitcoin and other digital currencies.
In the third quarter in 2023, total transaction revenue accounted for 46% of net revenue. However, Coinbase has been diversifying into new businesses. In 2022, transactions made up closer to 75% of revenue.
More than one-quarter of Coinbase’s revenue in the third quarter came from interest income on the exchange’s stablecoin reserves, including Circle’s U.S. dollar-pegged USDC coin. Stablecoin revenue more than doubled from a year earlier primarily due to rising interest rates.
“A few years ago, our business at Coinbase was 95% trading fees, and we made a big effort around the time it went public to start diversifying our revenue,” CEO Brian Armstrong told CNBC in a recent interview. “What’s great is that now we have multiple sources of revenue — some of them in a high interest rate environment go up, some of them in a low interest rate environment go up.”
Still, transaction fees remain a key income driver for the exchange. And unlike trading platform Robinhood, which enables investments in a wide array of asset types, Coinbase doesn’t allow for trading of ETFs.
“Spot bitcoin ETFs appear poised to take volume away from crypto exchanges,” said Bryan Armour, director of passive strategies research for North America at Morningstar.
JPMorgan anticipates that new account growth will slow as “novice crypto investors get their initial exposure and possibly final exposure through ETFs rather than Coinbase,” adding that many of these neophyte traders will never go beyond bitcoin, “thus never needing the services of a Coinbase.”
Mizuho sees the income from custody fees as fairly modest given how far investors have pushed up the stock. The firm predicts ETF approval may add just $25 million to $30 million in annual custody fees, with another $200 million to $210 million of new revenue “if incremental Bitcoin inflows generate additional spot trading opportunities.”
With a collective gain of up to $240 million in additional annual revenue, “this represents just mid-to-high…
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