Coinbase (COIN) may encounter challenges as providers of Bitcoin exchange-traded funds (ETFs) engage in a race to the bottom on fees, potentially impacting the popular cryptocurrency trading platform. Despite Bitcoin ETFs not yet being in circulation, Monday witnessed a flurry of filings, revealing plans for fees that are already approaching rock-bottom levels.
The Bitwise Bitcoin fund stands out with the lowest long-term fee, set at 0.24% annually. Close competitors such as the ARK 21Shares Bitcoin ETF and VanEck Bitcoin ETF are proposing a 0.25% expense ratio, while BlackRock’s iShares Bitcoin Fund plans to charge 0.3%. Notably, providers like Bitwise, ARK and 21Shares, and Invesco Galaxy have expressed intentions to waive fees for specific periods and under certain asset management thresholds.
Given that many brokerages don’t charge commissions, trading Bitcoin through these ETFs could essentially be cost-free during fee waiver periods, assuming narrow spreads between bids and offers. This heightened competition poses a potential threat to Coinbase, where retail trades often incur costs exceeding 1%, inclusive of fees and spreads.
In the third quarter, Coinbase’s average retail take rate, representing fees as a percentage of trading volume, stood at 2.5%, according to Raymond James. As the Securities and Exchange Commission is anticipated to approve the first filings for spot Bitcoin ETFs this week, around a dozen fund issuers have signaled their intent to launch such funds, with disclosed fees subject to change before trading commences.
Bitcoin advocates anticipate these new funds to attract tens of billions of dollars from previously inaccessible investors, potentially boosting the cryptocurrency’s value and sparking interest in other tokens. Despite Coinbase’s stock nearly quadrupling to $152.97 in the past year, it experienced a 0.7% dip in early Monday trading.
In response to the evolving landscape, Coinbase expressed optimism about spot ETFs being additive to the crypto market. The platform believes these ETFs will enable new entrants like wealth platforms, IRAs, and tax-advantaged accounts to venture into crypto through a familiar framework, potentially broadening user engagement with digital assets.
While Coinbase is named as the custodian for most ETFs, ensuring a share in their growing assets, analysts from Mizuho, led by Dan Dolev, project relatively low-margin returns for Coinbase in providing services to ETF providers. The estimated $25 million to $30 million in custody fees, coupled with around $200 million in additional revenue from potential spot trading, appears modest compared to the stock’s impressive 400% surge in 2023.
As January unfolds, Coinbase faces a critical juncture, not only due to the ETF landscape but also as a judge prepares to hear early arguments in a lawsuit by the SEC alleging that Coinbase operates as an unlicensed securities exchange. The interplay of these factors underscores the pivotal nature of the month for the leading U.S. crypto trading platform.
