Coinbase, a popular cryptocurrency exchange, generates a significant amount of its revenue from transaction fees. Normally, a bullish market would be extremely beneficial for the company because as more investors take advantage of the upward trend, there would be more transactions and thus more fees collected. However, in the first three quarters of 2023, Coinbase has experienced mixed trends, according to their public financials.
During this period, the company has witnessed a 16% decrease in monthly transacting users (MTUs) and a 54% decline in trading volume. Consumer trading volume is down 69%, while institutional volume is down 50%. Overall, transaction revenue for the year-to-date (YTD) is 51% lower compared to the same period last year. Additionally, 48.7% of all crypto assets held by customers and 37% of transaction revenue is related to Bitcoin (BTC).
Interestingly, Coinbase has registered a loss in trading volume for almost every cryptocurrency asset, except for Bitcoin, which saw a 28% increase in its share of trading volume.
One significant factor that has impacted the consideration of crypto assets as investments is the launch of numerous Bitcoin exchange-traded funds (ETFs) in January. These ETFs have gained massive popularity among the public, with daily volumes surpassing $1 billion for several consecutive days. To compete in this new asset class, fees have been greatly reduced, with some firms even waiving fees for a specific period or minimum dollar volume.
On the other hand, Coinbase charges higher fees ranging from 1.5% to 4% for crypto-related transactions. This has become a problem for the company as investors are increasingly switching to ETFs, which have strong correlations with their underlying assets. Discount brokerages like Robinhood have made it easier for investors to choose ETFs over the underlying assets, further impacting Coinbase’s revenue. Around 17% of Coinbase’s revenue comes from Bitcoin transaction fees.
However, Coinbase does benefit from being a custodian for eight out of the 11 new Bitcoin ETFs. As these ETF issuers are required to physically hold the underlying asset, Coinbase makes a smaller amount of revenue through custodian fees compared to transaction fees.
One positive aspect for Coinbase is that there are still “crypto-native” proponents who prefer to hold their cryptocurrencies directly through the exchange. However, the number of investors who hold Bitcoin as an investment asset is likely to be small and continue to decline. This suggests that the dominance of “crypto-natives” in the crypto marketplace is diminishing.
During Coinbase’s third-quarter earnings call, the company’s Chief Operating Officer stated that they do not plan to reduce transaction fees. It seems that they did not anticipate the number of approved ETFs or their popularity.
If more issuers are approved, it is expected to have a two-fold impact: reducing volumes of underlying assets traded in favor of ETFs and increasing competition from other exchanges now that crypto ETF approval has been established as a precedent.
Investors interested in Coinbase’s future should pay attention to the company’s fourth-quarter earnings on Feb. 15. They will be looking for any plans to address transaction fees and incentives offered to crypto ETF issuers.
The challenge for Coinbase lies in the ease of gaining exposure to crypto assets through discount brokerages, which also allow investors to manage their other assets alongside cryptocurrencies. While there may be an uptick in transactions during this period, driven by investors speculating on upcoming spot ETF approvals, it should be considered a “false positive.”
In the short term, Coinbase will continue to be impacted by reduced transaction fee volumes, which cannot be fully replaced by custodian fees. In the long run, the company will need to position itself as a niche for crypto ETF issuers if it wants to maintain its dominance in the crypto market.