Coinbase, a leading cryptocurrency exchange, relies heavily on transaction fees for its revenue. In a bullish market, one would expect the company to benefit greatly. As transaction fees are based on a percentage, an increase in the number of investors taking advantage of a bull run would result in more transactions and more revenue.
However, Coinbase’s public financials for the first three quarters of 2023 show mixed trends. The company has experienced a 16% decrease in monthly transacting users (MTUs) and a 54% decrease in trading volume. Consumer trading volume is down 69% and institutional volume is down 50%. Total transaction revenue for the year is 51% lower than the same period last year, and a significant portion of the revenue and crypto assets held by customers is related to Bitcoin.
Interestingly, while trading volume has decreased for most cryptocurrencies, Bitcoin has seen a 28% increase in trading volume. This can be attributed to the launch of numerous Bitcoin exchange-traded funds (ETFs) in January, which have changed the perception of cryptocurrencies as an investment option. These ETFs have attracted significant daily volumes, with some even offering discounted or waived fees for a specific period.
Coinbase, on the other hand, charges fees ranging from 1.5% to 4% for crypto-related transactions. With the availability of spot ETFs that closely track the performance of cryptocurrencies, investors have the option to switch to ETFs offered by discount brokerages like Robinhood, which charge lower fees. This poses a challenge for Coinbase, as Bitcoin transaction fees account for a significant portion of its revenue.
However, Coinbase does benefit from being a custodian for eight of the 11 new Bitcoin ETFs. As ETF issuers are required to hold the underlying asset, Coinbase earns custodian fees, although these fees are significantly lower than transaction fees.
The only positive aspect for Coinbase is that there will still be a group of “crypto-native” proponents who prefer to own cryptocurrencies directly through the exchange. However, this group is expected to shrink as more investors see Bitcoin as an investment asset that can be easily converted to fiat currencies when needed.
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 approval and popularity of so many ETFs.
If more ETF issuers are approved, it will have a two-fold impact: reducing the trading volume of underlying assets in favor of ETFs and increasing competition from other exchanges. Coinbase’s Q4 earnings on February 15 will provide more insights into whether they plan to address the issue of transaction fees and offer incentives for crypto ETF issuers.
In the short term, Coinbase is likely to be negatively affected by reduced transaction fee volumes, which cannot be offset by custodian fees. In the long run, the company will need to position itself as a niche venue for crypto ETF issuers to maintain its dominance in the crypto market.
It is important to note that this article is for informational purposes only and should not be considered legal or investment advice. The views expressed in this article are solely those of the author and do not necessarily reflect the views of Cointelegraph.