Bitcoin ETF Fees: A Blow to Coinbase?

Coinbase, a cryptocurrency exchange, has seen mixed trends in its financial performance during the first three quarters of 2023. Despite bullish markets that would typically benefit the company through increased transaction fees, Coinbase has experienced a 16% decline in monthly transacting users and a 54% decline in trading volume. Consumer and institutional trading volume is also down significantly. Total transaction revenue for the year is 51% lower than the same period last year, with a significant portion of it related to Bitcoin.

The launch of Bitcoin exchange-traded funds (ETFs) in January has had a significant impact on the cryptocurrency market. These ETFs have seen daily volumes surpass $1 billion, attracting investors with low fees and discounts. Coinbase, Charges fees ranging from 1.5% to 4% for crypto-related transactions. This has resulted in a problem for Coinbase, as around 17% of its revenue comes from Bitcoin transaction fees. Coinbase benefits from being a custodian for eight of the 11 new Bitcoin ETFs, earning smaller custodian fees.

While some investors still prefer to own cryptocurrencies directly through exchanges like Coinbase, the number of investors holding Bitcoin as an investment asset is likely decreasing. This shift is due to the increasing popularity of ETFs, which offer more convenience and accessibility. Coinbase’s Chief Operating Officer stated that the company does not plan to reduce transaction fees, but the growing number of ETF issuers and their popularity could reduce volumes of underlying assets being traded on Coinbase and increase competition from other exchanges.

Investors interested in Coinbase’s future performance should pay attention to the company’s fourth-quarter earnings report on February 15. It will reveal if Coinbase plans to address the issue of transaction fees for Bitcoin and offer incentives to crypto ETF issuers. In the immediate term, Coinbase is expected to continue being 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 remain dominant in the market.