Coinbase Is The Real Winner in the Bitcoin ETF Race

As competition for a spot Bitcoin ETF heats up, Coinbase could benefit most.

In the last month, a wave of major financial institutions have applied to offer spot Bitcoin (BTC -0.01%) exchange-traded funds (ETF) in a bid to bridge Wall Street with the original cryptocurrency. BlackRock (BLK 0.51%) made headlines on June 15 as the first firm to submit an application, followed by Fidelity, Ark Invest, Invesco, WisdomTree, and VanEck, all vying for a piece of the Bitcoin ETF market. While the potential benefits for Bitcoin itself seem obvious, there is another player that stands to gain significantly from this race: Coinbase Global (COIN 0.79%).

The current situation

After receiving the applications, the Securities and Exchange Commission (SEC) wasted no time in reviewing them and promptly sent them back for revisions, deeming them “inadequate.” The main issue it identified was a lack of clarity on how the firms would minimize fraud and market manipulation, a key concern for the agency. In response to the SEC’s feedback, each of the six firms expeditiously refiled their applications and tapped Coinbase as the partner for a shared surveillance agreement. By adding measures to monitor potential market manipulation, Coinbase will play a crucial role in enhancing market integrity and providing the necessary oversight asked for by the government.

Taking on a bigger role

Coinbase’s integral role in these applications is a testament to its position as a leader in the cryptocurrency industry. But the true opportunity for Coinbase lies not only in its surveillance capabilities but also in the additional services it will provide to the proposed fund issuers. According to Bloomberg, Coinbase is expected to perform various functions for these firms, including custodial services and acting as a trading platform to buy and sell Bitcoin. In fact, both Ark Invest and BlackRock have tapped Coinbase for their custodial services. BlackRock explicitly states in its SEC filing that it will use Coinbase Prime, a product tailored for institutional investors, as the platform for its Bitcoin transactions.

A lucrative opportunity

Transaction fees and custodial services have historically contributed around 10% of Coinbase’s quarterly revenue, but now that the platform might serve as a custodian and a brokerage with some of the biggest names on Wall Street, introduction of the Bitcoin ETFs could significantly bolster profits. To understand the full scope of how much capital could be involved, we can take a look at the Grayscale Bitcoin Trust (GBTC -1.34%), a popular product that provides investors with exposure to Bitcoin but one plagued with limitations such as inaccurate price tracking, a shortcoming that a spot ETF can remedy. As of today, Grayscale holds more than 625,000 Bitcoins to back its Bitcoin Trust, totaling more than $19 billion. Assuming Coinbase hasn’t changed its pricing structure since 2021 and still charges a 0.1% fee on custodial accounts, if it were to hold close to the same number of Bitcoins as the Grayscale Trust, the potential revenue from fees could amount to approximately $190 million based on recent Bitcoin prices. With net revenue from the first quarter of 2023 totaling $736 million, a boost in custodial fees of this size could increase Coinbase’s bottom line by roughly 25%. Adding to the profitability of custodial services, Coinbase is in line to also benefit from transaction fees. A unique feature of the new spot ETF applications is that the firms will be able to buy and sell Bitcoin on a daily basis, a feature not currently present with the Grayscale Bitcoin Trust. (This explains why it goes through bouts of trading at premiums or discounts relative to Bitcoin’s actual price.) With this added functionality, firms like BlackRock will be conducting a multitude of large transactions on a near-daily basis to help the ETF track Bitcoin’s price more accurately, potentially adding a significant boost to Coinbase’s revenue.

Some necessary context

Despite Coinbase’s ongoing lawsuit involving the SEC, the momentum and common theme among all the ETF applications should be viewed as a vote of confidence from some of Wall Street’s biggest players looking to do business with the company regardless of the SEC suit. Although no ETF has been approved yet, the SEC’s blessing looks more likely by the day. Even better, Coinbase shares still remain down more than 75% from their all-time high. For investors seeking exposure to the crypto industry’s continued growth and a potential SEC approval of the United States’ first spot Bitcoin ETF, Coinbase could be a compelling long-term opportunity at current prices.