Bitcoin ETFs threaten Coinbase after stock rose almost 400% in 2023

Now that the SEC has approved the creation of bitcoin exchange-traded funds, Coinbase’s position in the crypto market is poised to take a dramatic turn.

In the weeks ahead, Coinbase will help shepherd some of the biggest names in asset management, including BlackRock, Franklin Templeton, and WisdomTree, into the digital asset ecosystem as their custodial partner of choice. That means Coinbase will be central to the storage and safekeeping of the assets for those firms.

While custody revenue presents a big growth opportunity for Coinbase in the near term, some industry analysts are concerned that the company’s core transaction business is at risk due to the myriad ways investors will be able to access bitcoin. Instead of having to go to an asset exchange like Kraken, Binance, or Coinbase, they’ll be able to invest in the digital currency through the same mechanism they already use to buy stock and bond ETFs.

In a report on Dec. 4, analysts at Bernstein predicted that in less than five years, 10% of the global supply of the world’s largest cryptocurrency, or roughly $300 billion, will be managed by ETFs. The firm called it the “largest pipe ever built between traditional financial markets and crypto financial markets.”

In 2023, Coinbase’s stock was one of the top performers in the tech industry, soaring almost 400%. Much of that rally was tied to bitcoin, which increased 150%. But part of the outperformance relative to bitcoin was due to the excitement that new ETFs would drive more interest in crypto and be a boon for Coinbase.

“ETFs should expand the pie and bring new people and institutions into the cryptoeconomy,” Coinbase Chief Operating Officer Emilie Choi said on the company’s most recent earnings call in November. “They should add credibility to the market, and we should see increased liquidity and market stability as we’ve seen with other asset classes such as gold.”

From June 15, the day that BlackRock — with its $9 trillion in assets under management — filed for a so-called spot bitcoin ETF and named Coinbase its crypto custodian, shares in the exchange rose from around $54 to over $170 by the end of the year.

JPMorgan analysts wrote in a November report that Coinbase would be a key beneficiary of the coming ETF boom, given the immediate upside of custody fees from asset managers.

“We estimate Bitcoin custody and surveillance revenue will more than offset decline in Bitcoin trading volume as assets migrate to ETFs,” the analysts said.

Some of the momentum on Wall Street has faded to start 2023, with the stock down 14% since the calendar turned. According to Mizuho analysts, there could be more pain to come.

“With the hype around Bitcoin ETFs likely to reach a climax in the coming weeks, COIN bulls could experience a rough awakening when they realize how…