Coinbase is the real winner of the Bitcoin ETF race

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Over the past month, a wave of major financial institutions have asked to offer Bitcoin (BTC 0.33%) exchange-traded funds (ETFs) in an effort to connect Wall Street with the original cryptocurrency. BlackRock (BLK 0.51%) made headlines on June 15 as the first company to submit an application, followed by Fidelity, Ark Invest, Invesco, WisdomTree and VanEck, all vying for ETF market share. Bitcoin.

While the potential benefits for Bitcoin itself seem obvious, there is another player with a lot to gain from this race: Coinbase Global (COIN 0.79%).

Image source: Getty Images.

The present situation

After receiving the applications, the Securities and Exchange Commission (SEC) wasted no time in reviewing them and promptly referred them for review, deeming them “inadequate”. The main issue identified was a lack of clarity on how companies would minimize fraud and market manipulation, a major concern for the agency.

In response to the SEC’s comments, each of the six companies quickly filed their applications and chose Coinbase as their partner for a shared surveillance agreement. By adding measures to monitor potential market manipulation, Coinbase will play a crucial role in strengthening market integrity and providing the necessary oversight requested by the government.

Take on a bigger role

Coinbase’s pivotal role in these applications speaks to its leadership position in the cryptocurrency industry. But the real opportunity for Coinbase lies not only in its monitoring capabilities, but also in the additional services it will provide to the proposed money transmitters.

According to Bloomberg, Coinbase is expected to perform a variety of functions for these businesses, including custodial services and acting as a trading platform to buy and sell Bitcoin.

In fact, Ark Invest and BlackRock have used Coinbase for their custody services. BlackRock explicitly states in its filing with the SEC that it will use Coinbase Prime, a product designed for institutional investors, as a 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 could serve as a custodian and brokerage with some of Wall Street’s biggest names, the introduction of Bitcoin ETFs could significantly increase profits.

To understand the full extent of capital that could be involved, we can take a look at the Grayscale Bitcoin Trust (GBTC -1.34%), a popular product that offers investors exposure to Bitcoin but is plagued to limitations such as inaccurate price tracking. , a shortcoming that a spot ETF can address.

To date, Grayscale holds over 625,000 Bitcoins to support its Bitcoin Trust, totaling over $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 nearly the same number of Bitcoins as the Grayscale Trust, the potential revenue charges could be around $190 million. based on recent bitcoin prices. With Q1 2023 net revenue totaling $736 million, a custodial fee increase of this size could boost Coinbase’s bottom line by approximately 25%.

In addition to cost-effective custodial services, Coinbase is in line to benefit from transaction fees as well. A unique feature of the new spot ETF apps is that businesses will be able to buy and sell bitcoin daily, a feature not currently present with the Grayscale Bitcoin Trust. (This explains why he goes through bouts of trading at premiums or discounts to the actual price of Bitcoin.)

With this added functionality, companies like BlackRock will be making a slew 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.

A necessary context

Despite Coinbase’s ongoing lawsuit involving the SEC, the momentum and common theme running through all ETF applications should be seen as a vote of confidence from some of Wall Street’s biggest players looking to do business with the company, regardless of the SEC lawsuit.

Although no ETFs have yet been approved, the blessing of the SEC seems more likely by the day. Even better, Coinbase shares still remain down more than 75% from their all-time high.

For investors looking for exposure to the continued growth of the crypto industry and possible SEC approval of the first Bitcoin ETF in the United States, Coinbase could be a compelling long-term opportunity at current prices. .

RJ Fulton has positions in Bitcoin and Coinbase Global. The Motley Fool has positions and recommends Bitcoin and Coinbase Global. The Motley Fool recommends WisdomTree. The Motley Fool has a disclosure policy.

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