Coinbase, a leading crypto asset exchange, is at a pivotal juncture with the recent advent of US spot Bitcoin Exchange-Traded Funds (ETFs). While this development signals a mainstream breakthrough for crypto, it also places Coinbase in a spotlight fraught with potential rewards and significant risks.
The approval and commencement of the first spot exchange-traded funds investing directly in Bitcoin by the US Securities and Exchange Commission (SEC) have marked a significant moment in BTC’s journey toward mainstream acceptance.
This move has put Coinbase at the ‘center of action,’ as many spot ETF issuers, including industry giants like BlackRock and Ark Invest, rely on the exchange for essential services such as custodianship, trading, and lending.
The Dual-Edged Sword Of Centralization
Coinbase’s emerging dominance in the spot Bitcoin ETF market is a double-edged sword. On the one hand, the company is poised to benefit significantly from its central role in this new era of Bitcoin trading. On the other hand, this centralization raises concerns about the “concentration of risk,” according to Bloomberg.
David Schwed, COO at blockchain security firm Halborn, highlights the potential dangers of entrusting a single entity with multiple critical functions in the financial market infrastructure, noting:
By design, our financial-market infrastructure is segregated into different roles. When you have one entity that’s responsible for the entire life-cycle of the trade, I think that causes concerns.
Bloomberg reports that Coinbase, already the “largest crypto custodian” globally, is the preferred choice for custody among spot Bitcoin ETFs. However, spot ETF issuers have noted the risk of “service restrictions” or curtailments from the exchange in their risk disclosures.
Concerns about concentration risk are echoed by Dave Abner, principal at Dabner Capital Partners, an ETF consultancy. Abner points out the dangers of relying heavily on Coinbase as a crypto custodian, suggesting that a “multi-custodian setup” might be a safer bet for investors and issuers.
Despite these worries, Coinbase’s CFO Alesia Haas assures that the company “diligently avoids conflicts of interest,” asserting that traditional securities market structures may not be entirely applicable to the crypto sector.
Coinbase Balancing Growth And Market Dynamics
As the exchange navigates its influential role in the ETF space, it also faces challenges from emerging funds offering lower fees on Bitcoin investment vehicles.
This competition threatens revenue at Coinbase’s primary trading platform. While the company’s shares skyrocketed by over 100% last year, analysts from Mizuho, a leading bank in Japan, estimate that the new spot ETFs might add only a modest 5% to 10% to the revenue.
Potential changes in customer behavior further complicate Coinbase’s position in the market. Some current customers might pivot to buying Bitcoin through spot ETFs, which generally charge lower trading fees than the exchange.
This scenario, as outlined by Dan Dolev from Mizuho, could lead to fee compression across the crypto space, impacting Coinbase’s revenue streams. Despite these challenges, the company remains optimistic.
Haas expects the spot ETFs to benefit the crypto market and Coinbase. At the same time, Greg Tusar, head of institutional products at Coinbase, believes the spot ETFs will diversify to use multiple custodians over time.
Although possibly reducing Coinbase’s market share, this strategy could mitigate the risks associated with over-reliance on a single custodian.
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