ETF approval – a double-edged sword
- SEC approved 11 applications for Bitcoin spot ETFs, which was largely expected by the market
- Expect to see (1) a surge in Coinbase’s transaction fee driven by higher Bitcoin prices and (2) incremental custody and agency trading revenue from being custodian of the ETFs
- Revised up TP to US$150 on higher revenue forecast; maintain HOLD rating as we are cautious about the potential cannibalisation from the ETF launches
The long-awaited Bitcoin spot ETFs were finally approved. US SEC approved 11 applications for Bitcoin spot ETF. Coinbase is the custodial partner for most of the asset managers that are launching Bitcoin ETFs, and the company suggested that it will make money from custody fee, and other services such as agency trading and financing to ETF issuers. Most of the ETFs are charging zero fees initially and then 0.2%-0.3% of AUM annually. We think the ETFs will become a cheaper and easier alternative for retail investors, since many US stock brokers are charging zero commission and it does not require a crypto wallet to own Bitcoin ETFs. Also, this will enable pension funds, wealth advisers and other institutions, that had been precluded from investing into crypto, to gain access to the Bitcoin exposure, and therefore further raising Bitcoin’s penetration.
Huge fee jump in short-term, but long-term prospect not clear yet. Thanks to the huge jump in Bitcoin price and improved sentiment, Coinbase’s trading volume run-rate during 1 Dec 2023 – 10 Jan 2024 almost tripled that of 3Q23. Assuming Coinbase to maintain such run-rate and 3Q23 take rate and keeping everything else constant, this would imply a quarterly net revenue/profit of US$1.2b/US$0.4b respectively, markedly improving from 3Q23’s US$0.6b/-US$2m. Nonetheless, we are cautious about (1) the potential cannibalisation from the ETFs – a fraction of Bitcoin retail investors might switch to ETFs for lower cost, while the estimated margin from custody (0.1-0.16% of AUM annually) and agency trading (0.02%) are much more modest than Coinbase’s retail trading (1.5-2.0%); and (2) the sustainability of the rebound of Coinbase’s crypto trading volume, which might slow down as the hype of ETF approval gradually fades. Considering the uncertainty of its long-term profitability, we maintain HOLD rating on the counter. TP is lifted to US$150, reflecting higher transaction revenue forecast and improved growth profile.