Coinbase Global, the largest listed cryptocurrency exchange, could take a hit to its trading volume and margin, analysts said, if more investors dabble in bitcoin from the safety of cheap exchange trade funds tracking its spot price. It will also impact Coinbase’s trading commissions and spreads – the difference between the bid and ask price, J.P. Morgan analyst Kenneth Worthington said. The brokerage warned that if spot bitcoin ETFs succeed, it will push potential Coinbase customers into the hands of equity brokers. The lower-than-average fee charged by ETF issuers and the ease of gaining exposure to the digital asset through regulated stock exchanges could attract new investors. Since the new financial instrument arrived in the U.S. stock markets last week, shares of Coinbase have dropped nearly 13 per cent, compared to a 7.5 per cent slide in bitcoin, which is still up nearly 60 per cent since September end in anticipation of ETFs. CFRA Research downgraded Coinbase to “sell” from “hold”, saying the exchange could be forced to cut its trading fees to remain competitive with low-cost ETFs. The ease of accessing spot bitcoin ETFs via stock brokers such as Robinhood that charge very low commissions was also likely to pressure Coinbase margins. “This is likely to reset the bar lower for pure-play, over earning crypto exchanges like Coinbase,” Mizuho analyst Dan Dolev said. A Coinbase spokesperson said the company currently has no plans to reduce transaction fee and expects to benefit from a broader adoption of the world’s largest cryptocurrency. Investors have poured $1.9 billion into nine new ETFs in their first three days of trading, but it remains to be seen if the level of interest will be sustained. Launch of the ETFs come as Coinbase struggles with lower trading volume, which fell to $11 billion in the third quarter from $26 billion a year earlier due to the negative sentiment caused by crypto winter that began in late 2021. The silver lining, however, for Coinbase is crypto enthusiasts who see bitcoin as a currency and find more value in owning the digital asset directly through the exchange, analysts said. A vast majority of investors who also want to engage with crypto assets beyond bitcoin will also stay on Coinbase, Oppenheimer analyst Owen Lau said. CUSTODY FEE MAY NOT BE ENOUGH Coinbase spokesperson said it expects to benefit from the spot ETFs by monetizing custody fees charged for holding the underlying bitcoin purchased from crypto exchanges. The company was named a custodian in eight of the 11 ETF listings, but it did not provide details on its custody fee. J.P.Morgan estimated that it could garner 10 to 15 basis points in custodian fees. But the boost from custody fee, CFRA Research analyst Michael Elliott said, will not be enough to offset the potential loss of investors to ETFs. “The broader custody business is extremely competitive and as a result custody fees are usually very low.”