Potential Impact Of BlackRock’s Bitcoin ETF On Coinbase Stock (COIN)

Coinbase Global, Inc. (NASDAQ:COIN) stock has been on a wild ride this month. COIN stock crashed when the SEC sued the company on June 5, but these losses have been erased by the improving sentiment toward cryptocurrencies. BlackRock, Inc. (BLK), the largest asset manager in the world which is also a part of our model value portfolio at Beat Billions, filed paperwork with the SEC on June 15 to launch a Bitcoin ETF with Coinbase as the custodian for Bitcoin that will be held with the ETF. This news helped cryptocurrencies gain some traction after losing steam in recent weeks. Adding more fuel to the rally, Fed Chair Jerome Powell made some interesting remarks in his testimony to the House Financial Services Committee yesterday claiming that it is time to treat stablecoins as a form of money. The launch of BlackRock’s Bitcoin ETF may turn out to be a watershed moment in the adoption of cryptocurrencies, and the Fed Chair’s remarks suggest the crypto sector will finally see some proper regulation, which is an encouraging development. Coinbase stock, despite the looming threat of the lawsuit, is likely to strengthen in the coming weeks and is well-positioned to deliver handsome long-term returns after navigating the rough seas.

BlackRock’s Bitcoin ETF Will Be A Game-Changer

ETFs have taken the investing world by storm over the last two decades, and BlackRock has played a massive role in transforming the investment management industry with a low-cost ETF portfolio covering almost all asset classes an investor can think of. As of today, investors do not have an option to gain exposure to Bitcoin through a spot ETF although several funds have been launched in recent years to track the performance of Bitcoin. In case you are wondering, a spot Bitcoin ETF will be backed by Bitcoin whereas the funds available today are Bitcoin futures ETFs that are backed by Bitcoin derivatives.

The best way to understand the importance of a spot Bitcoin ETF is to evaluate the impact of the first gold-backed ETF back in 2004. Technically, the first gold-backed ETF is the Gold Bullion Securities fund which was launched by ETF Securities and Graham Tuckwell in Australia back in 2003. But things took off dramatically with the launch of SPDR Gold Trust ETF (GLD) by State Street Global Advisors in November 2004. Gold ETFs are now widely used by individual and institutional investors alike. In hindsight, we can identify a few ways gold-backed ETFs have changed investing in gold forever.

1. Gold ETFs have made it possible for investors of every scale and size to gain exposure to gold. Before the launch of ETFs, investing in gold was primarily accessible to HNIs and institutions with the necessary capacity to store gold physically.
2. Gold has gained popularity as one of the best hedges against market downturns with the commodity now being widely accessible. The rise of gold as a diversification tool has been enabled by gold ETFs.
3. ETFs have lowered the costs of investing in gold while creating a liquid market for the commodity.
4. The success of ETFs has enabled investment management companies to introduce innovative products such as gold mining ETFs and leveraged trading instruments, thereby expanding the investing community interested in gold.

As illustrated below, close to 24% of the total demand for gold in 2022 came from investors, which is a testament to how the commodity’s popularity as an investment vehicle has exponentially grown in the last two decades.

Coinbase, based on the results of a survey of 2,000+ Americans, predicted last February that around 20% of Americans have exposure to cryptocurrencies. This could be an inflated figure, but even if we go by this statistic, it is evident that the adoption of cryptos has a long way to go in the U.S. alone. If BlackRock’s ETF obtains the necessary approvals from the SEC to attract retail investors, I believe the interest in owning cryptos will notably increase similar to what happened with the launch of gold-backed ETFs two decades ago. Today, many investors are waiting on the sidelines because of regulatory uncertainty and the high price of Bitcoin compared to other traditional investments. A Bitcoin ETF will address both of these concerns, paving the way for Bitcoin and other cryptocurrencies to attract unprecedented demand. The launch of an ETF will also pave the way for institutional investors to invest in Bitcoin as a diversification tool.

A successful approval of BlackRock’s Bitcoin ETF will be a green light for other investment firms to launch similar products as well. This is exactly what happened soon after the approval of GLD by the SEC in 2004. Yesterday, WisdomTree filed an application with the SEC to allow an ETF backed by Bitcoin although its previous applications in 2021 and 2022 were rejected by the watchdog. This showcases how BlackRock’s application has already sparked enthusiasm among its peers. On June 21, Invesco also renewed its application with the SEC to get the approval to launch Invesco Galaxy Bitcoin ETF. This is just the tip of the iceberg. If BlackRock or any of these asset managers successfully launch a spot Bitcoin ETF, asset managers around the world will line up to launch such ETFs in the coming months to benefit from the increasing adoption of cryptocurrencies.

Coinbase Enjoys A Long Runway For Growth

As the leading crypto exchange in the U.S., Coinbase enjoys a long runway for growth. In the short run, however, the company will have to deal with increased regulatory scrutiny, including the lawsuit filed by the SEC. In the worst-case scenario, the company could be forced to discontinue its staking business, which will be a hit on the diversification efforts of the company although this business segment accounts for a small share of revenue today. The SEC’s allegation that Coinbase violated registration laws in the country by allowing its users to trade 13 crypto assets that are deemed as securities without registering them with the SEC is a bigger concern as the company could be met with a massive financial penalty to settle this. The market is likely to punish COIN stock if this risk materializes.

In the long term, Coinbase should be a winner in the increasing adoption of digital assets. The company has positioned itself to benefit from the rapid growth of this sector by offering a 360-degree product portfolio to complement its exchange services such as crypto debit cards and lending products. As I highlighted in my previous article, the company has the potential to grow exponentially, but investors need to keep a close eye on a few risks that are looming on the horizon, including new tax reporting requirements, intensifying competition, and regulatory scrutiny.

Takeaway

If BlackRock succeeds in obtaining the SEC’s approval to launch a spot Bitcoin ETF, crypto prices will surge higher. Given the strong positive correlation between COIN stock and Bitcoin prices, it is reasonable to expect Coinbase stock to benefit from this favorable development. Before Coinbase makes the most of the growth opportunities available in this space, however, the company will have to navigate a difficult few quarters characterized by regulatory crackdowns.