Despite all the gloom and doom about crypto, it looks like Wall Street is finally jumping feet first into the pool.
In August, we had the news that cryptocurrency exchange Coinbase Global (COIN -4.18%) was partnering with asset manager BlackRock (BLK -0.89%) on new crypto trading services for large institutional investors. And now we have a group of Wall Street giants — including Charles Schwab (SCHW -0.98%), Citadel Securities, and Fidelity Investments — joining forces on the launch of a cryptocurrency exchange called EDX Markets (EDXM).
Clearly, there is much more untapped demand for crypto products and services. After all, who launches a brand-new cryptocurrency exchange in the middle of a “crypto winter”? EDX Markets is scheduled for a soft launch in November before officially debuting in January. So what does it all mean for Coinbase?
The retail investor base
The potential impact on Coinbase’s retail investor base is most worrisome. The exchange has been under tremendous pressure of late to boost its monthly active users (MAUs) to generate as much trading revenue as possible. So any erosion of its retail investor base, no matter how small, will be closely scrutinized by Wall Street analysts.
The involvement of both Schwab and Fidelity in the new venture is certainly cause for concern, because tens of millions of customers from these companies will presumably now be encouraged to use a crypto trading platform other than Coinbase.
The good news, if you are a Coinbase investor, is that EDXM will likely be limited in the number of cryptos it will offer for trading. In contrast to Coinbase, which offers approximately 150 cryptos to trade, EDXM will only offer a handful. EDX Markets is tight-lipped about which cryptos it will offer, saying only that it will definitely have Bitcoin (BTC -6.20%). And it’s safe to surmise that EDXM probably won’t immediately offer extras for retail investors, like crypto staking for passive income, as you can get on Coinbase.
The institutional investor base
Where the new cryptocurrency exchange will likely hurt Coinbase the most is in terms of attracting new institutional investors. The news in August about BlackRock seemed so promising. Coinbase appeared to be so close to unlocking a huge new business opportunity, given that BlackRock has close to $8 trillion in assets under management. The idea at the time was that other large asset managers would also sign up with Coinbase, and that might be a huge new source of trading revenue.
If you look at the way EDXM is being pitched, it sounds like it is intended for institutional investors first and foremost. EDXM is basically taking the same structure in place for equity markets and transporting it over to crypto markets. Charles Schwab and Fidelity Investments will provide order flow; Citadel Securities and other market makers will execute the trades and collect the spreads. And all of this will be housed in a giant data center in Secaucus, New Jersey.
There will even be opportunities for “co-location,” which is the ability of market participants to house their computers right inside the same facility as the exchange, thereby guaranteeing the fastest possible trade executions.
A positive vote for crypto
The launch of a cryptocurrency exchange in the middle of a crypto winter has to be seen as a huge vote of confidence in digital currency. There is clearly untapped demand coming from investors. In April, for example, Fidelity began offering crypto investment options to its 401(k) account holders, and earlier this month, reports were circulating that Fidelity would offer Bitcoin to its retail investor base.
Crypto is entering a brand-new era, in which it is an officially recognized $1 trillion asset class. As a result, the biggest names on Wall Street are now interested in offering new products and services. Just two years ago, Wall Street executives were dismissing crypto as speculative, risky, volatile, and just plain shady. Now, they are talking about crypto as a potential way to save money for retirement or to diversify a portfolio.
Should you buy Coinbase?
It will be interesting to see how Coinbase deals with this new threat. From what I can tell, the news about EDXM will only be positive for Coinbase if it helps to expand the pie for the crypto industry as a whole. If Charles Schwab and Fidelity Investments are willing to venture into crypto, that could make it much more enticing to potential investors still sitting on the fence, generating new demand for Coinbase.
For now, I’m taking a wait-and-see approach with Coinbase. I need to see real growth in metrics like customer acquisition and trading volume before making a deeper commitment. Coinbase needs to prove that it can continue to pull in new customers and provide a deeper, richer product offering than its rivals.