Despite all the gloom and doom over crypto, it looks like Wall Street is finally jumping into the pool feet first.
In August we had the news that cryptocurrency is being exchanged Coinbase Global (COIN -4.18%) was a partnership with an asset manager Black Rock (BLACK -0.89%) about new crypto trading services for large institutional investors. And now we have a group of Wall Street giants – including Karl Schwab (BLACK -0.98%)Citadel Securities and Fidelity Investments – are joining forces to launch a cryptocurrency exchange called EDX Markets (EDXM).
There is clearly a lot more untapped demand for crypto products and services. After all, who is launching a brand new cryptocurrency exchange in the middle of “crypto winter”? EDX Markets is scheduled for a soft launch in November before making its official debut in January. What does all this mean for Coinbase?
The retail investor base
The potential impact on Coinbase’s retail investor base is the most worrying. The exchange has been under tremendous pressure lately to increase its monthly active users (MAUs) in order to generate as much trading revenue as possible. As a result, any erosion of the retail investor base, no matter how small, will come under the scrutiny of Wall Street analysts.
The involvement of both Schwab and Fidelity in the new venture is certainly of concern, as it is believed that tens of millions of customers of these companies are now being 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 offered for trading. Unlike Coinbase, which offers around 150 cryptos to trade, EDXM will only offer a handful. EDX Markets is not sure which cryptos it will offer, only saying that it will definitely be there Bitcoin (BTC 0.36%). And it’s safe to assume that EDXM isn’t likely to start offering extras for retail investors right away. B. Crypto staking for passive income like you can get on Coinbase.
The institutional investor base
Where the new cryptocurrency exchange is likely to hurt Coinbase the most is in attracting new institutional investors. The August news about BlackRock seemed so promising. Coinbase seemed so close to capturing a huge new business opportunity given that BlackRock has nearly $8 trillion in assets under management. The idea at the time was that other big money managers would also sign up to Coinbase, and that could be a huge new source of trading revenue.
If you look at the way EDXM is presented, it sounds like it’s primarily intended for institutional investors. EDXM basically takes the same structure as for the stock markets and applies it to the crypto markets. Charles Schwab and Fidelity Investments provide order flow; Citadel Securities and other market makers will execute the trades and collect the spreads. And all of this is housed in a massive data center in Secaucus, New Jersey.
There will even be opportunities for ‘co-location’, ie the ability for market participants to locate their computers directly in the same facility as the exchange, guaranteeing the fastest possible trade execution.
A positive vote for crypto
The launch of a cryptocurrency exchange in the middle of the crypto winter must be seen as a great vote of confidence in the digital currency. There is clearly untapped demand from investors. For example, in April Fidelity began offering crypto investment options to its 401(k) account holders, and earlier this month reports circulated that Fidelity would be offering Bitcoin to its retail investor base.
Crypto is entering a brand new era as 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 dismissed crypto as speculative, risky, volatile and just downright shady. Now they are talking about crypto as a possible 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. As far as I can tell, news about EDXM will only be positive for Coinbase if it helps expand the pie for the crypto industry as a whole. If Charles Schwab and Fidelity Investments are willing to venture into crypto, it could make it much more enticing to potential investors still sitting on the fence and generate new demand for Coinbase.
At the moment, I’m taking a wait-and-see approach at Coinbase. I need to see real growth on metrics like customer acquisition and trade volume before delving deeper. Coinbase needs to prove it can continue to attract new customers and offer a broader and richer product offering than its competitors.
Charles Schwab is an advertising partner with The Ascent, a Motley Fool company. Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin and Coinbase Global, Inc. The Motley Fool recommends Charles Schwab. The Motley Fool has a disclosure policy.