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The US-based crypto exchange Coinbase is facing increased competition and potential challenges to its market dominance following the approval of spot Bitcoin exchange-traded funds (ETFs) in the US.

Notable asset management firms, including BlackRock, Franklin Templeton, and WisdomTree, are set to enter the digital asset ecosystem with Coinbase as their chosen custodial partner.

While Coinbase stands to benefit from custody revenue in the short term, analysts have expressed concerns about the potential impact on the company’s core transaction business, CNBC reported on Wednesday.

The approval of spot Bitcoin ETFs enables investors to access Bitcoin through the same mechanisms used for traditional stock and bond ETFs, potentially reducing the need to use pure crypto exchanges like Coinbase.

ETFs taking market share

In a recent report that CNBC cited, analysts at Bernstein predicted that within five years, around 10% of the global supply of BTC, equivalent to roughly $300 billion, will be managed by ETFs.

As a result, the ETFs are seen as a significant pipeline connecting traditional financial markets with the crypto market.

Coinbase’s stock witnessed a surge of almost 400% in 2023, driven in part by the anticipation of new ETFs generating more interest in crypto.

While Coinbase CEO Brian Armstrong has emphasized the company’s efforts to diversify revenue streams beyond just transaction fees, some analysts have expressed concerns about potential challenges to the exchange’s market share.

‘Rough awakening’ for Coinbase investors

According to analysts at Mizuho, the revenue impact of the ETF approval might be minimal and could lead to a “rough awakening” for Coinbase investors when they realize that the fees from being a custodian for the ETF providers are “minimal.”

Further, competition from other platforms offering fee-free trading and discounted fees for ETF transactions poses additional challenges for Coinbase.

Despite this, the company remains optimistic about the positive catalyst that spot Bitcoin ETFs could bring to the entire crypto space, including increased credibility, liquidity, and participation from new institutions and participants.

“ETFs should expand the pie and bring new people and institutions into the cryptoeconomy,” Coinbase Chief Operating Officer Emilie Choi was quoted as saying, while adding:

“They should add credibility to the market, and we should see increased liquidity and market stability as we’ve seen with other asset classes such as gold.”

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