What Does the Launch of a Crypto Exchange Backed by Wall Street Mean for Coinbase?

Despite all the doom and gloom about cryptocurrencies, it appears that Wall Street is finally jumping into the pool.

In August, we got the news that the cryptocurrency exchange world coinbase (CURRENCY -4.18%) partnered with asset manager black rock (BLACK -0.89%) about new cryptocurrency trading services for large institutional investors. And now we have a bunch of Wall Street giants, including charles schwab (SCHW -0.98%)Citadel Securities and Fidelity Investments, joining forces in launching a cryptocurrency exchange called EDX Markets (EDXM).

Clearly, there is much more untapped demand for crypto products and services. After all, who launches a 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 all this mean for Coinbase?

The retail investor base

The potential impact on Coinbase’s retail investor base is more concerning. 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. Therefore, any erosion of its retail investor base, however small, will be closely scrutinized by Wall Street analysts.

The involvement of both Schwab and Fidelity in the new company is certainly a cause for concern, because presumably tens of millions of customers of these companies will now be encouraged to use a cryptocurrency trading platform other than Coinbase.

Image source: Getty Images.

The good news, if you are a Coinbase investor, is that EDXM will likely be limited in the number of cryptocurrencies it will offer to trade. Unlike Coinbase, which offers roughly 150 cryptos to trade, EDXM will only offer a handful. EDX Markets is tight-lipped on which cryptocurrencies it will offer, saying only that it will definitely have Bitcoin (BTC 0.27%). And it’s safe to assume that EDXM likely won’t immediately offer retail investor extras like crypto staking for passive income like 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 August news about BlackRock looked very promising. Coinbase appeared to be very close to unlocking a huge new trading opportunity, given that BlackRock has close to $8 trillion in assets under management. The idea at the time was that other big asset 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 launched, it seems like it is primarily intended for institutional investors. EDXM basically takes the same structure for the stock markets and transports it to the crypto markets. Charles Schwab and Fidelity Investments will provide the 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 for market participants to host their computers within the same facility as the exchange, ensuring the fastest trade executions possible.

A positive vote for cryptocurrencies

The launch of a cryptocurrency exchange in the midst of a crypto winter should be seen as a huge vote of confidence in the digital currency. Clearly, there is 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 circulated that Fidelity would be offering Bitcoin to its retail investor base.

Crypto is entering a 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 dismissed cryptocurrencies 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 expand the pie for the crypto industry as a whole. If Charles Schwab and Fidelity Investments are willing to venture into cryptocurrencies, that could make it much more attractive to potential investors who are still on the fence, generating new demand for Coinbase.

For now, I am taking a wait and see approach with Coinbase. I need to see real growth in metrics like customer acquisition and transaction volume before making a deeper commitment. Coinbase needs to prove that it can continue to attract new customers and offer a deeper and richer product offering than its rivals.

Charles Schwab is an advertising partner at The Ascent, a Motley Fool company. dominic basult has positions in Bitcoin. The Motley Fool has positions and recommends Bitcoin and Coinbase Global, Inc. The Motley Fool recommends Charles Schwab. The Motley Fool has a disclosure policy.

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