What does the launch of a Wall Street-backed crypto exchange mean for Coinbase?

Despite all the gloom and doom about crypto, it looks like Wall Street is finally jumping feet first into the pool.

In August, we got the news that cryptocurrency exchange Coinbase Global (COIN -4.18%) the collaboration with asset managers Black stone (BLK -0.89%) on new crypto trading services for large institutional investors. And now we have a group of Wall Street giants — included Charles Schwab (SCHW -0.98%)Citadel Securities and Fidelity Investments — are teaming up to launch a cryptocurrency exchange called EDX Markets (EDXM).

There is clearly 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 slated for a soft launch in November before officially debuting in January. So what does this mean for Coinbase?

The private investor base

The potential impact on Coinbase’s retail investor base is of most concern. The exchange has been under tremendous pressure lately to increase its monthly active users (MAU) in order to generate as much trading revenue as possible. So any erosion of the private 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, as tens of millions of customers from these companies will presumably now be encouraged to use a crypto 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 cryptos it will offer for trading. Unlike Coinbase, which offers approximately 150 cryptos to trade, EDXM will only offer a handful. EDX Markets is tight-lipped about what cryptos it will offer, saying only that it definitely will Bitcoin (BTC 0.09%). And it’s safe to assume that EDXM probably won’t immediately offer extras for retail investors, like crypto stakes 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 news in August about BlackRock seemed so promising. Coinbase appeared to be this close to unlocking a huge new business opportunity, given that BlackRock has close to $8 trillion in assets under management. The thinking at the time was that other major asset managers would also sign up with 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 is primarily intended for institutional investors. EDXM basically takes the same structure in place for stock markets and transports it over to crypto markets. Charles Schwab and Fidelity Investments will provide order flow; Citadel Securities and other market participants 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 possibility for market participants to house their computers right inside the same facility as the exchange, thus guaranteeing the fastest possible trade executions.

A positive vote for crypto

The launch of a cryptocurrency exchange in the middle of a crypto winter must be seen as a huge vote of confidence in digital currency. There is clearly untapped demand 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 offer Bitcoin to its private investor base.

Crypto is entering a whole new era, where 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 crypto as speculative, risky, volatile and downright 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 handles 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 bet on crypto, it could make it much more enticing to potential investors who are still 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 trade volume before I commit more deeply. Coinbase needs to prove it can continue to attract new customers and offer a deeper and richer product offering than its competitors.