No-fee trading has arrived for crypto. Here’s what that may mean for revenue at these companies

Published Sun, Jun 26 20228:34 AM EDT

Zero-fee trading has come to the world of bitcoin, raising questions over how fee compression may affect revenues for crypto trading platforms. Last week, the U.S. arm of the crypto exchange Binance, which had some of the lowest trading fees around, dropped fees for spot bitcoin trading . Shares of Coinbase, one of its main competitors and known for its expensive fee structure, fell nearly 10% on the news. "We hope our pricing model sees broader industry adoption over time as that would have a positive impact on the ecosystem and market participants overall," a spokesperson for Binance.US told CNBC. "We are happy to lead the race to zero-fees everywhere. Spot trading is just one service we offer our customers. We continue to roll out new products and services, such as staking earlier this month." Some see no-fee trading as inevitable. Robinhood changed the brokerage world when it began offering free trades, and now it's becoming more common for investors to include crypto in their portfolios, or at least to see crypto trading offered in the same experience. The big problem for exchanges like Coinbase is figuring out how to make up that revenue and whether those alternatives are enough. "Coinbase has been diversifying away from trading, but the majority of the revenue still comes from trading," said Oppenheimer equity analyst Owen Lau. "So right now that's not enough. Coinbase needs to do more and faster in this environment to diversify away from trading." However, others say that the fee compression that's become widespread on stock-trading platforms is unlikely to migrate to the crypto world. "I don't see the presumptive view that the structure of the equities market is going to translate directly into the structure of the crypto market, which is very nascent and very complex," said Lisa Ellis, MoffettNathanson partner and senior equity analyst. "We also see plenty of situations in non-trading functions in and around FinTech and banking where consumers pay, you know, fees all the time – like instant transfer fees or overdraft fees – they'll complain about them, but those structures are maintained." Here's why the move by Binance.US to drop fees has some worried about the future of crypto exchanges – and not others. Where the money comes from It's possible that with the dawn of free crypto trading, exchanges feeling the pressure to lower or eliminate fees are headed nowhere good. Lau said he's worried companies will take on higher risk to make up for a loss in trading fees, and that the industry will need to enter a new age of transparency around its business models. "The big question is: how can Binance.US make money if they maintain this zero-commission trading?" Lau said, noting that it wasn't too long before investors realized the reason Robinhood could offer commission-fee trading is that they made it up by taking payment for order flow , the back-end payments that brokers receive for directing clients' trades to market makers. "There are too many problems in the community right now," Lau added. "Do you really want to get to the point where you're free on the one end but on the other end you don't have transparency around how you make money?" Ellis noted that Coinbase is "pretty rapidly" diversifying its business into other revenue streams, including Coinbase Cloud and its NFT marketplace. The trading platform also testing a subscription service called Coinbase One that would give them access to zero-fee trading for up to $10,000 in transactions a month. The move by Binance.US came at the lowest point of a nearly seventh-month sell-off in crypto and other risk assets, as it has been struggling with the Federal Reserve's interest rate hikes and the collapse of the biggest stablecoin project in recent history. Adding to the pain, earlier this month crypto lender Celsius pointed to "extreme market conditions" when it decided to halt account withdrawals . Crypto hedge fund Three Arrows Capital was forced to liquidate leveraged bets on various tokens. Another lender, BlockFi, and crypto brokerage Voyager Digital took bailouts from crypto billionaire Sam Bankman-Fried . "People are taking loans and then can't fulfill that repayment and some crypto firms, like BlockFi, have had to liquidate collateral," Lau said. "That pushes the bitcoin price down." "Just like what happened during 2008 and 2009, we keep deleveraging, keep selling and then the price goes down and then you've got to get margin call, people can't get a margin call," Lau added, referring to a situation in which investors need to commit more funds to avoid losses on trades made with borrowed money. "It's happening right now so that's why I'm worried about the whole spill-over risk in the market." Dan Dolev, Mizuho America's senior fintech analyst, said last week marked "the beginning of the end for high trading fee regimes." Binance.US is effectively unleashing on the crypto trading world what Robinhood brought to the brokerage world, and Coinbase won't have a choice in whether to lower fees, Dolev said. "It's sort of a downward spiral from here," he said. "You're going from a market share war to the worst possible thing that can happen to Coinbase, which is a price war." A league of its own Ellis countered that Coinbase is different from firms in the traditional world of equities. The company has an exchange for crypto, but that's just one part of the business. It's also an integrated custodian and a brokerage. "You're not paying necessarily for the pure trading aspect of it," Ellis said. "A lot of the value that you're getting from a player like Coinbase has a lot more to do with the brokerage and custodian aspects of what they do, and less the trading aspects of what they do." She also noted that many of Coinbase's trading revenue comes from retail investors who aren't heavy, sophisticated traders. They are often newcomers to crypto who find comfort in the brand's footprint and status. "There are a number of places you can buy crypto for 'free,' but customers overwhelmingly chose value over cost," a spokesperson for Coinbase told CNBC. "Our customers chose to use Coinbase on the basis of security, safety and, most importantly, trust. These are factors that Coinbase will always win on." Lau agreed, and said Binance.US lowering fees may have temporarily hurt Coinbase and other U.S. crypto exchanges, but only in sentiment. "At the end of the day, will people actually be willing to materially move their money from Coinbase or from another platform to Binance.US just to get 10 basis points less relative to a month ago?" he said. "In this environment people look not just at price," Lau added. "Customers also think about the safety of their funds as well. And they may be willing to pay to see for a higher quality platform that has a stronger reputation or ensures the safety of the funds."