Can Coinbase really grow bigger than Charles Schwab in 2025? Here's what could make that bold call a reality.

MW Can Coinbase really grow bigger than Charles Schwab in 2025? Here's what could make that bold call a reality.

By Frances Yue

Welcome back to Distributed Ledger. This is Frances Yue, crypto reporter at MarketWatch.

For this installment, I caught up with Matthew Hougan, chief investment officer at crypto asset manager Bitwise Asset Management, who said he expects Coinbase Global Inc. $(COIN)$ to surpass Charles Schwab Corp. $(SCHW)$ in market capitalization next year - becoming the largest brokerage firm in the world in the process.

Bitwise, which had $5 billion in assets under management as of October, holds roughly 11% of its $233 million Bitwise Crypto Industry Innovators exchange-traded fund BITQ in Coinbase, according to a Bitwise spokesperson. It also has roughly 11.2% of its $4 million Bitwise Web3 ETF BWEB in the crypto exchange. Coinbase is BITQ's second-largest holding - with the largest being MicroStrategy, $(MSTR.AU)$ which takes up about 17.1% of the fund - but the crypto exchange is the largest holding of its smaller BWEB ETF.

While those are the only holdings Bitwise has in Coinbase shares, the spokesperson said, a boost to Coinbase's stock would benefit those Bitwise ETFs. Coinbase also provides digital-asset custodian services for Bitwise's spot bitcoin BITB and ether ETHW exchange-traded funds.

Coinbase shares have had an incredible run this year, thanks to bitcoin's rally. The crypto exchange's shares were up 75.3% so far this year to around $304.61 on Wednesday afternoon, pushing up its market cap to roughly $76.7 billion as of Wednesday - nearly double from $37.4 billion at the beginning of the year.

Still, the company's market cap was roughly half that of Charles Schwab, which was about $140.5 billion on Wednesday, according to FactSet data.

For Coinbase to surpass Schwab next year, its market cap would have to double again - while assuming Schwab's market cap remains unchanged.

"Coinbase has been able to establish itself with a dominant position in multiple areas of crypto - in brokerage, in custody, in layer-2 activity, in stablecoins and in payments," Hougan said in a phone interview. (Layer 2 refers to a blockchain or a set of protocols built on top of an existing blockchain. Stablecoins are cryptocurrencies whose values are pegged to another asset.)

"It's an incredible stack of revenue drivers that may have a higher margin than the stack of revenue drivers you have at Charles Schwab," Hougan said.

Coinbase's revenue mostly consisted of transaction revenue as well as subscription and services revenue - including stablecoin revenue, blockchain rewards, interest income and custodial-fee revenue.

In comparison, Charles Schwab generates its revenue mostly from net interest, asset-management and administration fees, and trading-commission fees, among other sources.

Representatives for Charles Schwab and Coinbase did not respond to requests seeking comment for this article.

Market share

However, Dan Dolev, senior fintech equity research analyst at Mizuho Securities, disagrees with Hougan's prediction, saying that it's unlikely that Coinbase's market cap will exceed that of Charles Schwab next year. While Coinbase is an important player in the crypto space, the fees they charge on trading are likely to decline over time, Dolev said.

Coinbase charges higher taker fees - the fees charged when a trader places an order at that market price that gets filled immediately - than most other major crypto exchanges. Coinbase charges a taker fee of up to 0.6%, while Kraken and Gemini each charge up to 0.4%.

While crypto bulls expect the regulatory environment to become more friendly to the crypto industry under Donald Trump's second White House administration, that will likely encourage more competition, noted Dolev.

"If you open up the market to a lot more of these exchanges, eventually there will be more competition for trading," Dolev said.

For Coinbase's market cap to expand and surpass that of Charles Schwab, it will have to keep its market share and maintain its current fees, according to Dolev.

Still, analysts at Needman wrote in a recent note that "traditional competitors will not be fast enough to enter the marketplace to take noticeable share in Q1 and possibly Q2 '25." Presumably, that would help Coinbase retain its competitive edge as a crypto trading platform.

Extended bull market

For Coinbase's market cap to grow, investors will also need to see the crypto bull market continue, with increased participation from traders.

For the nine months through Sept. 30 this year, Coinbase reported a total revenue of roughly $4.3 billion - almost doubling its revenue last year during the same period, which was roughly $2.2 billion.

That was in line with the rise of bitcoin, which rose from around $16,000 at the beginning of 2023 to roughly $103,733 on Wednesday.

Trading volumes on Coinbase tend to move in tandem with changes in the price of bitcoin, Mizuho's Dolev wrote in a recent note.

S&P 500 candidate?

If Coinbase could join the S&P 500 next year, it may boost its market cap, said Bitwise's Hougan.

Oppenheimer's Owen Lau, in the summer, pointed to Coinbase as a potential candidate to be included in the S&P 500 SPX. It is one of the biggest companies by market cap that meets the index's other criteria but still isn't yet in the index.

The S&P 500 is rebalanced quarterly, usually on the third Friday of March, June, September and December. To be included in the S&P 500, companies need a market capitalization of $18 billion or more, with the decision eventually made by an indexing committee. The committee may seek to avoid particularly volatile components or focus on particular attributes at different times.

Stocks tend to rise when they are announced as forthcoming S&P 500 constituents, particularly because there are trillions of dollars invested in index funds that track the benchmark.

MicroStrategy, known for its big bets on bitcoin, will be joining the Nasdaq-100 index NDX on Dec. 23.

Crypto in a snap

Bitcoin (BTCUSD) has increased 2.3% over the past seven days, to around $103,766 at the time of writing Wednesday. Ether (ETHUSD) has edged up 0.3% over the past seven days, to around $3,842, according to Dow Jones Market Data.

Must-reads

-- MicroStrategy's quirky Nasdaq-100 nod could mean more risk for fund investors (MarketWatch)

-- Bitcoin hits another record high. Can it reach $150,000 this cycle? (MarketWatch)

-- Ether may finally rise to record high next year, after lagging behind bitcoin (MarketWatch)

-- Gold or bitcoin? Here's the case for adding both to your portfolio in 2025. (MarketWatch)

-- As bitcoin soars, luxury brands consider accepting crypto payments (Reuters)

-- Crypto.com CEO Met Trump at Mar-a-Lago as Industry Seeks Influence in New Administration (Bloomberg)

-Frances Yue

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December 18, 2024 17:18 ET (22:18 GMT)

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