Stock Markets Offer Insight on Surviving Crypto Winter

In Brief

• Investors stung by high fees could be in for a respite if crypto companies heed stockbrokers' advice.
• Coinbase and PayPal charge substantial fees for certain transactions, which could worsen the crypto winter for many traders.
• Business diversification and lower fees could fuel sustained growth of some crypto companies.

A stock market-inspired respite might be in sight for crypto retail investors beset by high transaction fees.
As the cryptocurrency markets experience an extended winter, consumers could rid themselves of the chill by looking at a stock market trend that began on May 1, 1975.

While bitcoin fees have been dwindling as the cryptocurrency’s price languishes in the low $20,000s, Ethereum fees last year were 100 times higher than Visa’s average transaction revenue.

Lower fees and diversification key to survival
The picture looks bleaker for traders using payment providers and traders. Payment provider PayPal announced amendments to its fee structure earlier this year, charging 1.8% for crypto transactions up to $1,000 and $1.5% for transactions above $1,000.

Coinbase charges a 1% fee on all cryptocurrency transactions, but costs vary around that point depending on the size of the transactions. Binancecan charge up to 4.5% for debit or credit card purchases, and 0.1% fee for trading, and 0.5% for instant buy/sell.

But the stock market offers a ray of hope since stock buyers and sellers have not paid as much as 1% to stockbrokers for many years. Stockbrokers are persons or companies that charge a brokerage fee or commission for helping clients buy and sell stocks.

On May 1, 1975, the U.S. Securities and Exchange Commission ruled that stockbrokers could no longer charge fixed-rate commissions for trading stocks following a mass exodus of stock market investors five years earlier. This resulted in a drop of 20% in commission rates between 1975 and the mid-1980s, driving trading revenues through the roof as trading volume increased.

But the stock market also leveraged another powerful weapon when stock trading volumes plateaued in the mid-1980s: diversification. Research, wealth management, and banking services broadened the revenue base of the securities industry, propelling ancillary services to more than 80% of stockbrokers’ revenue by the 1990s.

Recently Coinbase announced its staking service and a new focus on subscriptions to sustain it through the market winter. Subscriptions and services accounted for 18% of the exchange’s revenue in Q2, 2022. It also sold crypto tracking services to the U.S. government earlier this year.

Coinbase has also announced that the company has $6 billion on its balance sheet and that a few mergers and acquisitions could be on the cards.

Only a handful of crypto companies have been able to offer lower fees and business diversification. FTX.US, FTX’s American operation, recently began offering zero-fee stock trading, offering customers stocks from Apple (AAPL) and Tesla (TSLA). FTX Ventures, the VC arm of FTX, recently purchased a 30% stake in Anthony Scaramucci’s SkyBridge Capital.

“Once the Wild West is over, and the strongest players survive, you expect there will be consolidation,” opines Reena Aggarwal, a senior official at Georgetown University.

Regulatory issues threaten companies’ survival
Diversification into staking and derivatives could both be stymied by regulatory hurdles. Recently, SEC chair Gary Gensler commented that Ethereum’s recent Merge could have transformed the blockchain’s native token ether into a security, possibly requiring exchanges listing it to register as a securities provider or prompting them to remove it from their platforms. This would affect exchanges offering ETH staking.

Mergers and acquisitions could face scrutiny from consumer bodies like the Federal Trade Commission, which seeks to protect consumers from anti-competitive practices and market abuse by dominant players.

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