On May 13, S&P Dow Jones Indices announced that Coinbase will officially replace Discover Financial Services in the S&P 500 Index on May 19. While there have been companies like Block and MicroStrategy with strong ties to Bitcoin in the S&P 500 index before, Coinbase is the first exchange primarily focused on cryptocurrency to join the index. This also signifies that cryptocurrency in the United States is gradually moving from the periphery to the mainstream.

On the day of the announcement, Coinbase's stock price surged by 23%, surpassing the $250 mark. However, just 3 days later, Coinbase was hit by consecutive events, including a hack where the perpetrators bribed employees to steal customer data and demanded a $20 million ransom. Additionally, the U.S. Securities and Exchange Commission (SEC) launched an investigation into the authenticity of Coinbase's claim in its 2021 public listing filing and marketing materials that it had over 100 million "verified users." These two events acted like mini bombs, and at the time of writing, Coinbase's stock had dropped by over 7.3%.

Coincidentally, Discover Financial Services, which was replaced by Coinbase, could also be called the "Coinbase" of the previous payment era. Discover is a U.S.-based digital banking and payment services company headquartered in Illinois, founded in 1960. Its payment network, Discover Network, is the fourth-largest payment network after Visa, Mastercard, and American Express.

In April, after the approval of the acquisition of Discover by the sixth-largest U.S. bank, Capital One, this longstanding digital banking company, established over 60 years ago, smoothly passed on its seat in the S&P 500 to this emerging cryptocurrency "bank." This unexpected coincidence also created a cinematic moment for Coinbase entering the S&P 500, a passing of the torch between old and new eras. However, this baton pass also brought Coinbase's accumulated "external threats and internal troubles" to a tipping point.

The Side Effects of ETFs

Over the past decade, cryptocurrency exchanges have been the most stable "profit machine." They play a key role in providing liquidity for the entire industry and rely on transaction fee revenue to sustain operations. However, with the comprehensive rollout of ETF products in the U.S. market, this profit model is facing unprecedented challenges. As the leader in the "American castle," with over 80% of its business originating from the U.S. domestic market, Coinbase is most significantly impacted by this shift.

Starting from the approval of Bitcoin and Ethereum spot ETFs, traditional financial capital has significantly embraced users and funds that originally belonged to exchanges in a more cost-effective, compliant, and transparent manner. The transaction fee revenue of crypto exchanges has started to decline, and this trend may further intensify in the coming months.

According to Coinbase's 2024 Q4 financial report, the platform's total trading revenue was $417 million, a 45% year-on-year decrease. The contribution of BTC and ETH trading revenue has dropped from 65% in the same period last year to less than 50%.

This is not a result of a decline in market enthusiasm. In fact, since the approval of the Bitcoin ETF in January 2024, the inflow of BTC in the U.S. market has continuously hit new highs, and asset management sizes of funds like BlackRock and Fidelity have rapidly expanded. Data shows that just BlackRock's iShares Bitcoin ETF (IBIT) has exceeded $17 billion in AUM. As of mid-May 2025, the cumulative net inflow of 11 major institutional Bitcoin spot ETFs on the market has surpassed $41.5 billion, with a total net asset value of $121.469 billion, accounting for approximately 5.91% of the total Bitcoin market cap.

Chart showing the growing trend of net outflows only in Grayscale among the 11 institutions

Institutional investors and some retail investors have begun to shift towards ETF products, partly due to compliance and tax considerations, and partly because ETF transaction costs are much lower than those of crypto exchanges. While Coinbase's spot trading fee rate varies annually in a tiered manner but averages around 1.49%, for example, the management fee of IBIT ETF is only 0.25%, with most ETF institutional fees ranging from around 0.15% to 0.25%.

In other words, the more rational users are, the more likely they are to migrate from exchanges to ETF products, especially for investors aiming for long-term holdings.

According to various sources, several institutions including VanEck and Grayscale have already submitted Solana (SOL) ETF applications to the SEC, and some institutions also have plans to submit XRP ETFs. Once approved, this may trigger a new round of fund migration. According to a report submitted by Coinbase to the SEC, as of April, XRP and Solana trading revenue accounted for 18% and 10% of Coinbase's platform trading revenue, nearly capturing one-third of the platform's transaction fee revenue.

However, the Bitcoin and Ethereum ETFs passed in 2024 have also reduced the transaction fees for these two tokens on Coinbase from 30% and 15% to 26% and 10%, respectively. If the ETFs for SOL and XRP are approved, it will further weaken the core transaction fee revenue source for exchanges like Coinbase.

The expansion of ETF products is gradually weakening the financial intermediary status of cryptocurrency exchanges. From their initial roles as matchmakers and clearers, they are now gradually being reduced to mere "on-ramps and off-ramps," with exchanges’ marginal value being squeezed by ETFs.

Robinhood Takes a Bold Stand, Traditional Brokerages Join the Fray

On May 12, 2025, SEC Chairman Paul S. Atkins delivered a keynote address at the Tokenization of Assets Cryptocurrency Working Group Roundtable. The entire speech revolved around one theme, "It is a new day at the SEC," where he stated that the SEC would not enforce regulation in the same way as before, but rather pave the way for cryptocurrency assets in the U.S. market.

With signs of the SEC's "NEW DAY" declaration and the compliance of cryptocurrencies, more and more traditional brokerages are trying to enter the cryptocurrency industry. The well-known U.S. securities market Robinhood is the most representative case, expanding into the crypto business since 2018. By the time it went public in 2021, Robinhood's crypto business revenue accounted for over 50% of the company, especially propelled by the Dogecoin "one-hit-wonder" promoted when Musk was joking around.

Robinhood showcased strong growth in the 2025 Q1 earnings report, particularly with significant revenue growth in cryptocurrency and options trading. Boosted by Trump's Memecoin, cryptocurrency-related revenue reached $250 million, nearly doubling year-over-year. As a result, Robinhood Gold subscription users also reached 3.5 million, a 90% increase year-over-year. The rapid growth of Robinhood Gold has provided the company with a stable source of revenue.

Meanwhile, RobinHood is actively expanding into the crypto space through acquisitions. In 2024, the company announced a $2 billion acquisition of the long-standing European crypto exchange Bitstamp. Additionally, Canada's largest cryptocurrency CEX, WonderFi, which recently went public on the Toronto Stock Exchange, also announced its integration with RobinHood Crypto. With licenses secured in the UK, Canada, Singapore, and other markets, RobinHood has taken the lead in compliant cryptocurrency trading.

More and more traditional brokerage firms are following a similar path, with firms like Futu Securities and Tiger Brokers exploring crypto trading and some already applying for or obtaining the VA license from the Hong Kong SFC. While the user base is currently small, traditional brokerages have a natural advantage in user trust, regulatory licenses, and low fee structures. This could pose a threat to native crypto platforms.

User Data Breach: Is Coinbase Still Safe?

In April 2025, security researchers discovered that some Coinbase user data was leaked on the dark web. Although the platform initially responded by calling it a "technical miscommunication," it still raised concerns among users regarding its security and privacy protection. Just two days before Standard & Poor's announced Coinbase's inclusion in the S&P 500 Index, on May 11, 2025, Coinbase received an email from an unknown threat actor claiming to have obtained customer account information and internal documents, demanding a $20 million ransom to not disclose the data. Subsequent investigations by Coinbase confirmed the data breach.

Cybercriminals obtained the data by bribing overseas customer service agents and support staff, primarily in non-US regions such as India. These agents abused their access to Coinbase's internal customer support system to steal customer data. As early as February this year, blockchain sleuth ZachXBT revealed on X platform that between December 2024 and January 2025, Coinbase users lost over $65 million to social engineering scams, with the actual amount potentially higher.

Among the victims was a notable figure, 67-year-old Ed Suman, a renowned artist in the art world for nearly two decades, known for his involvement in creating artworks such as Jeff Koons' "Balloon Dog" sculpture. He fell victim to a fake Coinbase customer support scam earlier this year, losing over $2 million in cryptocurrency. ZachXBT criticized Coinbase for failing to address such scams properly, pointing out that other major exchanges have not faced similar issues and recommending Coinbase to enhance its security measures.

Amid a series of social engineering incidents, although there has not yet been any technical impact on user assets, many retail and institutional investors are concerned. This is particularly worrisome for institutions holding a significant amount of assets on Coinbase. Just considering the U.S. BTC ETF institutions, as of mid-May 2025, there is a total holding of nearly 840,000 BTC, with 75% of it being custody by Coinbase. If we price BTC at $100,000, this amounts to a staggering $63 billion, equivalent to the nominal GDP of two Icelands in 2024.

Graph: ChatGPT, Source: Farside

In addition, Coinbase Custody serves over 300 institutional clients, including hedge funds, family offices, pension funds, and endowments. As of the Q1 2025 financial report, Coinbase manages total assets (including institutional and retail clients) amounting to $404 billion. The specific amount of institutional custody assets was not disclosed in the latest report, but it is expected to still be over 50% based on the Q4 2024 report.

Graph: ChatGPT

Once this security barrier is breached, not only could the rate of user attrition far exceed expectations, but more importantly, institutional trust could erode the foundation of their businesses. Consequently, following a hack event, Coinbase's stock price plummeted significantly.

CEXs Are All in Self-Rescue Mode

Facing a decline in spot trading fee revenue, Coinbase is also accelerating its transformation, attempting to find growth opportunities in derivatives and emerging assets. By the end of 2024, Coinbase acquired a stake in the options platform Deribit, and announced plans to officially launch perpetual contract products in 2025. This acquisition helped fill Coinbase's weaknesses in options trading and its relatively small global market share.

Deribit has a strong presence in non-U.S. markets (especially in Asia and Europe), and the acquisition gave Coinbase leverage in Bitcoin and Ethereum options trading, where it dominates with "about 80% of the global options trading volume, with daily trading volumes exceeding $2 billion."

At the same time, 80-90% of Deribit's customer base consists of institutional investors, who favor its professionalism and liquidity in the Bitcoin and Ethereum options market. Coinbase's compliance advantage, together with its already robust institutional ecosystem, makes it even more suitable. By leveraging institutions as an entry point, Coinbase can compete in the derivatives market and face off against giants like Binance and OKX.

Facing a similar dilemma is Kraken, which is attempting to replicate Binance Futures' model in non-US markets. Since the derivatives market relies more on professional users, fee rates are relatively higher and stickiness is stronger, making them a significant source of exchange profits. In the first half of 2025, Kraken completed the acquisition of TradeStation Crypto and a futures exchange, aiming to build a complete derivatives trading ecosystem to hedge against the risk of declining spot transaction fee income.

With the surge of Memecoin in 2024, Binance, OKX, and various CEX platforms began massively listing small-cap, high-volatility tokens to activate active trading users. Due to the wealth effect and trading activity of Memecoins, Coinbase was also forced to join the battle, successively listing popular Solana ecosystem tokens such as BOOK OF MEME and Dogwifhat. Although these tokens are controversial, they are frequently traded, and their fee rates are several times higher than mainstream currencies, serving as a "blood transfusion" for spot trading.

However, due to its status as a publicly traded company, this approach poses a greater risk for Coinbase. Even in the current crypto-friendly environment, the SEC is still investigating whether tokens like SOL, ADA, and SAND are considered securities.

In addition to the forced transformation strategies carried out by the aforementioned CEXs, they are also beginning to expand into RWA and the most mentioned area of stablecoin payments. For example, Coinbase and Paypal's collaboration to launch PYUSD, Coinbase's support for the Euro stablecoin EURC by Circle, or Binance's collaboration with WIFL for USD1. In a market that is becoming increasingly crowded in the trading sector, many CEXs have shifted their focus from just trading markets to application areas.

The golden age of transaction fees has quietly come to an end, and the second half of the cryptocurrency exchange's game has quietly begun.

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