Coinbase Could Be a Material ‘Beneficiary’ of Ethereum’s Merge Transition, JPMorgan Analyst Says

JPMorgan analyst Kenneth Worthington says digital currency exchanges like Coinbase will end up being a meaningful “beneficiary” of Ethereum’s long-awaited transition from proof-of-work (PoW) to proof-of-stake (PoW). Based on $2K ethereum prices and a 5% ethereum yield, Worthington explained that The Merge could boost Coinbase’s annual income by $80 to $100 million from staking services.

In 29 days, the Ethereum network is expected to implement The Merge on or around September 15, 2022. It will be a very big deal for the chain that has operated as a PoW blockchain for seven years. That’s because the network will fully transition into a PoS distributed ledger system. Four days ago, Bitcoin.com News reported on JPMorgan (NYSE: JPM), strategists saying Ethereum Classic (ETC) could benefit from The Merge, as ether miners will be forced to mine another Ethash-based cryptocurrency.

This week, JPMorgan analyst Kenneth Worthington explained in a note to investors that the crypto exchange Coinbase Global (Nasdaq: COIN) could be a “meaningful beneficiary” of The Merge. The investment bank’s analyst also noted that staking revenue could bolster exchanges like FTX, Binance, and Gemini as well.

“We see the staking revenue opportunity bigger (proportionally) than the income opportunity given we expect institutional staking clients will contribute meaningfully to [ether] staking revenue, but much less so for institutional customers,” Worthington said. “The vast majority of the economics remains with retail,” the JPMorgan analyst added. In order to be a validator 32 ether is required to stake on your own, but a number of exchanges offer ethereum staking services with negligible threshold requirements to earn from staked assets.

At the time of writing, Coinbase is one of the largest ETH holders in terms of validators, according to the ETH Staking dashboard hosted on Dune Analytics. Out of the 13,326,533 ether deposited into the Ethereum 2.0 contract, Coinbase commands 14.7% or 1,966,080 ETH. Crypto firms like Kraken, Binance, Bitcoin Suisse, and Bitstamp also have significant staking positions, but Coinbase and the liquid staking service Lido have the largest. JPMorgan’s Worthington expects Coinbase to benefit significantly from the staking rewards.

“We estimate Coinbase incremental annual staking revenue from the Ethereum Merge of $650 million based on $2,000 [ether] and 5% [ethereum] yield. We see [an] incremental annual income of $80-$100 million of staking income,” Worthington’s note detailed.

Year-to-date, COIN is down 65.04% with a $357 per share high this year, but the current $85.44 is up from the $47 low share prices saw on June 30. Furthermore, on August 16, Coinbase summarized in a blog post what customers “need to know” about the upcoming PoW to PoS transition. During The Merge, Coinbase will “briefly” pause ethereum transactions and it will not process withdrawals and deposits during the change. The Coinbase pause rule further applies to ERC20-based tokens built on top of the Ethereum network.

On August 14, Coinbase and a number of exchanges were asked: “If regulators ask you to censor at the ethereum protocol level with your validators will you: (A) Comply and censor at [the] protocol level (B) Shut down the staking service and preserve network integrity.” Coinbase co-founder and CEO Brian Armstrong responded to the question on Twitter three days later, on August 17.

“It’s a hypothetical we hopefully won’t actually face,” Armstrong wrote on Thursday. “But if we did we’d go with (B), I think. Got to focus on the bigger picture. There may be some better option (C) or a legal challenge as well that could help reach a better outcome.”

What do you think about the commentary from JPMorgan’s analyst Kenneth Worthington? Let us know what you think about this subject in the comments section below.