The growing reliance of Wall Street on Coinbase for Bitcoin ETF custody raises questions about the concentration risk in this sector. After two years promoting a regulated version of Bitcoin through exchange-traded funds (ETFs) akin to traditional equities and bonds, the industry has successfully attracted tens of billions into these instruments.
Morgan Stanley’s launch of the Morgan Stanley Bitcoin Trust on April 8 marked a milestone as the first US bank-linked asset manager to offer a cryptocurrency ETP. The fund began with a $34 million trading volume and an attractive fee structure, choosing Coinbase for custody alongside BNY Mellon.
However, the real intrigue lies in the structural dynamics: a significant portion of the ETF market is routed through Coinbase. By April 8, the US bitcoin ETF complex managed by Bitbo tracked $91.71 billion in assets, with funds citing Coinbase as custodian accounting for about $77.10 billion—or 84.1% of the total. Even under stricter criteria that exclude multi-custodian setups, approximately $74.06 billion, or 80.8%, remains tied to Coinbase.
This concentration is notable, with top ETFs like BlackRock’s IBIT holding $55.70 billion and Grayscale’s products at $14.67 billion being custodied by Coinbase. Some funds list additional custodians—BlackRock mentions Anchorage as a backup, while ARK 21Shares cites both BitGo and Anchorage alongside Coinbase.
Coinbase’s regulatory status under New York trust rules and its existing operational infrastructure made it an attractive choice for the first wave of ETF issuers. Its early approval in January 2024 by the SEC further reinforced this position, as subsequent entrants opted for a familiar path to expedite their launches.
Coinbase’s recent conditional approval from the Office of the Comptroller of the Currency for a national trust charter promises to solidify its standing in the market. This would enable Coinbase to operate under a single federal regulator, enhancing its appeal among institutions demanding stringent regulatory assurance.
Yet, this reliance on a single custodian poses significant operational risks. A disruption at Coinbase could impact multiple ETF issuers simultaneously due to their shared dependency on its services. Such an event could affect fund processes and investor confidence alike—challenging the narrative of Bitcoin’s institutional credibility.
While some firms like Fidelity and VanEck have sought alternative custodians, the broader industry has yet to make substantial moves toward diversification. The question remains whether this concentration is a reflection of market choice or a constrained environment where alternatives were either too nascent or complex during the critical ETF launch period.