E*TRADE Financial Corp. (ETFC) is reportedly preparing to enter the cryptocurrency world with plans to allow customers to trade popular coins such as Bitcoin and Ethereum on its platform. The move would make it one of the largest securities brokerages to allow cryptocurrency trading, according to anonymous sources familiar with the firm's plans interviewed by Bloomberg.

An E-Trading Pioneer’s Foray Into Cryptocurrency

  • E*TRADE boasts market cap of $12.4 billion, versus Coinbase at $8 billion and Robinhood at $5.6 billion
  • Both fintech startups have yet to turn a profit, while E*Trade grew earnings by 17% in Q1 2019
  • E*TRADE will start offering Bitcoin and Ethereum trading, and consider other coins in the future
  • All players face headwinds such as regulatory uncertainty, market manipulation and abuse in the new cryptocurrency industry

Source: Bloomberg

Bitcon Jumps Despite Headwinds

E*TRADEs entrance into the digital currency space comes at a time when the once red hot market is in upheaval, with crypto prices drastically below their 2017 highs. While Bitcoin has rallied about 40% over the recent two months, the world’s largest digital currency remains roughly 70% below its peak in December 2017, right before the crypto-bubble burst and bitcoin nearly hit $20,000.

Meanwhile, the space has become roiled by allegations that a major crypto operation, which runs the Bitfinex exchange and crypto company Tether Ltd., hid $850 million in losses in client and corporate funds from investors and dipped into Tether's cash reserves to fill the gap. The event reportedly protected big investors, whose cash was held by custodian banks in New York, but hurt small investors, whose funds were sent to firms around the world, according to two people with knowledge of the matter interviewed by Bloomberg.

The recent scandal illustrates just how volatile the new and uncharted cryptocurrency space that E*TRADE is entering can be. Over the past 18 months, murky regulation and reports of market manipulation have attributed to the major drop in crypto prices. Initial Coin Offerings (ICOs) have fallen from a whopping $5.8 billion in June of last year, to $208.6 million in May 2019, according to Bloomberg data.

How E*TRADE Stacks Up Against Rivals

The New York City-based e-trading pioneer will head off against startups like Coinbase Inc., which have made names for themselves as go-to places for such transactions. Coinbase reached a valuation of $8 billion in 2018 and projected sales of $1.3 billion. Fintech startup Robinhood, a zero-fee trading platform popular among millennials and most recently valued at $5.6 billion, has also added cryptocurrency trading as a way to woo young customers.

E*TRADE’s competitive advantages over its newer competitors include its longstanding reputation in the financial services world, where it has been a player since the early 1980s. The platform had more than 7 million users as of March 31, 2019 and average over 279,000 trades per day in Q1 2019, according to the The Wall Street Journal. While Robinhood and Coinbase have the early-mover advantage, they have yet to turn a profit, and many remain skeptical of the millennial-targeting businesses. E*Trade, on the other hand, saw a 17% jump in profits in the latest quarter over last year, while total sales increase 7% to $755 million. The online brokerage firm’s size and maturity, including its full suite of brokerage services, could draw in potential clients away from its smaller competitors.

Initially, E*TRADE will enable trading for just Bitcoin and Ether, the two largest digital assets by market capitalization, before considering other digital coins for the future, according to the person familiar with the matter.

Looking Ahead

E*TRADE’s foray into the volatile cryptocurrency space would mark a major milestone for the burgeoning industry as it attempts to push into the mainstream and gain credibility with institutional investors. A major brokerage launching cryptocurrency trading would provide a substantial amount of legitimacy for digital asset trading, reeling in bigger investors.