It’s not so much because JC and Louis needed me to step in. It’s because I wanted to share something with you.
I want to discuss a potential mean-reversion trade opportunity in Coinbase $COIN.
I think it’s one of the best ways to express a bullish tactical thesis on cryptocurrency markets right now.
I know that’s really not saying a lot these days. The asset class is a mess. “Disaster” might be a better descriptor, particularly as it relates to the FTX meltdown.
In the aftermath of its collapse, how can we trust any of the crypto exchanges right now? Why the hell would we want to buy Coinbase? Isn’t it just the next domino to fall?
Hear me out…
While the FTX token $FTT has cratered toward zero in the past several weeks, Bitcoin $BTC and Ethereum $ETH have been relatively unscathed.
Both are trading about 20% off their highs from earlier in the month before news of the scandal broke.
As for other major exchanges, such as Binance $BNB and Coinbase, the charts are still stuck in the same ranges they’ve been in since the second quarter.
The knock-on effect from their main competition blowing up wasn’t enough to force a downside resolution from these consolidation patterns.
My point is, these assets have been resilient. The market is telling us they’re probably okay.
If you want to see what the price action looks like for investments that might not be okay, take a look at the chart of Solana $SOL.
Or maybe even Credit Suisse $CS. I know, I know. It’s only a rumor… Well, for now.
We’ve already discussed the state of crypto markets from a sentiment perspective. If you’re unsure what I’m referring to, just check out these magazine covers.
But sentiment is also as bad as it gets at a more micro level for Coinbase specifically.
Where do I even start? Here are some things I’ve heard about this stock recently:
It’s counting customer deposits in operating cash flow.
It’s cash-flow negative, so “the company is worthless.”
Insiders are dumping shares.
Its bonds are trading at distressed levels.
The revenue model is unsustainable.
Some of these things I know for a fact are untrue.
For example, insiders have been net buyers all year. We track this every day in The Hot List.
Others, I know for sure, are true.
Its unsecured bonds are trading for just above 50 cents on the dollar. But this isn’t really new news. They’ve been junk for a long time.
And others I have no idea about.
But I’m not so concerned about the revenue model or where they categorize certain items on their cash flow statement.
Here are some things I do know and care a lot about when it comes to Coinbase:
The company is not only an SEC registrant, it’s also registered with FINRA. This means it files the same reports with regulators as traditional Wall Street banks.
It reports its net capital position as well as a detailed analysis of its customer accounts monthly to ensure it has ample liquidity and is segregating customer assets according to securities laws.
Deloitte, the largest and most respected accounting firm in the world, audits these statements.
You couldn’t have said any of these things about FTX.
But this has very little to do with my bullish thesis. If it helps you sleep better at night owning the stock, that’s great.
Here’s what has me interested:
There’s a classic mean-reversion pattern setting up with clear levels to trade against and a juicy risk/reward.
There’s also a massive short interest of about 31 million shares, about 20% of the public float.
This means one of every five shares available for the investing public is held short.
More importantly, it represents fuel for the fire in the case price hooks higher and takes out the lower bounds of its current range.
We think the stock could be in for a wild short squeeze if this turns out to be a failed breakdown. And it wouldn’t be the first time.
Here’s the chart:
In late June, the stock was trading in the high 40s, just like it is today. There was also a bullish momentum divergence in place, similar to the one we have today.
From the intraday lows on June 30 to the intraday highs on August 4, COIN rallied by more than 150%.
Not bad for a bear market rally.
We think a similar move could be materializing now. After all, from failed moves come fast moves…
If we’re above 46, we’re buying COIN with a target of 83.
Our stop is at the lows near 41. If we’re below there, we’re out. We don’t care if the stock is worthless. Let it go to zero.
We will happily take a 10% loss for the chance at an 80% gain.
We also love knowing there is a catalyst in the form of short covering at our backs if and when this trade starts moving in our favor.
