Coinbase looks like a Meme stock. Careful, shorts.
is traded as a side bet on
Consider the frenzied exchange surrounding the Coinbase (ticker: COIN) earnings report for August 9. Ahead of the report, the stock nearly doubled from a low of around $50 in July, hitting $98 last week. Along the way, the stock plunged 21% on July 26, only to rally more than 80% in the days that followed. After a retreat, the stock closed 7.7% higher at $90.49 on Friday.
Volatility stems from several factors. On the one hand, hordes of investors are betting against it. About 18% of Coinbase shares are sold short. Such a high short interest rate makes a stock vulnerable to a “squeeze”, when traders who had sold borrowed stocks – with the aim of buying them back later at a lower price – must frantically cover their positions, causing a surge. actions.
This helps Coinbase trade independently of its fundamentals, acting like similar stocks such as AMC (AMC) and GameStop (GME), both heavily shorted and unrelated to valuation metrics such as price-earnings ratios. “COIN is still a very compressible stock,” says Ihor Dusaniwsky, managing director of data analytics firm S3 Partners.
Coinbase has other meme features. Most of the brokerage’s user base consists of retail investors betting on Bitcoin and other major cryptos. Retail traders bet on Coinbase shares on apps like Robinhood, where Bitcoin also trades. The ties between Coinbase and Bitcoin – which have no intrinsic value – create an echo chamber, making them both vulnerable to a mob mentality.
Right now, Coinbase is in a tussle between crypto bulls and bears. Its fans claim that the company is building the first platform to trade cryptos and digital assets such as non-fungible tokens or NFTs. A recently announced crypto partnership between Coinbase and
Black Rock (BLK)
broke the stock of the old.
Those betting against Coinbase expect its retail trading fees – the vast majority of its revenue – to erode. Coinbase is burning money as it grows and comes under greater regulatory scrutiny. Even the bulls say the BlackRock deal will have minimal impact on earnings. Amid a deep token price freeze, Coinbase posted a loss of $1.1 billion in the second quarter, missing consensus estimates.
Betting against the stock paid off, with cumulative profits of $800 million on short positions, an average return of 55% this year, Dusaniwsky says. Still, he adds, “being long or short, the stock mimics the volatility of the crypto market and is not for the faint of heart.”
If Bitcoin rebounds, so will Coinbase stock. But trying to value Coinbase on its fundamentals is like an art critic evaluating a Bored Ape NFT on its visual merits. The point is missing.
Write to Joe Light at [email protected]