Short COIN/Long BTC Trade Will Be a Winner as Soaring Coinbase Nears Overvaluation: 10x Research
Coinbase (COIN) stock is nearing overvaluation, according to 10x Research, prompting a recommended pair trade strategy. Analyst Markus Thielen suggests shorting COIN and simultaneously going long on Bitcoin (BTC) due to a perceived disconnect between Coinbase’s fundamentals and its recent price surge.
Thielen’s analysis reveals a significant correlation between Coinbase’s stock price and Bitcoin’s price and trading volume. Their linear regression model indicates that 75% of COIN’s price movement is explained by BTC’s performance and trading volume, leaving only 25% attributed to other factors. This suggests a $20 increase in COIN for every $10,000 rise in BTC and a $24 increase for every $100 billion increase in trading volume.
However, the recent market action shows a significant divergence. Coinbase’s stock has rallied 84% in the past two months, while Bitcoin’s increase is only 14%. This disparity, coupled with relatively stagnant trading volumes around $108 billion, indicates an overextended valuation for COIN, making it vulnerable to a price correction or “mean reversion.”
The report argues that the positive influences from Circle’s IPO, the “GENIUS” stablecoin bill, and the Korean investor frenzy are likely already priced into COIN’s valuation. The recent price reversals observed in Circle, KakaoPay, and Metaplanet further support this assertion, suggesting a potential local top for Coinbase shares. This cooling momentum increases the risk of underperformance for COIN.
Thielen’s proposed pair trade aims to capitalize on this potential market correction. By shorting COIN and going long on BTC, or utilizing options strategies like selling COIN calls and buying BTC calls, traders can potentially profit from the anticipated mean reversion. The strategy acknowledges the inherent risks associated with short-selling and emphasizes the importance of defined risk management. The core argument rests on the fundamental disconnect between Coinbase’s performance metrics and its current inflated market valuation.
