Shares in Nasdaq-listed cryptocurrency exchange Coinbase (COIN) are fast approaching an overvaluation threshold, 10x Research, headed by Markus Thielen, said Friday. Thielen is recommending a pair trade that comprises a short position in COIN and a simultaneous long position in bitcoin BTC.
In a note sent to clients, Thielen explained that Coinbase's fundamentals, mainly trading volumes, haven't kept pace with the rally in share prices, which are fast nearing the overvaluation threshold, a classic setup for a "tactical reversal."
"While Coinbase hasn’t quite breached the +30% overvaluation threshold, it’s approaching fast, and despite being one of the few high-quality, listed crypto plays, its current premium suggests the risk of underperformance ahead," Thielen detailed. "Traders looking to capitalize on this dislocation might consider going long Bitcoin while shorting Coinbase, or using options by selling a COIN call and buying a BTC call to express the same view with defined risk."
Fundamental disconnect
According to 10x's linear regression model, 75% of Coinbase's stock price action is explained by bitcoin's price and trading volumes. That means just 25% of COIN's price action is led by other factors, such as the potential impact of Circle's IPO or U.S. crypto and macro developments.
In quantitative terms, it suggests that COIN's price tends to rise by $20 for every $10,000 move in BTC and by $24 for every $100 billion increase in trading volume.
The recent price action suggests the rally is overextended relative to bitcoin's price and trading volumes. Shares in Coinbase have surged 84% over the past two months, while bitcoin has risen by just 14%.
"Not only is this premium stretched relative to bitcoin’s current price, but it also appears disconnected from underlying crypto trading volumes, which are hovering around $108 billion," said Thielen. "This rare deviation suggests Coinbase’s valuation is extended and vulnerable to mean reversion."
The report said that other factors – Circle’s IPO on June 3, the June 17 “GENIUS” stablecoin bill and the buying frenzy from Korean investors – seem to have been priced in.
"As this momentum cools, evident in the recent reversals of Circle, KakaoPay, and Metaplanet, there is growing risk that Coinbase shares could also be nearing a local top," Thielen said.
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