-
Crypto cracks over the weekend offer a pairs trade idea
-
Long BTCUSD vs. COIN stock
-
COIN stock grossly overvalued
-
Insiders sell most of their allowed holdings
-
The pairs trade provides a hedged bet on correction in sector
Crypto cracks over the weekend offer a pairs trade idea
This weekend the crypto market experienced what many in the media ara calling Black Sunday as a variety of instruments including Bitcoin and Ethereum dropped nearly 20% before recovering somewhat.
At the start of the week’s trade the price action in crypto has stabilized but the rebounds have been less that impressive with Bitcoin only up about 1.5% on the day still trading 10% of it’s all time highs. This wild price action in crypto is typical as the asset has the highest volatility of any major investment instrument in the world and the action this weekend may have simply been a quick profit-taking move after a relentless rally, but if this is indeed the start of a deeper correction in the whole sector then there could be several ways to play the move without the need to guess the top.
Long BTCUSD vs. COIN stock
One way to mitigate some of the volatility risk is to construct a pairs trade that would go long BTCUSD and short COIN stock. At current prices, the pairs trade would require a 20:1 ratio of one Bitcoin unit to 20 units of COIN in order to establish an equal position on both sides.
Last week the biggest crypto exchange Coinbase went public at a whopping valuation of $84 Billion and actually rose in value to $100 Billion. There are many reasons to believe that COIN stock is grossly overvalued but the underlying thesis for the pairs trade is that the price of COIN stock will be highly correlated to the price action of Bitcoin and will collapse if Bitcoin tumbles as well.
COIN stock grossly overvalued
Coinbase is the largest crypto exchange in the world and as such enjoys rentier profits from both its size and its dominance of what is essentially a highly inefficient market. To get an idea of the massive transaction fees that Coinbase collects one needs to understand that an average $1000 transaction in Bitcoin on the Coinbase exchange would cost an investor about $40 in commissions not including the bid-ask fees. In comparison, a similar stock transaction would be essentially free to the investors excluding bid-ask fees and a similar transaction in forex would cost a dime excluding bid ask fees.
The massive profit margins that exist in crypto dealing are due to the fragmentation and the volatility of the market and while most retail investors are unaware or simply don’t care about the fees given the massive rally in the sector they will become far more price-sensitive as the market matures. The inexorable trend in financial services is towards lower and lower transaction costs and Coinbase which faces stiff competition from a slew of competitors is sure to feel margin pressure as the year proceeds.
Insiders sell most of their allowed holdings
Little wonder then the insiders dumped as much of their stock as possible on the IPO liquidating nearly $5 Billion of their holdings. The firm’s main venture capital fund Union Square Partners sold $1.2 Billion, Coinbase founder Brian Armstrong sold nearly one-half of his stock holdings and CFO Alesia Haas sold all her allowed stock on the IPO. Defenders of the stock have pointed out that the reports of wholesale dumping of positions were misleading given the fact that executive management have millions of stock options available to them, but that would only further the point of dilution for public shareholders that would enjoy none of the capital raise were those options to be exercised.
The pairs trade provides a hedged bet on correction in sector
Can Coinbase run higher in the upcoming months despite its gross overvaluation? Yes. But it's almost impossible to imagine a jump in COIN stock without a contemporaneous rally in Bitcoin which is why the pairs trade should serve a hedge in the trade. On the other hand, if Bitcoin corrects the decline in COIN is likely to be far steeper given its overvaluation and vulnerability to erosion of margins from increased competition in the space.
Past performance is not indicative of future results. Trading forex carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade any such leveraged products you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading on margin, and seek advice from an independent financial advisor if you have any doubts.
Recommended Content
Editors’ Picks
Ripple's move above this key level could trigger nearly 50% rally for XRP
Ripple has overcome a critical resistance level and flipped into a support floor on the weekly time frame. This development happened while XRP tightly consolidated for roughly 250 days. Investors can expect XRP to kickstart a massive rally.
Optimism price outlook with nearly $90 million worth of OP tokens flooding markets on Friday
Optimism volatility has shrunk in the ours leading to the network’s cliff unlock. It joins the likes of dYdX and Sui, which have similar events on their calendars. As token unlocks are often considered bearish catalysts, investors should brace for a reaction after the event.
Top 3 Price Prediction Bitcoin, Ethereum, Ripple: Retail watches from the sidelines with a bias for shorts
Bitcoin could clear $73,777 peak as BTC bulls resurface. Ethereum might fall 10% before next leg up as ETH RSI teases with sell signal. XRP could lose $0.6000 threshold as Ripple bulls fail to show up.
Jito price could hit $6 as JTO coils up inside this bullish pattern
Jito price action shows a potential cup and handle formation. Based on theoretical measurement rules, a successful breakout could yield a 56% rally to $6.0. A breakdown of the $3.86 support level would create a lower low for JTO and invalidate the bullish thesis.
Bitcoin: BTC may have recovered, but is it out of the woods?
Bitcoin’s (BTC) upward momentum has shown a significant decline for the past two weeks or so. This development led to a bearish signal on the weekly and an uncertain outlook on the monthly.