3 Ways to Trade Coinbase Global After the Shares' Recent Drop

Cryptocurrency marketplace Coinbase Global has lost about a third of its value since its IPO in April 2021.
Recent falls in the price of digital assets, especially Bitcoin, have put a strain on COIN stocks.
Long-term investors might want to consider buying the dips in COIN stocks, especially if it moves below $250 and toward $240.

Early investors in the digital trading exchange Coinbase Global (NASDAQ:) have not had a good 2021. COIN went public on April 14, 2021 at an opening price of $381, reaching an intraday all-time high of $429.54.

But the stock ended the year at $252.37, down more than 33% from its debut IPO price and 41% from its all-time high (ATH).

By comparison, and , the two largest cryptocurrencies by market capitalization, returned nearly 50% and 390% in the past year. The 52-week range of COIN stock was $208.00 – $429.54, while the market cap (cap) is $54.3 billion.

On November 9, Coinbase Global released third quarter financial data that analysts estimate. About 90% of the revenue currently comes from the transaction costs of crypto trading on the platform.

In the third quarter, the market generated $1.23 billion in net revenue, as opposed to the second quarter of $2.03 billion. Wall Street was not impressed. Net profit of $406 million translated into diluted EPS of $1.62.

Management said:

"Coinbase is not a quarter-to-quarter investment, but rather a long-term investment in the growth of the crypto economy and our ability to serve users through our products and services."

Before the release of the quarterly results, COIN stock was about $360. Since then, investors have pressed the 'sell' button. On December 20, shares hit a multi-month low of $231.77, but ended the year higher at $252.37.

What to expect from COIN

Of the 22 analysts surveyed via Investing.com, Coinbase stock has an "outperform"- rating.

Chart: Investing.com

Analysts also have a median 12-month price target of $392.25 for the stock, representing an increase of more than 55% from current levels. The 12 month price range is currently between $242 and $600.

Source: InvestingPro

Similarly, according to some valuation models, such as DuPont analysis or multiples (such as P/E, P/B, P/S) valuation, the average fair value for COIN shares through InvestingPro is $304.42 , or a potential increase of about 20.5%.

In addition, we can look at the financial health of the company determined by ranking more than 100 factors relative to peers in the financial sector. In terms of earnings health, Coinbase Global ranks 5 out of 5 (top score). And the cash flow is at 4. Overall performance is rated "great".

The latest P/E, P/B and P/S ratios for COIN stocks are 23.5x, 10.1x and 9.2x. By comparison, those metrics for peers are 5.2x, 2.7x, and 2.8x.

Readers may also be interested to know that these numbers for the fintech giant PayPal (NASDAQ:), which allows users in certain countries to trade a number of cryptocurrencies, 44.9x, 10.0x are, and 9.0x. PYPL shares also lost 19.5% in 2021.

Over the next few weeks, we expect COIN stocks to trade in a range, possibly between $245 and $265. Once it establishes a base, another move is likely to be made later in 2022. with a horizon of two to three years who are not concerned about short term volatility may consider buying the stocks around these levels for long term portfolios. The fair value is $304.42 and analyst consensus expectations have set a target of $392.25.

As an alternative, investors may consider buying an exchange traded fund (ETF) that has COIN as a stake. Examples include:

Global X Blockchain (NASDAQ:)
Bitwise Crypto Industry Innovators ETF (NYSE:)
VanEck Digital Transformation ETF (NASDAQ:)
ARK Innovation ETF (NYSE:)

Finally, those experienced in options should consider options trading. However, most options strategies are not suitable for most retail investors. Therefore, the following discussion is provided for educational purposes and not as an actual strategy to be followed by the average retail investor.

Traders who are optimistic about COIN stocks over the long term, but believe that the short-term shakiness may persist, could construct a diagonal debit spread on COIN stocks using Long-Term Equity Anticipation Securities (LEAPS) options.

The strategy, also known as "Poor Man's Covered Call" or "Poor Person's Covered Call", includes options. We covered numerous examples before using Apple (NASDAQ:), NVIDIA (NASDAQ:) and Taiwan Semiconductor and most recently PayPal as examples.

Buying 100 Coinbase shares currently costs about $25,237 based on last Friday's closing price, a significant investment for many people.

But in this strategy, a trader would first buy a "longer term" call with a lower strike price. At the same time, the trader would sell a "shorter term" call with a higher strike price, creating a long diagonal spread.

In other words, the two call options for the underlying stock (in this case COIN) have different strikes and different expiration dates. The trader goes long with one option and short with the other to create a diagonal spread.

In this LEAPS covered call strategy, both the profit potential and the risk are limited. The trader determines the position for a net depreciation (or expense). The net depreciation represents the maximum loss.

Most traders adopting such a strategy would be slightly optimistic about the underlying security – here, Coinbase.

Instead of buying 100 shares of Coinbase, the trader would buy a LEAPS call option with that LEAPS call acting as a surrogate for owning the COIN shares.

At the time of writing, COIN was $252.37.

For the first leg of this strategy, the trader can buy a deep in-the-money (ITM) LEAPS call, such as the COIN January 19, 2024 180 strike call option. This option is currently offered for $114.30 (middle of the current bid and ask spread). In other words, it would cost the trader $11,430 instead of $25,237 to own this call option which expires in more than two years.

For the second part of this strategy, the trader is selling an out-of-the-money (OTM) short-term call, such as the COIN Feb. 18, 260 strike call option. The current premium of this option is $19.90. In other words, the options seller would receive $1,990 excluding trading commissions.

There are two expiration dates in the strategy, making it quite difficult to give an exact formula for a trade breakeven point.

Maximum potential is realized when the share price is equal to the strike price of the short call on the expiration date of the short call.

In other words, the trader wants the COIN stock price to stay as close as possible to the short option's strike price (i.e. $260 here) on expiration (February 18), without going above it.

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In our example, the maximum return would theoretically be about $2,395 at a price of $260 at maturity, excluding trading commissions and fees. (We arrived at this number using an online calculator. Readers wishing to see the detailed calculation of this earning potential should, however, refer to the earlier examples.)

Understandably, if the strike price of the long or short option had been different, the profit potential would also change.

Therefore, by not investing $25,237 in 100 COIN shares initially, the trader's potential returns are exploited.

Ideally, the trader hopes that the short call will expire out-of-the-money. Then the trader can sell one call after another until the long LEAPS call ends in about two years.

Finally, we must keep in mind that a diagonal debit spread requires regular position management.

Bottom Line

Investors who want to participate in the growth of the cryptocurrency ecosystem, but not buy digital assets, can consider COIN stocks as a proxy.

Management is working to diversify the revenue stream. For example, the Coinbase Ventures segment looks at potential startup investments. Wall Street also expects the platform to become a major player in the non-fungible tokens (NFT) space.

Finally, Coinbase Global could also become an acquisition candidate in the coming months. Therefore, despite the short-term volatility, we are optimistic about COIN stocks in the long term.