When FTX — the second-largest cryptocurrency exchange — declared bankruptcy, a company previously valued at $32 billion collapsed within days. The decline sparked a stampede for the exits of crypto holders to get their coins off exchanges like Coinbase. It's a lesson in which the staunchest Reddit crypto advocates might cry out "Not Your Keys, Not Your Coins."
On the FTX implosion, shares of Coinbase unsurprisingly plummeted. While the company is unlikely to face solvency risks in the short term, the long-term picture is bleak. Investors wanting to bet on further weakness in Coinbase shares can consider using a bear put spread.
Constructing Bear Put Spread On Coinbase
To construct a bear put spread, simultaneously buy a put and sell a put at a lower strike price with the same expiration. For Coinbase stock, investors can consider buying a 50 put while selling a 30 put, both with a March 17 expiration.
To place the trade, investors will pay a debit of $9.50. This coincides with a maximum loss of $950 should Coinbase trade above 50 on expiration. The stock traded around 44 Friday at midday.
The maximum gain is the width of the strikes minus the debit paid. In this case, it's a maximum gain of 20-9.5 x 100 = $1,050 if Coinbase trades below 30 on expiration.
On inception, this trade has a delta of -30, which provides similar exposure to shorting 30 shares of Coinbase. Because shares of Coinbase are heavily shorted — leaving the stock at risk of a short squeeze — this makes the bear put spread particularly attractive due to its defined risk.
Facing Greater Competition
On a podcast this week, famous short-seller Jim Chanos bluntly said that Coinbase's business model doesn't work.
It is hard to disagree with him. Investors scarred from the FTX debacle are now far more likely to keep their coins off exchanges, or avoid cryptocurrency entirely.
For those who keep their coins on exchanges, rumors of established firms such as Fidelity and Vanguard exploring the space could add to the competition. Offering a more reputable option, they would have a low bar to beat because Coinbase currently charges costly commissions averaging 1.3% per trade.
Revenue is also concerning. In the third quarter, Coinbase got 45% of its transactional revenue from altcoin trading. With the froth being removed from the crypto space amid higher interest rates, it is unlikely that the speculative trading fever in altcoins will come back any time soon, if at all.
Coinbase has a dismal IBD Composite Rating of 8 with shares trading near all-time lows, down over 80% year to date.
