Trading Analysis: Is Coinbase Stock Overvalued Compared to Bitcoin?

A compelling pair trade opportunity is emerging in the cryptocurrency space, according to a recent analysis by 10x Research. The firm, led by analyst Markus Thielen, recommends a strategy of shorting Coinbase (COIN) stock while simultaneously taking a long position in Bitcoin (BTC). This recommendation stems from a growing disconnect between Coinbase's soaring share price and its underlying fundamentals, particularly crypto trading volumes and the price of Bitcoin itself. Over the last two months, COIN shares have skyrocketed by 84%, a stark contrast to Bitcoin's more modest 14% increase. This divergence suggests that COIN's valuation may be overextended and ripe for a correction, a classic setup for what Thielen describes as a "tactical reversal."

The core of 10x Research's thesis lies in its quantitative analysis. A linear regression model developed by the firm indicates that approximately 75% of Coinbase's stock price movement can be explained by just two factors: the price of Bitcoin and overall crypto trading volumes. The model quantifies this relationship, suggesting that COIN's price typically increases by $20 for every $10,000 rise in BTC and by $24 for every $100 billion surge in trading volume. However, with current crypto trading volumes hovering around $108 billion and Bitcoin trading near $108,050, Coinbase's recent price action appears fundamentally disconnected. Thielen notes that while the stock has not yet hit the critical +30% overvaluation threshold, it is approaching rapidly. This rare deviation, he argues, makes Coinbase's valuation "extended and vulnerable to mean reversion." For traders, this could be actioned by shorting COIN and buying BTC, or through a defined-risk options strategy of selling a COIN call option while buying a BTC call option.

MicroStrategy's S&P 500 Catalyst and Preferred Stock Frenzy

While one crypto-adjacent stock shows signs of being overbought, another is capturing market attention for a different reason. MicroStrategy (MSTR), the well-known corporate Bitcoin accumulator, is potentially on the verge of being included in the prestigious S&P 500 index. This speculation appears to be driving significant buying activity, particularly in its perpetual preferred shares. The catalyst was Bitcoin's strong monthly close for June, ending at $107,750. According to analysis from Jeff Walton, this price level provided an approximate $11 billion positive earnings impact for MicroStrategy. This boost is believed to have pushed the company's earnings per share to around $39.50, satisfying the final criterion for S&P 500 eligibility: a net positive income figure over the most recent four quarters.

Front-Running the Index Inclusion

The market's reaction has been swift. On Monday, MSTR common stock rose 5% to break the $400 level for the first time since late May. However, the more dramatic moves were seen in its perpetual preferred stocks. The STRK shares surged an impressive 15%, STRF climbed 7.5%, and STRD added 3%. An expected inclusion in a major index like the S&P 500 often leads to such front-running, as institutional funds that track the index are compelled to buy the stock, creating guaranteed demand. Furthermore, these preferred shares offer highly attractive yields in the current interest rate environment. STRK, for instance, now has an effective yield of 6.6%, while STRF offers 8.8% and STRD provides a substantial 11.1%. The performance of STRK has been particularly noteworthy, delivering a 42% return since its launch on February 6, significantly outperforming both Bitcoin's 11% gain and the S&P 500's 2% rise in the same timeframe. This raises the question of whether the rally is purely about the S&P 500 or if these high yields are a primary driver of investor interest.