Coinbase Is Not Headed To Zero: Buyout And Short Squeeze Potential (NASDAQ:COIN)

I wrote a bearish Coinbase Global, Inc. (NASDAQ:COIN) article in September 2021 here, explaining the company’s operations and cryptocurrencies in general were headed for a bust. Of course, most of the commenters called me an idiot, not understanding the glorious future of intangible, computer-generated money creations or the enterprises like Coinbase trying to ride the easy-money boom in these new speculative inventions.

Well, COIN’s share price has declined -87% from my article posting, dropping from $243 to $35 last week, over 15 months of steady liquidation. Short sellers now dominate trading, with a good 24% of share float borrowed and sold down the river. Operating profits (especially the GAAP variety) are actually negative losses during the ongoing cryptocurrency implosion, and nearly every article on Seeking Alpha is screaming at investors to sell the company.

I am not having a radical change of heart, but I think the possibility of a serious short squeeze on any good news in the world could cause a frenzy of equity and cryptocurrency buying (examples include Russia’s Putin dying, which might bring an end to the Ukraine war quickly; China surviving its COVID winter, and actually recovering and fully reopening by early summer; the Federal Reserve switching teams to an easing, lower-rate policy; or China-Taiwan negotiating a peaceful 50-year transition of political power). I know it’s hard to visualize such happening after the rotten 2022 bust performance in cryptocurrencies and the stock market, but things do change.

To me at $35, with a tangible book value around $21 per share, and a real-world setup as the top crypto exchange, the downside argument of Coinbase going out of business, and falling to $0 for price is rather improbable.

What if a large financial institution like Goldman Sachs (GS) or JPMorgan Chase (JPM) decides now is the time to purchase Coinbase on the cheap? Don’t say it cannot happen. Maybe a bid for $50 or $60 per share is coming in the first half of next year.

So, hold on to your britches. Although I still believe cryptocurrencies will decline in 2023 again, perhaps dramatically, Coinbase’s share quote may actually stabilize or rise during the year! I am upgrading my view of its stock from Sell to Hold/Neutral. That doesn’t mean a $25 or $20 price in the opening months of 2023 will not take place. All I am saying is the risk of a rebound is about the same as the risk of steep future declines. I would rather focus buying and selling attention on other opportunities.

Valuation Ideas

$5 billion in cash held on the balance sheet vs. $3.7 billion in total debt (at the end of September), and an equity market capitalization of $8 billion does not highlight anything close to a Strong Sell, even with operating losses again in 2023. From its bubble IPO valuation of 40x sales and 20x tangible book value in early 2021, today’s 2.1x trailing sales and 1.6x tangible book value ratios look like any other S&P 500 company. I could even argue valuations are cheaper now than many large financial institutions, meaning any unexpected jump in cryptocurrency pricing and/or acceptance by businesses as a form of transaction payment could produce a monster rebound in Coinbase shares.

Stretched Short Position

Am I suggesting you run out and buy Coinbase shares? No, the risk of a complete and total bust in cryptos could drag the share price lower over time. Company sales could be negatively affected by both lower trading volumes (investor interest) and crypto trade prices, while operating losses will mean book values are in decline. However, I would definitely rethink a short position and cover before any squeeze appears.

Below is a graph of the sharp rise in short selling volumes and stats. At 24% of the float and 17% of shares outstanding, the level of bearish trade positioning has doubled since the spring of 2022. Assuming a change in attitudes toward a bullish outlook appears, it will be next to impossible for shorts to cover their borrowed shares without a sizable price increase, as they fight for supply with new buyers.

Technical Trading Chart

A very large portion of my favorite momentum indicators are flashing sell, and this would be your expectation looking at the collapse in price since November 2021. However, “bust” charts like Coinbase often reverse sharply with little warning. And, we could be getting close to a January Effect bounce, where big stock losers of the previous year recover some in price as tax-loss selling subsides.

Several indicators are hinting such a rebound may be next in Coinbase shares. I have drawn a daily chart of volume and price changes below, beginning from the IPO date in April 2021. For starters, the 14-day Ease of Movement calculation is telegraphing heavy selling volumes are necessary day-in and day-out to keep pressure on the stock quote (boxed in green).

Second, a subtle change in the behavior of the Negative Volume Index (marked with a red arrow) is signally some buying on weakness is taking place on slower volume days. This has never happened before December 2022. It could be short covering, if I had to guess.

Third, an oversold condition on the 14-day Money Flow Index (marked with blue circle) now exists that suggests decent odds of intense selling pressure relaxing a bit in January.

Taken together, these three momentum indicators may be laying the groundwork for some sort of bottom in the days ahead (if not reached last week). Of course, any new drop in cryptocurrency prices would surely mean COIN selling will continue. I would watch general price levels in the space for clues.

Final Thoughts

I am modeling one last move lower in stocks will coincide with the start of a U.S. recession in Q1 or Q2 2023. Both a recession and falling equity quotes would then cause the Federal Reserve to begin easing aggressively again to prevent a worsening macroeconomic situation by late 2023. I am not a cryptocurrency expert, but believe a gradual slide in trade values for the sector will remain a problem until the Fed goes crazy with its fiat paper money printing presses. At that point, maybe demand for cryptos will reverse into a multi-year uptrend.

If crypto pricing survives another year without a total collapse, who knows, maybe a bull move could play out in late 2023 and 2024. Such would mean Coinbase’s immediate future is not the going-out-of-business kind, but something akin to a sector-related depression in activity and interest. At least, that’s the strongest bullish case I can dream up, trading various booms/busts since 1986.

Having said that, I am a bigger believer in gold and silver for 2023, as they will be the main beneficiaries of a new round of Fed easing. I am even on record suggesting gold prices will eventually surpass Bitcoin, possibly into 2024. Does this mean cryptos are dead money forever? No. Does this mean Coinbase will never fully recover to its IPO price and valuation? Absolutely.

In my opinion, COIN was part of a crazy mania move that will never be repeated by cryptocurrencies. However, I suspect computer-money will remain part of our lives, and Coinbase may be able to generate decent profits off its exchange/banking business a few years out, after government rules/regulations are put into place to protect the marketplace from fraud, and some confidence by stung users and investors re-emerges.

I am estimating the odds of $20 per share are about the same as $50 in 12 months. So, with a current $35 COIN price, I am looking at other stock market names for my money. If you already own a position, holding for a rebound makes some sense. I might consider buying a position at prices in the mid-$20s, if shares continue to decline in the first few months of 2023.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.