End of Crypto Winter?

After being constantly bombarded by the negativity surrounding the recent bear market, I’m starting to think that smart money is anticipating the turn of events. I spotted that Coinbase stock has refused to fall in line with Bitcoin and broader crypto since mid-May. Coinbase is just one of many crypto exchanges, but it is by far the largest and most liquid pure-play crypto company traded on the US stock market. I believe stock market investors consider Coinbase in the context of crypto exposure and not just company fundamentals.

In traditional finance, significant divergence between a commodity price and stocks of companies doing business with the same commodity is relatively rare and sometimes may be a useful leading indicator. Just look at how investors in energy producers’ stocks ignored the oil price fall in April 2020.

Brent oil price and energy producers’ stocks

Source: Bloomberg

In hindsight, April 2020 was an epic buying opportunity for oil. Of course, in real-time, it might not look like a perfect signal, but a significant divergence like this should raise eyebrows and make you think about possible trend reversal.

Coinbase stock reached a bottom on May 11 and has increased by 10% since May 11 while Bitcoin has been down 24% since May 11 and most altcoins have fared even worse.

Coinbase stock and Bitcoin

Source: Bloomberg

In an alternative chart view, Coinbase stock price in Bitcoin terms had dropped by about 60% this year till May 11 but has been recovering since then.

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Coinbase stock price in Bitcoins

Source: Bloomberg

Coinbase stock performance seems to be skewed by a bad earnings report. The stock tumbled by 26% on May 11 after a quarterly earnings miss and a forecast of a trading volume decline. Does it change my point? Does Coinbase stock performance in the last few months reflect just corporate news?

It's not easy to distinguish an effect of corporate news, but the current BTC-denominated Coinbase price is higher than on May 10, just before the earnings report. Moreover, Coinbase stock performance this year was largely in line with other high-risk tech companies. In the last few months, Coinbase stock underperformed high-risk tech peers, meaning that Coinbase may have been supported by a demand for high-risk tech despite bad corporate news and crypto prices decline.

Coinbase stock and high-risk tech

Source: Bloomberg

High-risk technology companies are usually considered a long-duration play. With most of their cash flows, if any, in the distant future, their share prices are particularly sensitive to interest rates. These stocks have been supported probably because long-term rates have stopped rising. 30-year US Treasuries yield has failed to sustain above the 3.2% level reached in May. It increasingly looks like a regime change from a relentless rally earlier this year to trading in the range of 3.0-3.4%.

30-year US Treasuries yield

Source: TradingView

In essence, Coinbase stock price has been supported by a macro view of stabilizing long-term rates. At the same time, cryptocurrencies were pressured by the forced liquidations of large leveraged funds like Three Arrows Capital. From that point of view, Coinbase stock’s recent outperformance over crypto prices does look like a bullish sign for crypto. US Treasuries market is very liquid and extremely efficient, and I would bet it’s smarter than most other markets.

The caveat is that this extremely efficient market is now particularly uncertain about its future direction. The implied volatility of US Treasuries options is at the highest level since 2009.

ICE BofA MOVE Index (implied volatility of US Treasuries)

Source: TradingView

Even though the very high implied volatility of US Treasuries suggests the market is not sure about holding its current range and somewhat mutes a signal by the US Treasuries market, to me the Coinbase indicator still favors crypto bullish sentiment. Hence, if we’re to trust smart money, crypto long positions could turn out a reasonable bet for the foreseeable future.

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