Coinbase Earnings Strategy: Selling Volatility Example

Coinbase Earnings Analysis - February 12th, 2025

Key Concepts:

• Coinbase (COIN): A leading, publicly traded cryptocurrency exchange.
• Subscription & Services Revenue: Revenue generated from Coinbase One, staking, USDC, and the Coinbase credit card.
• Implied Volatility (IV): The market's expectation of future price fluctuations, used in options pricing.
• Options Trading (Puts & Calls): Strategies involving buying and selling contracts that give the right, but not the obligation, to buy or sell an asset at a specific price.
• Poly Market: A prediction market platform where users bet on the outcome of future events.
• Realized Volatility: The actual historical volatility of an asset's price.
• Contrarian Stance: An investment strategy involving going against prevailing market sentiment.
• Tokenization: The process of representing real-world assets as digital tokens on a blockchain.

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I. Introduction & Historical Performance

The discussion centers around the upcoming Coinbase (COIN) Q4 2025 earnings announcement on February 12th, 4:30 p.m. Central Time. Coinbase’s stock performance is noted to be heavily correlated with Bitcoin’s price action, given its role as a major cryptocurrency exchange. The speakers highlight a successful past trade involving Coinbase, buying at $50 after the FTX/Luna crash in 2022 and riding the stock back up. Historically, Coinbase has reacted negatively to earnings announcements, with an average 1-day downside move of 4.5% and being lower one week later in six out of the last eight quarters. However, current market conditions and potential catalysts suggest a possible contrarian opportunity.

II. Revenue Diversification & Key Metrics

Coinbase is actively diversifying its revenue streams beyond trading fees, focusing on subscription and services. This segment, including Coinbase One (subscription), staking revenue, and USDC stablecoin-related revenues, has grown to approximately 40% of total revenue, up from around 30% in the previous year. The launch of the Coinbase credit card, offering 4% Bitcoin rewards, is cited as a driver of subscription growth. Analysts are projecting $1.85 billion in revenue and $1.15 in earnings per share for Q4. The key metric to watch is the growth of the subscription and services revenue, with the “top end” of analyst expectations being a positive signal.

III. Options Market Analysis & Trading Strategies

The speakers delve into the options market to assess potential trading opportunities. They observe that options are pricing in a significant move – around 20% – for Coinbase stock leading up to the earnings announcement, while historical moves have averaged 8%. This discrepancy presents an opportunity to sell volatility, specifically through put options.

A specific trade idea is proposed: selling a March 20th expiration put option at a strike price of $100, aiming for a premium of $1.30-$1.40. This strategy is attractive because the trader would be comfortable owning the stock at $100, given its current depressed price and the potential for a bounce. Coinbase’s 30-day annualized volatility is around 80%, and the proposed trade targets an implied volatility higher than that level. The trade requires approximately $2,000 in buying power.

IV. Market Context & Correlation with Bitcoin

The discussion emphasizes the strong correlation between Coinbase stock and Bitcoin’s price. Over the past 30 days, the correlation has been almost perfect. Given the recent downturn in the crypto market, expectations for “blowout” earnings are low. Year-over-year trading revenues are expected to be lower. The recent earnings announcement from Robinhood, which has some business similarities to Coinbase, provided a preview of potential outcomes, with elevated volatility in Coinbase options ahead of the announcement. The stock had already dropped $12 the day before the earnings announcement, suggesting a potential for a bounce if the news isn’t as bad as feared.

V. Prediction Markets & Investor Sentiment

The speakers turn to prediction markets, specifically Poly Market, to gauge investor sentiment. On Poly Market, as of February 11th, only 22-23% of participants believe Coinbase will beat the consensus earnings estimate of 61 cents per share. This low expectation further supports the potential for a positive surprise and a subsequent rally in the stock price. The payout on Poly Market is $1 for every 23 cents bet if Coinbase exceeds 61 cents EPS.

VI. Coinbase’s Future Initiatives & Regulatory Landscape

Coinbase’s diversification efforts extend beyond subscription services. The recent acquisition of Echo, a token sale platform, is highlighted as a move towards tokenizing private companies. The company is also exploring institutional custodianship and navigating the evolving regulatory landscape for cryptocurrencies in the US. Management guidance on these initiatives – verification business, subscription revenue, token platform, Layer 2 solutions, and regulatory clarity – will be crucial for investors.

Notable Quotes:

• Ryan: “I think it’s simple and I think it kind of provides you with a lot of upside, right? Maybe you want if it gets down to 100, I’m more than happy to own the stock there.”
• Dan: “There’s some interesting stuff here. They acquired… Echo, which again this is like the Robin Hood move, their tokenized platform, right?”

Data & Statistics:

• Coinbase Stock Performance: Dropped 60% from recent highs.
• Historical Earnings Reaction: Average 1-day downside move of 4.5% after earnings. Lower one week later in 6 of 8 quarters.
• Subscription & Services Revenue: Grew to approximately 40% of total revenue.
• Analyst Estimates: $1.85 billion revenue, $1.15 EPS for Q4.
• Poly Market Prediction: 22-23% probability of Coinbase beating EPS of 61 cents.
• Coinbase 30-day Volatility: Approximately 80% annualized.

Synthesis/Conclusion:

The analysis suggests a potentially attractive trading opportunity in Coinbase ahead of its Q4 earnings announcement. While historical performance indicates a negative reaction to earnings, current market conditions, the company’s diversification efforts, and low investor expectations create the possibility of a positive surprise. Selling put options, particularly with a strike price of $100, is presented as a strategy to capitalize on potentially elevated volatility and benefit from a possible bounce in the stock price. Monitoring prediction markets like Poly Market can provide additional insights into investor sentiment and the likelihood of a positive earnings outcome. Ultimately, the success of this strategy hinges on Coinbase’s ability to demonstrate continued growth in its subscription and services revenue and navigate the evolving regulatory landscape.