Coinbase (NASDAQ:COIN) burst into the public scene in April amid great fanfare. Bitcoin (CCC:BTC-USD) was going for $60k, and the temperature surrounding cryptocurrencies was red hot. Unfortunately, whether by coincidence or the gods’ devilish sense of humor, the IPO of COIN stock arrived on the day crypto peaked.
While it may not be the penultimate top, it was certainly a top that spelled the end of the latest bull market for digital currencies. Bitcoin has since tumbled 56%. While significant by stock standards, it’s a mere speedbump for the crypto king. Bitcoin has seen dozens of haircuts of equal or larger magnitude in its history.
What piqued my interest, and is the motivation behind today’s look at Coinbase, is the recent breakout. I’ve been watching the stock ever since the IPO, and this is the first time anything with a whiff of bullishness has transpired on the chart.
Before diving into the price action, let’s set the stage with a fresh look at just how correlated COIN stock is to Bitcoin.
Coinbase Hearts Bitcoin
Some theorized that Coinbase would become a proxy for Bitcoin since there’s no exchange-traded fund yet available. Now that we have three months of data under our belts, we can test the premise.
In the lower panel of the COIN stock chart below, you’ll find the 10-day correlation coefficient between Bitcoin futures and Coinbase shares.
For the uninitiated, a reading above zero means both securities are positively correlated. The closer to 1, the stronger the link.
I find two things interesting. First, the correlation has been positive virtually the entire time, illustrating the tendency of COIN and Bitcoin to move in the same direction. Second, the current reading of 0.72 is high enough to give further merit to the idea that the price of Coinbase is mirroring Bitcoin.
If the bullish trend reversal in COIN is going to have legs, we really need Bitcoin to find a bottom here. It has stopped plunging, but prices haven’t been able to get off the mat so far. It’s also worth noting that Coinbase has had a far stronger link to Bitcoin than the S&P 500.
COIN Stock Chart
The price breakout referenced above occurred on June 28. And I view it as the potential gamechanger for the trend. It completed and confirmed a symmetrical triangle bottoming formation and is giving buyers the best hope possible for a bona fide uptrend to form.
Follow-through is the key, though. Prices have retreated for four days and are now retesting the old breakout area. So bulls must step up and create a higher pivot low here.
Another wrinkle to the reversal attempt that just entered the picture is the 50-day moving average. Last week’s breakout was rejected right at the 50-day. I consider breaking above it the second objective once the higher pivot low has formed.
If you’re in the mood for bottom fishing here, watch for the price to push above a prior day’s high. Heading into Wednesday, that places the line in the sand at $243.
My Favorite Play
To increase the odds of success, I prefer using bull put spreads. That way, if COIN stock can simply float sideways, I still profit.
The Trade: Sell the August $190/$185 put spread for 65 cents.
Consider it a bet that the stock sits above $190 at expiration.
On the date of publication, Tyler Craig was LONG BITCOIN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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