GraniteShares 2x Long COIN ETF: Fortune Favors The Brave

Summary I rated CONL a ‘sell’ in August, but the fund has since delivered a 91% total return in just over 3 months. Despite CONL’s past underperformance compared to Coinbase, the recent surge in digital assets has driven significant returns for both COIN and CONL. Bitcoin hitting $100k and capital flows into Ethereum have fueled a rally in the digital asset space, benefiting CONL. We’ll assess if now is the right time to leverage products like CONL for continued gains in the crypto market. I last covered the GraniteShares 2x Long COIN Daily ETF ( CONL ) for Seeking Alpha in late August. For the second time this year, I rated CONL a ‘sell’ and made the argument that the proof was in the pudding on the fund. At that time, CONL had produced a 26% loss since my April article covering the fund. Compared with the 3% loss in Coinbase Global, Inc. ( COIN ), CONL was clearly underperforming badly. But as has occasionally been the case in my experience writing for Seeking Alpha, my ‘sell’ call in August turned out to be very wrong. Data by YCharts The total return for CONL since my August 27th article is over 90%. Not too shabby. While I think it’s also necessary to point out that CONL has not actually delivered two times the return of holding Coinbase Global, Inc. ((COIN)) directly, I can’t argue with a 91% total return in slightly over 3 months. The proof is in the pudding again and ‘ fortune favors the brave ‘ as they say over at a competing crypto exchange. Since August, Bitcoin USD ( BTC-USD ) has hit $100k per coin, capital flows have returned to Ethereum USD ( ETH-USD ), it’s a party in the digital asset space , and even celebrity meme coins are making national headlines for all the wrong reasons . Crypto is so back . In this update, we’ll look at what has been driving returns in Coinbase stock and assess whether the time is right to make a leveraged bet on the crypto bull party continuing through a product like CONL. Quick Recap: CONL Details, Objective, & Key Risk The GraniteShares 2x Long COIN ETF was launched in 2022 and has one purpose; to produce double the returns of COIN shares each and every day. The fund is rebalanced on a daily basis, which ultimately leads to long-term decay in the fund. This is absolutely not a product that is intended for long-term investment. It is specifically designed for traders who want to place short-term directional bets on Coinbase stock. AUM: $1.6 billion. Expense ratio: 1.10%. Inception: August 2022. There are certainly some benefits to single-stock leveraged funds. For someone who has a strong bullish (or bearish) opinion on a stock and doesn’t want to use a margin account or personally play around with options, leveraged ETF shares can work quite well as a way to express a high-conviction idea. Essentially, CONL gives a trader who believes COIN will quickly appreciate ‘synthetic buy power’ while only risking whatever capital has been allocated to the trade. Data by YCharts However, it is very important to remember that the daily rebalancing strategy will cut into the fund’s performance over a long period of time. Consider the chart above which shows the total return of COIN and CONL since the inception of CONL. CONL’s 2x leveraged strategy loses against the unleveraged stock over the long term. So, if you like Coinbase as an investment, just buy COIN. CONL is fine for short-term trading, but will not beat the underlying over a longer period of time. With all that said, is it time to buy this fund even after COIN has already produced a 10x run over these last two years and nearly doubled in just 5 weeks? This may surprise some of my readers, but I’m actually not going to totally admonish the idea. What Drives COIN Performance Data by YCharts In prior work, I’ve mentioned valuation as a significant risk in longing Coinbase stock. Any downward repricing risk in COIN would be doubly bad for CONL. However, it seems clear that – at least for now – valuation is not what is driving the bus on COIN. Data by YCharts Looking at the price of COIN against quarterly revenue, the stock price generally leads sales both to the upside and to the downside. For instance, when reported revenue peaked in Q4-21, the price of COIN stock had already peaked in mid-November, well before earnings were released for full year 2021. Coinbase hit a bombed-out low of $31 per share in January 2022; presumably driven down by end-of-year tax loss harvesting in December. While total quarterly revenue had already bottomed out in Q3-22, transaction revenue didn’t find a sequential rebound until Q1-23: Revenue Millions Q1-22 Q2-22 Q3-22 Q4-22 Q1-23 Total Transaction Revenue $1,013.0 $655.2 $365.9 $322.1 $374.7 Total Subscription & Service Revenue $151.9 $147.4 $210.5 $282.8 $361.7 Net Revenue $1,164.9 $802.6 $576.4 $604.9 $736.4 Source: Coinbase It’s a bit more difficult for the market to predict subscription and service revenue from the Coinbase platform. However, it’s much easier to project the quarterly revenue from transactions. Thus, transaction volume can serve as a great indicator of top line revenue in Coinbase’s quarterly reports. When exchange volume is moving, COIN stock generates positive returns. And exchange volume is absolutely on fire at the moment: Coinbase Monthly Exchange Volume (The Block) The chart above shows the monthly exchange volume for Coinbase going back to May 2017. November 2024 produced $175.8 billion in volume. That’s the fourth-best month for Coinbase on record: Top 5 Months Exchange Volume May 2021 $259.1 November 2021 $208.2 October 2021 $186.1 November 2024 $175.8 September 2021 $157.5 Source: The Block The chart above the table also has a crudely drawn arrow above December 2024 as well. Through just 5 full days, Coinbase has already done $49.1 billion in exchange volume this month. If we assume this 5-day average volume pace continues through the end of the month, December would do over $304 billion in exchange volume for Coinbase. To be clear, I am not projecting that to happen and would expect a transaction volume slow down in late December. But in my opinion, transaction volume in December 2024 is likely going to challenge for Coinbase’s best month ever. I suspect exchange volume is probably one of the best metrics to pay attention to if you’re looking to time a long trade in CONL, or COIN for that matter. And if this rally in altcoins continues to drive exchange volume revenue for Coinbase, it’s tough for me to argue against CONL as a solid way to express that thesis from now through the end of the year. Closing Thoughts Data by YCharts It is imperative to remember that funds like CONL are intended for short-term tactical trading by seasoned speculators. 2x leveraged funds are not products intended for long-term investment. One leveraged long position at a time is perfectly suitable for my own portfolio, and I’ve already chosen the Volatility Shares’ 2x Ether ETF ( ETHU ) for that honor. But I’m going to begrudgingly upgrade CONL to a ‘hold’ from a ‘sell’ at this point in time. I have little doubt that CONL shares will ultimately trade well below the current share price of $67 at some point down the line. However, I see a very real possibility that the fund shares will go much higher from here before that happens. Good luck out there. Try not to ‘over-degen’ it.

Source: Seeking Alpha