CONL Displays Substantial Exposure To Bitcoin

Summary CONL offers 2x daily leveraged exposure to Coinbase via swaps, amplifying both gains and losses for active traders. CONL may provide traders with exceptional exposure to bitcoin due to Coinbase’s brokerage and lending operations. The ETF is highly liquid with over $1 billion AUM and robust trading volume, creating a viable vehicle for active traders. Given strong historical performance and minimal value decay, I rate CONL a BUY for traders seeking aggressive, short-term COIN exposure. The GraniteShares 2x Long COIN Daily ETF ( CONL ) is a leveraged trading strategy designed to provide traders with 2x the daily performance of Coinbase Global ( COIN ). COIN share performance is relatively correlated to the performance of bitcoin, given the significant exposure to bitcoin transactions Coinbase inherently holds. TradingView In short, Coinbase offers a variety of financial services as a cryptocurrency brokerage platform, including bitcoin collateralized loans. These features may create a certain leveraged-like revenue stream for Coinbase, resulting in substantial relative performance to bitcoin over a long holding period. TradingView CONL does not directly invest in COIN shares, but rather, provides exposure entirely through the use of swap contracts. As a swap payer , CONL receives the daily performance of COIN while paying a fixed rate, providing leveraged exposure to the underlying stock. CONL holds a 200% position by weight in COIN swaps. Because of the daily settlement of the swap options, CONL performance will reflect that of the swaps and reset daily, resulting in the 2x target performance only being applicable to daily performance. Longer holding periods may result in a compounding effect for CONL investors, potentially resulting in excess gains or losses to the performance of COIN shares. Comparing the 1-month performance between CONL and COIN shares, CONL’s performance has exceeded the 2x daily target, exhibiting the compounding effect to the upside. TradingView Downside risk can also be amplified during extended holding periods tied to the downside performance of the underlying stock. Investors must remain cautious if seeking to hold CONL for an extended period, as consecutive days of downside risk can result in substantial losses to a position in CONL. TradingView Looking at performance since inception, CONL does not exhibit a substantial level of value decay often realized across the leveraged ETF space. Though past performance shouldn’t be indicative of the future, I believe the market depth and underlying performance of COIN shares have supported relative strength in CONL. TradingView Looking at the ETF components, CONL provides substantial depth for traders to actively manage a position. CONL has $1.02b in assets under management with an average of 7.64mm shares trading hands on a daily basis. This should provide traders with a liquid market for entering and exiting a position, minimizing cost-in/cost-out risk. CONL has a relatively high fee when compared to peer leveraged ETFs of 110bps. It is typical for leveraged strategies to command higher fees and given the market depth, I do not believe a few extra basis points on the fee should be a determining factor for trading this strategy. Seeking Alpha Risks Related to Leveraged Strategies There are inherent risks in investing in leveraged strategies. Because these strategies are meant to achieve their stated multiple over the underlying index on a daily basis, holding these strategies beyond a single day can lead to skewed performance, especially following consecutive days of upside or downside risk. This can lead to a compounding effect as well as value decay as a result of the daily reset in the derivatives positions. Leveraged strategies also add an extra layer of risk to amplified downside potential. For example, if the underlying index were to appreciate by 2% in a single day, a 3x strategy would appreciate by 6%, meaning that an investment of $100 would increase to $106. If the following day results in a -2% decline in the underlying index, or a -6% decline in the leveraged strategy, the investment will decline to $99.64. Holding leveraged strategies for longer than a single day can lead to a compounding effect on one’s position, potentially leading to significant skews from the intended multiplier. During multiple days of downside risk, an investor can experience significant value decay, potentially resulting in the inability to recover losses. Liquidity must be considered prior to investing in a leveraged fund strategy. Given that these funds are designed to be traded daily, trading volumes must be considered to ensure that cost-in/cost-out isn’t deteriorated by spreads. Traders must also consider additional taxes on short-term capital gains as well as trading fees prior to considering a leveraged trading strategy. You can review additional risks here . Before making a trading or investment decision in leveraged strategies, be sure to fully understand your risk profile and set a trading mandate to manage these risks. I believe preemptively setting parameters for selling out of a position is prudent in ensuring that an investor appropriately manages downside risk. Final Thoughts CONL provides traders with an appealing wrapper for amplifying returns on COIN shares on a daily basis. Taking into consideration historical performance and minimal deviation from the target multiple over COIN shares, I believe CONL may be an appealing ETF for those seeking higher risk exposure. I am recommending CONL with a BUY rating.

Source: Seeking Alpha