Coinbase (COIN) shares are showing a confident upward trend, reacting in sync to Bitcoin's (BTC) breakout above the psychological $80,000 mark. Against this backdrop, investment giant Goldman Sachs has revised its forecast, raising its price target for the crypto exchange's stock from $173 to $196.
This rally once again brings to the forefront the age-old question of the degree of correlation between the quotes of the public American crypto exchange and the price of the leading digital currency. However, as my observations show, this relationship is not as straightforward as it might seem at first glance.
Moderate correlation: it's not that simple
The key difference between Coinbase and, say, Strategy (MSTR, formerly MicroStrategy) is that the exchange does not hold bitcoins on its balance sheet. Its main source of income is trading fees. Therefore, the logic is simple: when BTC rises in price, trading activity in the market increases, and the platform's commission fees grow, pushing the stock up. Conversely, a drop in volumes usually leads to a decline in COIN quotes.
However, data from portfolio analytics firm PortfoliosLab shows that the long-term correlation between COIN and Bitcoin is 0.61. This is only a moderate level of connection, which refutes the common belief in their almost complete synchronization. The behavior of other crypto-associated stocks, for example, miners, can differ significantly from the dynamics of the first cryptocurrency.
Volatility as a key difference
The main difference between these assets lies in the scale of movements. COIN's volatility over the long term is more than double that of BTC: about 20% versus 8.5%. This increased amplitude works both ways. In mid-August, Coinbase shares jumped 9.5% in a day, then added another 8% when Bitcoin settled above $70,000.
This week, as the flagship coin moved toward $80,000, COIN traded on Tuesday in a range from $174.73 to $189.27. The daily swing exceeded 8%, and over the month the stock has gained about 16%.
The inverse relationship is also obvious. Since the start of the year, as Kaiko analysts noted, Coinbase shares have fallen by about 36%, while Bitcoin has only dropped by 27%. This further confirms that, despite all attempts to diversify the business, COIN remains a high-risk leveraged play on BTC.
My conclusion: the current growth is a classic scenario for Coinbase, where the stock amplifies the movement of the underlying asset. However, investors should remember that the same spring easily snaps back in the opposite direction, bringing losses significantly exceeding the drawdown of Bitcoin itself. This is a tool for those who are ready for extreme volatility.