Coinbase (COIN 0.34%), one of the world's largest cryptocurrency exchanges, has been a volatile investment ever since its direct listing four years ago. It closed at $328.28 per share on its first day and eventually rose its record-high closing price of $357.39 seven months later.
But by Dec. 28, 2022, Coinbase's stock sunk to a record low of $32.53. It was crushed as rising rates and other macro headwinds chilled the crypto market. After soaring 766% in 2021, its trading volumes plunged 50% in 2022 and dropped 44% in 2023. Its total revenue, which had risen 545% in 2021, fell 57% in 2022 and 7% in 2023.
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Yet that slowdown eventually ended as interest rates declined, more crypto ETFs were approved, and the regulatory headwinds for the crypto market dissipated. In 2024, Coinbase's trading volume surged 148%, its total revenue rose 111%, and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) more than tripled. The bulls rushed back, and its stock now trades just slightly below its all-time high at around $356.
That was a remarkable comeback, but Coinbase's stock isn't a screaming bargain at 11 times this year's sales. It could certainly deserve that higher valuation if it locks in more customers and the crypto market keeps expanding, but it could also lose its luster if the market cools off or it faces fresh competition from other crypto trading platforms.
If that happens, then it might be smarter to short Coinbase's stock than to hold it. But if shorting Coinbase sounds too risky, you can take a closer look at Tidal's YieldMax Short COIN Option Income Strategy ETF (FIAT -0.89%) -- which simulates a short position in Coinbase without selling or buying any of its shares.
How does FIAT short Coinbase without owning any shares?
To short a stock, you borrow someone else's shares and sell them. If the stock price declines, you buy those shares back, return them to the owner, and keep the difference as your profit. If the stock price rises, you still need to buy back the shares and return them at a loss. For each day the short seller borrows those shares, they pay borrowing fees. Short selling can only be done on margin since you're assuming debt by temporarily selling someone else's shares, and margin accounts accrue and compound interest daily. Therefore, a short seller must cover those positions quickly to outpace those borrowing and interest fees.
Fiat simultaneously buys puts and calls on Coinbase to create a "synthetic short position," which moves in the reverse direction as its stock without ever borrowing the shares. That seems like a much more complicated way to bet against Coinbase than simply shorting its stock, but most ETFs aren't structured in a way to consistently borrow shares as a hedge fund would. Buying puts and calls is also a more cost-efficient approach because they don't incur any borrowing fees or direct interest.
FIAT is also an income-oriented ETF
In addition to its synthetic short position in Coinbase, FIAT writes cash-secured puts on Coinbase's stock to generate extra income. In a cash-secured put, you collect a premium by selling a put option (a promise to buy the stock at a lower price at a future date) on a stock you don't own -- but you need to lock up enough cash to fund that trade. If the stock drops to that level by then, you're obligated to buy the stock. If not, you keep that premium and your cash.
So instead of buying Coinbase's shares, FIAT sets aside enough cash to constantly sell cash-secured puts on the stock to generate extra income. It sells those puts out of the money (far below its actual trading price), so it doesn't accidentally buy those shares. At the same time, FIAT parks its excess cash in U.S. Treasuries to earn additional income. It adds that income and put premiums to its total distributions.
But does it make sense to buy FIAT?
FIAT pays a jaw-dropping distribution rate of 55.6%. But that rate is a lot less impressive when we consider that nearly 93% of that distribution is a return of capital (ROC) -- which means it's simply paying its investors their own cash. It also has a relatively high gross expense ratio of 0.99%. Therefore, you're being charged a fee to only get a mid-single-digit yield on your original investment, which is awkwardly tied to a synthetic short position against Coinbase. Yet FIAT will also likely underperform a real short position against Coinbase because its own cash-secured puts will force it to buy the stock if it drops too quickly.
That's why it isn't surprising that FIAT's stock price fell nearly 84% and completely erased the gains from its distributions over the past 12 months. If you're bearish on Coinbase, it makes sense to directly short the stock than to buy this odd income-oriented ETF. If you want income, ignore its high distribution and buy some more stable dividend ETFs.
