Coinbase Stock Is Looking Like a Meme Stock. Watch Out, Shorts.

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Coinbase Global

trades like a side bet on

Bitcoin.
Lately, though, shares of the crypto brokerage have added meme-stock volatility to the mix, taking cues from the likes of

GameStop

and

AMC Entertainment
.

Consider the frenetic trading surrounding Coinbase’s (ticker: COIN) earnings report on Aug. 9. Leading up to the report, the stock nearly doubled from lows around $50 in July, reaching $98 this past week. Along the way, the stock plunged 21% on July 26, only to roar back more than 80% in the ensuing days. After a retreat, the stock closed up 7.7%, at $90.49, on Friday.

The volatility arises from several factors. For one, hordes of investors are betting against it. About 18% of Coinbase stock is sold short. Such high short interest makes a stock vulnerable to a “squeeze,” when traders who had sold borrowed shares—aiming to buy them back later at a lower price—must frantically cover their positions, causing a stock to surge.

This helps Coinbase trade untethered from its fundamentals, acting like meme stocks such as AMC (AMC) and GameStop (GME), both heavily shorted and unmoored from valuation measures like price/earnings ratios. “COIN is still a very squeezable stock,” says Ihor Dusaniwsky, managing director at data analytics firm S3 Partners.

Coinbase has other meme characteristics. Most of the brokerage’s user base consists of retail investors betting on Bitcoin and other major cryptos. Retail traders bet on Coinbase stock on apps like Robinhood, where Bitcoin also trades. The connections between Coinbase and Bitcoin—which has no intrinsic value—create an echo chamber, making both vulnerable to a mob mentality.

Right now, Coinbase is in a tug of war between crypto bulls and bears. Its fans argue the company is building the premier platform for trading cryptos and digital assets like nonfungible tokens, or NFTs. A crypto partnership announced recently between Coinbase and

BlackRock (BLK)

caused the former’s stock to pop.

Those betting against Coinbase expect its retail trading fees—the vast majority of its revenue—to erode. Coinbase is burning cash as it expands and is facing more regulatory scrutiny. Even bulls say the BlackRock deal will have minimal impact on earnings. Amid a deep freeze in token prices, Coinbase posted a $1.1 billion loss in the second quarter, missing consensus estimates.

Betting against the stock has paid off, with aggregate profits of $800 million on short positions, an average 55% return this year, says Dusaniwsky. Still, he adds, “being long or short the stock mimics the volatility of the crypto market and is not for the faint of heart.”

If Bitcoin bounces back, so will Coinbase stock. But trying to value Coinbase on its fundamentals is like an art critic assessing a Bored Ape NFT on its visual merits. It misses the point.

Write to Joe Light at joe.light@barrons.com