Insider Buying

An Insider at Coinbase Just Spent $50 Million on Stock

If a corporate insider is spending millions of dollars on company stock, it’s often worth taking a closer look. Insiders are some of the most informed participants in the market and their trades can provide investors with valuable insights.

Recently, we spotted a large insider purchase at Coinbase Global Inc (COIN:US). Coinbase is a financial technology company that operates a crypto-asset exchange platform. Founded in 2012, it currently has around 100 million customers in over 100 countries. The company – which came to the market in 2021 via a direct listing – is listed on the Nasdaq Global Select Market and has a market capitalization of $16.5 billion at present.

Coinbase: Insider Buying

Our insider transaction data shows that on May 13, Coinbase Co-Founder and board member Fred Ehrsam bought 706,554 COIN shares at an average price of $70.77 per share. These shares were purchased for Mr. Ehrsam’s investment firm Paradigm – which is focused on crypto-assets – and are being held by Paradigm One LP.

The graph represents Coinbase' price history, with significant buy and sell events highlighted.

A Bullish Trade

We think this trade is interesting for a number of reasons.

Firstly, Mr. Ehrsam is a top-tier insider. In 2012, he co-founded Coinbase along with current CEO Brian Armstrong, and he has served on the company’s board since March 2013. Between November 2012 and January 2017, he served as President. So, he is likely to have an intimate understanding of the business.

Secondly, Mr. Ehrsam has considerable investment experience. Since June 2018, he has served as Co-Founder and a Managing Partner at Paradigm. And prior to co-founding Coinbase, he was a foreign exchange trader at The Goldman Sachs Group, Inc.

Third, Mr. Ehrsam has previously been a seller of Coinbase stock. Back in April 2021, we noted that the insider had offloaded around $112 million worth of stock shortly after the company’s direct listing. The fact that he is now buying suggests that he sees a lot more value in the stock now. This makes sense, as the stock has fallen nearly 75% in 2022.

Overall, this insider transaction looks quite bullish, in our view.

The Bulls Versus the Bears

However, one thing that concerns us in relation to Coinbase stock is the high level of short interest.

Looking at our short selling data on Coinbase, we can see that 22.01 million shares are currently on loan. That represents around 75% of the free float. This is a red flag, in our view. It indicates that hedge funds and other institutions are betting heavily against the stock.

Different short selling measures are depicted in this diagram, which gives shorting statistics.

And the high level of short interest is not the only red flag here. What’s also concerning is the fact that the number of shares on loan has surged recently. At the end of April, just 3.4 million shares were on loan. However, since then, the figure has risen by approximately 550%.

Meanwhile, utilization – a measure of demand from short sellers – has jumped from 15% to 100% over that period. This tells us that the short sellers are ramping up their downside bets aggressively. Research shows that sharp spikes in short interest are often followed by periods of underperformance.

Poor Q1 Results

As for why Coinbase has seen a spike in its short interest recently, it’s most likely related to the company’s recent Q1 results, which were very poor.

For the quarter, revenue was down 35% year on year to $1.17 billion. Analysts had been expecting $1.48 billion. Meanwhile, the company posted an adjusted loss of $1.98 per share for the quarter versus analysts’ forecast of earnings per share of $0.24.

And looking ahead, the company said that it expected users and trading volume to decline in the current quarter compared to Q1.

Overall, the results showed that the crypto company has lost its momentum.

Coinbase Stock: Caution is Warranted

In light of the high level of short interest here, we think caution is warranted towards Coinbase stock at present.

The large purchase from the Co-Founder certainly looks interesting. However, with short sellers targeting the stock aggressively right now, we think investors need to be careful.

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