Wall Street essentially owns much of the world. And until about six weeks ago, it expected world leaders and politicians to be deferential and willing to do almost anything to placate the almighty investor class.
President Donald Trump has investors wondering if something has changed.
Trump’s use of tariffs to influence other countries is increasingly perceived as antithetical to Wall Street’s best interests. He just hit Canada and Mexico with 25% tariffs and increased tariffs on China.
Wall Street is culturally and intellectually wired to avoid conflict. Executives want to do deals, get paid, and do it again. Trump is different. He wants his way more than he wants a deal.
Rather than joining the global fret-a-thon about Trump’s tough ways, investors should change their approach. Trump cannot be anticipated. He can only be reacted to. It helps if you know how to use options to benefit from stock price volatility.
Consider cryptocurrency. It surged after Trump’s re-election because Trump likes it, though prices have since withered in the absence of substantive policies.
This past Sunday, Trump unexpectedly posted on Truth Social that Bitcoin, Ether, XRP, Solano, and Cardano would join the nation’s crypto strategic reserve. Cryptos first rallied and then declined.
That brings us to Coinbase Global and the U.S. exchanges. We think that Coinbase and a traditional exchange should combine to create a company that has the expertise and operational prestige to dominate crypto’s fragmented markets.
Coinbase’s stock is volatile; it trades as if Trump is the arbiter of its fate. It surged some 100% on Trump’s re-election, and has fallen some 40% since then in the absence of clarity from Trump. During the past 52 weeks, Coinbase has ranged from $146.12 to $349.75.
Coinbase trades at around 22 times 12-month trailing earnings and has a surprisingly large market value of about $52 billion. But the exchanges have the wherewithal to make the pieces fit.
Intercontinental Exchange, which owns the New York Stock Exchange, has a $100 billion market capitalization and trades at 36 times trailing earnings. CEO Jeffrey Sprecher’s wife, Kelly Loeffler, is in Trump’s cabinet. CME Group, which dominates global futures trading, has a $93 billion market cap. It trades at 26 times trailing earnings. Nasdaq has technological expertise and a strong global network. Its market cap is $47 billion, and it trades at 41 times trailing earnings.
An affiliation with a major U.S. exchange would open important doors of power and opportunity to Coinbase that likely remain closed or hidden to them.
With the stock at $212.55, aggressive investors could sell Coinbase’s May $200 put option for about $22 and buy the May $220 call option for about $24.50.
The risk-reversal strategy—selling a put and buying a call with a higher strike price and similar expiration—positions investors to buy the stock on a decline and to participate in rallies. If Coinbase is at, say, $275 at expiration, the call is worth $55. Should the stock decline, investors should buy Coinbase at $200 to build a position.
Frankly, Coinbase deserves to be in play. The executives have built a strong business and they could likely use the power and prestige of a top exchange to create interesting possibilities.
The big exchanges might be too myopic to recognize the opportunity, but the businesses generate loads of cash. CME makes so much money that it distributes a huge dividend at the end of each year.
Just imagine what could be if big investors urged a big exchange to combine with Coinbase. The new company would be positioned to maximize returns when crypto finishes journeying from the financial frontier toward mainstream acceptance.
editors@barrons.com
