Summary GraniteShares 2x Long COIN ETF (CONL) aims to provide 2 times the daily percentage change of Coinbase stock. Leveraged ETFs come with risks, notably decay from daily rebalancing. Given the recent run and the extreme valuation in COIN, leveraged long Coinbase via CONL is the wrong trade at this point in time. Among the many different product offerings that the innovators on Wall Street have concocted through the years, some of the more risky may arguably be leveraged ETFs. I've covered a few of these types of funds in the past for Seeking Alpha. In my experience, leveraged ETFs typically track with broader indexes or specific market sectors. More recently, we've seen single-stock leveraged ETFs enter the market as tradeable securities. One such fund is the GraniteShares 2x Long COIN ETF ( CONL ). Fund Objective & Details Perhaps obvious from the name of the fund, CONL exists solely to add leverage to shares of Coinbase ( COIN ). Per the fund's latest fact sheet : The Fund seeks daily investment results, before fees and expenses, of 2 times (200%) the daily percentage change of the common stock of Coinbase Global Inc. GraniteShares launched CONL in August 2022. Interestingly, for most of the fund's history, it was intended to be a 1.5x leveraged ETF. However, in January 2024 GraniteShares changed the fund objective to hunting 2x COIN returns. CONL AUM: $366 million Expense ratio: 1.15% TTM Yield: 0.23% One of the benefits of single-stock leveraged ETFs is simplicity. While these funds are designed to be trading instruments rather than long term investments, leveraged ETFs are an easy way to get more upside on high conviction trades without the need to directly use margin or options. With CONL, a trader who believes COIN will appreciate in the short to medium term can essentially add synthetic buy power to his/her position while only risking the capital that they put in. Of course, if the trader is wrong, they'll lose more than they would have had they just purchased COIN stock outright. Risks With Levered ETFs Fundamentally, CONL has all of the same risks as buying COIN. Buying individual stocks puts the trader/investor at the risk of underperforming the index. As a crypto-proxy stock, Coinbase is further out on the risk curve than what may be typical for most individual stocks. It's not abnormal for COIN to trade 5-10% up or down in a single trading session during times when there is volatility in the crypto market. Data by YCharts In the roughly 3 months since CONL transitioned from a 1.5x leveraged ETF to a 2x leveraged ETF, the fund has indeed offered a total return nearly double that of Coinbase stock. Though it should be noted that COIN has been in a large uptrend since the end of January that appears to now be rolling over. On the way down, CONL is going to double the losses of COIN. Again, that's by design, as the fund is rebalanced daily. An additional way CONL holders can lose is if the market experiences chop for a sustained period of time. In the example below, I'm taking the closing prices for both COIN and CONL from 4/18/24 as a starting point and simulating total returns, assuming 5% moves up and down each day: 5 percent chop model (Author's Calculations) 20 days of back and forth 5% trading sessions in COIN shows how quickly CONL can begin to decay. Even if the GraniteShares 2x COIN fund works as designed and doubles the returns of COIN, it only takes a few weeks before CONL starts underperforming due to market chop. So while the leverage can work very well in a sustained uptrend, the fund will decay over time from daily rebalancing without a strong uptrend. This illustrates why traders really need to time entries and exits right to make the 2x ETF justified over simply buying the stock directly if holding for longer than a few days. Is Long Coinbase Even The Right Trade? I actually covered Coinbase recently for Seeking Alpha and focused on the company's Ethereum ( ETH-USD ) scaling blockchain called "Base." There are certainly some positive signs from both Base usage and from the company's recent quarterly earnings report: Data by YCharts The resurgence in the crypto market late last year helped propel Coinbase to nearly two year highs in both quarterly revenue and net income - the latter of which broke a seven-quarter streak of negative performance. Indications from the public chain data for Q1-24 are also very good: Coinbase Monthly Exchange Volume (The Block) Coinbase did over $157 billion in exchange volume during the month of March. It's the company's highest single month since November 2021. Additionally, Coinbase's exchange volume from both January and February exceed figures from all three months during Q4-23. The point is, Coinbase's first quarter is going to be strong. Despite some of the positives, COIN is ridiculously overvalued: COIN Value Grades (Seeking Alpha) COIN stock is trading at 88 times forward earnings, 10 times forward sales, and 8 times book value. By any realistic stretch of the imagination, the positives have been priced in. Given that, I expect COIN's stock to experience a great deal of weakness in the short to medium term. If GraniteShares' leveraged ETF performs as designed, weakness in COIN will be twice as bad for CONL. Final Takeaways I think I've made the case at this point that products like CONL are not optimal for buy and hold investors. These instruments are for active traders who want a simple way to execute high conviction ideas. Given the run that COIN has had following the approval of spot Bitcoin ( BTC-USD ) ETFs and the excitement around the block reward halving, I suspect short term gains in COIN have been made and the stock has a high likelihood of struggling for the next several months. In such an environment, CONL will perform even more poorly. I'd personally stay away from CONL at this point in time. If you've ridden this thing up from the lows, take the money and run.
