A plummeting cryptocurrency market has hit blockchain-adjacent enterprises hard, with Coinbase Global Inc (NASDAQ:COIN) being one of the more prominent victims. Because the company's success is directly tied to the health of cryptos, it wasn't surprising that COIN stock plunged. However, the bigger issue is the Federal Reserve, which is pensive about its monetary policy. Despite the turmoil that this matter has caused, there may be reason for optimism.
Granted, it's been a rotten week for the equities sector. In the trailing five sessions, the S&P 500 is down 2%, while the tech-centric Nasdaq Composite slipped about 2.5% during the same period. Even mighty Nvidia Corp (NASDAQ:NVDA), which delivered another blockbuster quarterly performance and raised outlook, could not lift Wall Street.
Primarily, the culprit appeared to be a hotter-than-expected U.S. jobs report. While such a print would have been considered great news in most other contexts, it also dampened enthusiasm for a December rate cut. As such, risk-on sentiment faltered as investors readjusted their expectations in light of the new information.
Nevertheless, the nuance here is that the labor market is still relatively weak. Even amid the positive surprise in the latest jobs reading, the unemployment rate edged up from 4.3% to 4.4% — marking the highest level since October 2021.
To be fair, oddsmakers have pegged about a 35% chance of a quarter-point cut from the Fed next month. That's not great but it's far from a consensus expectation. In a note to CNBC, Kay Haigh, global co-head of fixed income and liquidity solutions at Goldman Sachs Asset Management, stated that a "December cut remains possible given continued labor market softness as expressed by the unemployment rate."
Yes, COIN stock losing 30% in the trailing month is downright hideous. Still, there's also reason to believe in the contrarian case.
Leveraging The Power Of Data Science To Trade COIN Stock
According to authors Philip E. Tetlock and Dan Gardner, it's incredibly difficult for humans to make sense of apparent randomness. "We don’t have an intuitive feel for it. Randomness is invisible from the tip-of-your-nose perspective. We can only see it if we step outside ourselves," they wrote in the book Superforecasting: The Art and Science of Prediction.
In a seminal experiment, psychologist Ellen Langer demonstrated that even Yale students — among the best and brightest in society — can be duped into believing that they can find patterns in coin tosses, a ridiculous notion when viewed objectively. Such insights reveal the critical flaw of fundamental and technical analysis, which assume universal cause-and-effect signals.
In quantitative analysis, we let the data speak for itself. That alone is a paradigm shift in thinking. However, one of the biggest hurdles is functionality. In my particular quant model, I do not treat price as a journey across time. Instead, I treat probability density as a function of price.
Stated differently, we're focused primarily on where a security tends to cluster given hundreds (if not thousands) of repeated trials. Further, by analyzing the trials of price behaviors associated with specific signals, we can determine whether there are behavioral variances — which may indicate an informational arbitrage between expected outcomes versus what is contextually realistic.
Using a Kolmogorov-Markov framework layered with kernel density estimations (KM-KDE), the forward 10-week median (nominal) returns can be arranged as a distributional curve, with outcomes ranging between roughly $237 and $255 (assuming an anchor price of $242.14). Further, price clustering would also likely be predominant around $242.
The above assessment aggregates all sequences since Coinbase's public market debut. However, we're interested in the response to a specific signal. In the trailing 10 weeks, COIN stock printed a 3-7-D sequence: three up weeks, seven down weeks, with an overall downward slope.
Under this signal, the following 10-week median returns tend to range between $220 and $320. Moreover, price clustering would likely be predominant around $269. Essentially, we have an informational arbitrage of 11.16% in probability density dynamics relative to baseline conditions.
There's a hidden geometry in every publicly traded security, which is why quantitative models will rise to the forefront of financial analysis. We're just several years ahead of the game.
Trading Is The Easy Part
Since we have an empirical idea of where COIN stock is likely to cluster, it's much easier to formulate a plan. I'm looking at the 260/270 bull call spread expiring Jan. 16, 2026. This trade involves two simultaneous transactions: buy the $260 call and sell the $270 call, paying a net debit of $375 (the most that can be lost).
Almost every broker should allow you to place the above trade as a combined single execution. If COIN stock rises through the second-leg strike ($270) at expiration, the maximum profit is $625, a payout of about 167%. Breakeven lands at $263.75, making this an enticing idea.
It's also sensible, assuming of course that you believe that prior statistical trends will follow through again in the future. We're placing the target strike right on the thickest part of the distributional curve, which is where probability density is most prominent. We could choose to try for a higher strike such as $300. However, that's a thinner part of the distribution, which means that it's less likely to reach there.
With quantitative analysis, there's a reason why we do what we do — it's not just vibes and trust-me-bro logic. Adopting this minority mindset already puts you ahead of the game.
The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.
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