Coinbase and other crypto stocks get a shorter time.
Betting against crypto stocks seems like a sure thing. But it has become a nightmare for traders over the past month – another sign of how tough it can be to make money in crypto.
With Bitcoin sharply down and the crypto industry on the rise, investors have piled into bets against crypto-related stocks. Companies including Coinbase Global (ticker: COIN), Silvergate Capital (SI), MicroStrategy (MSTR), and Marathon Digital (MARA) are now some of the most shorted stocks on the market.
Shorting a stock involves borrowing shares and selling them. The trade is profitable if the stock goes down, allowing investors to buy shares at a lower price and pay back the borrowed stock.
However, that can quickly go wrong if prices rise and investors face pressure to “cover” the short, forcing them to buy back the stock at a loss. If many short sellers are under pressure, this can lead to more buying, stimulating price gains while exacerbating losses for short sellers – what is known as a “short squeeze”.
Short squeezes were a big part of the “meme” stock rally in GameStop (GME) and other companies in early 2021. The same dynamic settled into crypto after the FTX collapse in late 2022, and they are now causing more volatility in stocks.
Silvergate, a bank that has drawn scrutiny for its ties to FTX, has been a target for short sellers. Shares have fallen more than 80% in the past year due to falling crypto prices and a $1 billion loss in the fourth quarter.
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Shorting Silvergate has also become popular. More than 88% of outstanding shares are held short, according to data analytics firm S3 Partners. That makes it the most shorted US stock with at least $10 million in short interest.
Coinbase’s stock, meanwhile, is up 78% this year. It has turned into a losing bet for short sellers, with 22% of the outstanding shares held short.
MicroStrategy ( MSTR ) — a software group with significant Bitcoin holdings — is up 93% this year. And crypto miner Marathon Digital (MARA) is up 112%. Both shares are also heavily shorted with over 30% of the outstanding shares held short.
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Add it all up and net losses on short positions have approached $900 million over the past month on a mark-to-market basis, according to S3. On February 2nd, when Coinbase and Silvergate shares both jumped more than 20%, short sellers recorded a loss of $630 million.
The cost of shorting crypto shares has also increased sharply. Investors who want to short the shares now face high loan fees – upwards of 20% for Marathon and 30% for MicroStrategy
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according to S3. That’s because they have become “difficult to borrow” with over 95% of the lending pool no longer available, says S3 managing partner Ihor Dusaniwsky. “This will greatly limit the amount of new short selling,” he says.
S3 gives all four stocks a “squeeze score” above 80. Silvergate’s score is 90. MicroStrategy’s is 100. That makes them all particularly vulnerable to a squeeze, Dusaniwsky says.
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When a stock is heavily shorted, it doesn’t take much to cause a bounce. Coinbase, for example, saw a double-digit rise in its shares in January after settling a case with New York state financial regulators related to compliance issues in 2018-19. While the development hardly elicited a shrug from analysts, it sent the stock soaring.
Silvergate, for its part, surged 52% last week between Monday and Wednesday as major investment groups disclosed ownership – although the stakes were at least a month old and in some cases represented neutral positions among market markets.
Bitcoin has rallied this year, up nearly 50%, fueling some of the rally in crypto-related stocks. But regulatory clouds are weighing on the room, while the macro climate remains tough with the Federal Reserve’s interest rate policy still in headwinds.
Even with pressure building, however, betting against crypto stocks can be a losing proposition.
Write to Jack Denton at [email protected]
