Short sellers bet US$11bn crypto stock rally won’t last

Total short interest, or the amount that contrarian traders have pledged against crypto stocks, has increased to nearly US$11 billion this year, according to a report from S3 Partners LLC on Monday. 

More than 80 percent of total short interest in the sector are bets against MicroStrategy and Coinbase Global.

Paper losses for the group have mounted to nearly US$6 billion as a more than 65 percent year-to-date run for Bitcoin has lifted the rest of the sector. Still, the cohort is doubling down on such positions.

“Crypto stock short sellers have been selling into a rallying market — either looking for a pullback in the Bitcoin rally or using the short positions as a hedge versus actual Bitcoin holdings,” Ihor Dusaniwsky, managing director of predictive analytics at S3, said in the report.

Over the last 30 days, traders betting against crypto-linked stocks have increased their positions, especially in MicroStrategy even as its shares climbed. 

Traders have poured US$974 million into bets that the enterprise software maker will fall. That’s more than offset short covering — or contrarians buying back stock to exit trades — in shares of Coinbase, Marathon Digital Holdings and Hive Digital Technologies in that period, per S3.

The increase has pushed total short interest in MicroStrategy higher, taking up more than 20 percent of its total float, or shares outstanding, per S3. The company is now one of the most-shorted stocks in the US market, stacking up against much bigger companies such as Nvidia Corp, Microsoft Corp and Apple.

Of course, there could be more pain ahead for short sellers if their bets against crypto-linked stocks are incorrect. 

Many names in the group are poised for short squeezes, a phenomenon where short sellers are forced to buy the stock back to exit losing positions and in doing so push the price higher, further pressuring other traders.

MicroStrategy, Coinbase and Cleanspark are all poised for a squeeze given their rally and a limited amount of available shares left to short, according to the S3 report. So far this year, MicroStrategy is up almost 200 percent, while Coinbase and Cleanspark are up about 60 percent.  — Bloomberg